Once our current COVID-19 induced hibernation comes to an end, we will face the aftermath of an economy decimated by the biggest global disruption in living memory. It would have been inconceivable only a few months ago to literally shut down economies and tell people to stay at home for anything longer than a long weekend. And yet, here we are.
The impact of our current situation will only fully emerge in the months and even years to come. What we know right now is that people across the globe are fighting for their lives against an invisible killer. By the same token, businesses and employees alike are metaphorically fighting for economic survival.
The South African mining industry is a significant contributor to the country's GDP. It is also a substantial employer. As a net-exporter of minerals, the mining industry is also a source of foreign currency, putting healthy pressure on the exchange rate. But the lockdown has hit the industry hard. Most mines had to stop production or greatly scale down operations. In addition, although the Rand is at a record low to the world currencies, mines can't capitalise on higher Rand profits as the commodity prices have sunk to new depths.
Obviously, the economy and businesses in this country will have to restructure in the months to come as they absorb this body-blow. The negative impact may in some cases be too much to absorb and there are predictions that many businesses will be liquidated.
Liquidation is simply not a viable option for mines, as mining rights revert to the State upon the final liquidation of the company holding the right, thus stripping out the most valuable asset, which is the right to access and exploit the minerals.
Business rescue has as its fundamental aim the preservation of the business in a revised form. It creates a moratorium on creditors claiming payment and puts the restructuring in the hands of an expert. But it takes time and great expense to restructure a mine, during which all statutory and regulatory compliance must be maintained. Even a small mining operation put out of production during its business rescue may spend several million rand per month on care and maintenance.
When restructuring businesses, it is best to do it as early as possible when more options are still available. Boards of directors should not delay in looking at their financial positions, as section 129(1) of the Companies Act requires them to continuously determine whether they can pay their debts in the ensuing six months, failing which, this triggers financial distress and obligations on directors to act. One cannot underestimate the negative impact of COVID-19 on businesses and a failure to continuously assess financial distress could be reckless.
Why would mines want to restructure?
Mines are capital hungry businesses with massive overheads. Restructuring may be required because of an inability to access capital, leading to solvency issues, or because there is a lack of liquidity. Restructuring may take many forms. At one level it may need the re-negotiation of funding covenants. At a more operational level, it may mean the right-sizing of overheads, reduction in employment or the moth-balling of unprofitable operations. At a strategic level, mines may want to merge in order to capitalise on economies of scale, centralisation of services, the pooling of mineral resources or access to beneficiation plants.
It is at this level where the Department of Mineral Resources and Energy (DMRE) and other Governmental agencies may come in to assist by throwing a regulatory life line to ailing mines. Here are some suggestions:
- A financier may need to take security over the mining right by way of a mortgage bond. Section 11 of the Mineral and Petroleum Resources Development Act (MPRDA) requires Ministerial consent before passing a mortgage bond over a mining right, except in cases where the financier is a South African bank. One solution could be to suspend the requirement for Ministerial consent for the time being to allow for the re-capitalisation of mines.
- Neither mergers and acquisitions, nor a change in the controlling shareholding of the mining company, can happen without Ministerial consent. These section 11 applications can take anything from 7 to 24 months to approve (some exceptions notwithstanding). The DMRE could set up a specialist team to expedite section 11 consents and their subsequent registration in the Mining Titles Office, where they are precipitated by the post COVID-19 impact. This would ensure that consents could be obtained in a matter of weeks, rather than months.
- Some regulatory compliance that is disproportionately financially onerous during a period of financial distress could also be suspended or deferred. For example, social and labour plan spend could be deferred, certain health and safety appointments could be allowed to be shared between mines to reduce costs, and ongoing environmental rehabilitation could be deferred.
There is precedent for this. We have seen how quickly our Government can act in response to the pandemic. Other countries have already implemented and proposed similar regulatory holidays to combat the annihilation of their economies. It goes without saying that to achieve a more streamlined restructure of the mining industry, while at the same time aiming to preserve it, requires the urgent creative and collaborative efforts of Government, industry and labour.
Written by Wessel Badenhorst, Partner, Head of Asia-Africa Practice Group at Hogan Lovells