An opportunity for the industry

On 7 December 2012 the South African Cabinet approved the draft Mineral and Petroleum Resources Development Amendment Bill, 2012 (the Bill). Although the Bill is still in draft form, the Department of Mineral Resources (DMR) has invited interested parties to make written submissions on the Bill by 8 February 2013.

While the Bill has laudable stated objects ― including to remove ambiguities that exist within the Mineral and Petroleum Resources Development Act, 2002 (the MPRDA); to streamline administrative processes; and to improve the regulatory system ― the substance of the Bill unfortunately belies these objects. This is apparent from some of the amendments discussed below.

The Bill purports to amend the MPRDA as if the Mineral and Petroleum Resources Development Amendment Act, 2008 (the Amendment Act) is in force, although the Amendment Act has never been brought into effect. It is thus necessary to read the Bill together with the MPRDA and the Amendment Act to understand the import of the proposed changes properly.

The following are some of the key amendments proposed by the Bill (this list is not exhaustive):

• Mineral beneficiation and restrictions on export: the Bill requires the Minister of Mineral Resources (the Minister) to initiate the beneficiation of minerals and petroleum in South Africa and grants the Minister broad discretionary powers to do so. For example, the Bill allows the Minister, in her sole discretion, to set the levels required for beneficiation, the percentage per commodity and price that is required for beneficiation, as well as the percentage of raw mineral production to be offered to local beneficiators. The Bill also requires any person who intends to export "designated minerals", a term that it fails to define, to obtain the Minister's written consent prior to doing so.
• The ownership of tailings created prior to the commencement of the MPRDA on 1 May 1994 (historic tailings): the Bill brings historic tailings, which are currently subject to the common law of ownership, under the ambit of the MRPDA for the first time. It appears that the State will in future hold historic tailings in custody for the benefit of all South Africans, and that third parties will be able to apply for prospecting and mining rights to these tailings. A possible consequence of this amendment may mean that rights to such tailings will fall under the rights of those parties with prospecting or mining rights to the land physically underlying these tailings. This amendment may constitute an unconstitutional expropriation of historic tailings, as it would be difficult for the State to link such expropriation to a public purpose.
• Free carried interest: the Bill grants the State a right to a free carried interest in all new exploration and production rights in the petroleum industry, with an option for the State to acquire a further interest through a designated organ of state or a state-owned entity. A "free carried interest" refers to a share in the annual profits derived from the exercise of an exploration or production right, without the State being expected to make any contribution towards capital expenditure.
• Rule by regulation and broad administrative discretion: there are a number of clauses in the Bill (such as beneficiation and restrictions on export, mentioned above) in terms of which the Minister is granted the power to determine important issues by Ministerial regulation. This will in future be done by regulation in the Government Gazette. The Bill also deletes many of the time periods currently provided for in the MPRDA, and replaces these with reference to a "prescribed period" to be determined by the Minister. The Bill does not provide any objective criteria against which the Minister's exercise of discretion may be assessed. There is a strong argument that the discretion afforded to the Minister by the Bill is overbroad and contrary to the rule of law. The rule of law requires that the law be certain, and that the exercise of powers and discretions under the law not be undertaken in an unrestricted manner.
• Associated minerals: the Bill allows the primary holder of a mining right to mine and dispose of associated minerals discovered in the mining process. However, the Bill also allows third parties to apply for rights, permits or permissions over associated minerals. The only requirement in this regard is that the third party notifies the primary mineral right holder of the application being made.
• Transferability and encumbrance of prospecting and mining rights: the Bill confirms that an applicant is allowed to hold a share in a right. The Bill requires the proposed transferee of such a share to lodge an application for a prospecting or mining right, as the case may be, prior to the transfer, for which Ministerial consent is required. The transferee must then comply with all the requirements under the MPRDA for the grant of a right in order for the Minister to consent to the transfer. The Bill furthermore requires Ministerial consent for the transfer of any interest in a listed company that holds a right, which is impossible given the manner in which shares in listed companies are traded.
• Order of processing applications: the Bill deletes section 9 of the MPRDA, which deals with the order of processing of applications for rights, including the "first-come-first-assessed" principle (FIFA principle). It is, however, unclear whether or not the Bill intends to remove the FIFA principle entirely from the MPRDA. If it does, this would fundamentally alter South Africa's mineral licensing regime, which has followed the FIFA principle for over a hundred years. That said, the changes effected by the Amendment Act to sections 16 and 22 of the MPRDA effectively require the DMR to adhere to the FIFA principal. As the Bill envisages the enactment of the Amendment Act, it is unlikely that, despite the proposed deletion of section 9, the Bill intends to remove the FIFA principle from the MPRDA.
• Environmental provisions: under the Bill, all the environmental requirements of the MPRDA will in future be implemented under the National Environmental Management Act, 2008. This will cause a confusing and apparently irreconcilable overlap in responsibilities between the Minister and the Minister of Water and Environmental Affairs. In addition, the Bill stipulates that a rights holder will remain liable for environmental and associated damage caused by prospecting or mining operations even after the Minister has issued it with a closure certificate. This creates serious liability issues for the industry.
• Penalties: the Bill seeks to increase significantly the penalties that may be imposed for, among other things, non-compliance with the MPRDA, other relevant law, the terms and conditions of a right, or a social and labour plan. Unlike the current position under the MPRDA, the Bill sets its penalties with reference to a percentage of annual turnover and exports, and in some instances imposes hefty penalties per day that the contravention persists.
• Concentration of rights: the Bill prohibits the Minister from granting any additional prospecting or mining rights to an applicant where this would lead to the applicant's "dominance" in the mining industry, and may constitute "anti-competitive conduct" and be contrary to the MPRDA’s objects.

The Bill, in its current form, leaves much uncertain. Such uncertainty will exacerbate rather than improve the difficulties that exist with the current mineral regulatory regime and may further damage investor confidence in the mining industry. The DMR's invitation for written submissions on the Bill provides a crucial opportunity for the mining and petroleum industry to attempt to highlight any shortcomings in the Bill before it is introduced to Parliament, and thus attempt to ensure that the Bill achieves its truly laudable objects.

Should you require assistance with assessing the effect of the proposed changes, or would like us to assist you in preparing submissions on any aspect of the Bill, please contact your usual Webber Wentzel lawyer or one of the contacts listed below.

Peter Leon | Partner and Head of Africa Mining and Energy Projects
Tel: +27 11 530 5248 | peter.leon@webberwentzel.com

Jonathan Veeran | Partner
Tel: +27 11 530 5336 | jonathan.veeran@webberwentzel.com

Jeanette Russell | Partner
Tel: +27 11 530 5417 | jeanette.russell@webberwentzel.com

Erin Warmington | Associate
Tel: +27 11 530 5858 | erin.warmington@webberwentzel.com