• Ground rules

    In an ever-changing landscape beset by regulatory challenges, companies need to be prepared and able to adapt in order to take full advantage of the sector’s potential, says Warren Beech, head of mining at Hogan Lovells South Africa.

    Ground rules

    If the South African government expects all aspects of mining to continue to make a significant contribution to GDP, and for investors to remain or revive their interests (let alone provide a welcoming platform for new players), at least four important legislative issues, along with the challenges those bring, need to be finalised.

    Warren Beech, head of mining at law firm Hogan Lovells South Africa, explains that with some 242 pieces of legislation that apply to the sector, there exists an extremely complex environment for mining players to navigate. This situation is further compounded by regular changes to legislation – something the industry and its legal representatives have had to contend with for some years now.

    First of the major challenges is a number of proposed amendments to the Mineral and Petroleum Resources Development Act (MPRDA) that were introduced in 2013.

    While some of the amendments have been passed, says Beech, they have yet to be enforced.

    ‘The MPRDA has undergone frequent amendments over time. But as with all legislation, the process that needs to be followed within the constitutional framework is slow, and this has not been helped by our having had a number of different mining ministers over the past four years.’

    Overall, the MPRDA is ‘a relatively good piece of legislation but some of the amendments are set to make mining more complex’, says Beech.

    ‘Looking at one positive, one of the amendments allows mining of associated minerals beyond what was applied for. So, if you apply to mine gold and find silver, after complying with certain requirements, you will be allowed to proceed with the mining of both. This will solve at least 40% to 50% of the current mining disputes that have arisen because one company has the rights to mine, for example gold, while another silver, all from the same ore body, thus solving overlapping rights issues.’

    Beech also provides an example of a more complicated amendment, namely that to Section 102. ‘This allows a mining company to amend its rights to include adjacent areas of land in its mining activities. This is going to be made a lot more complex and will probably lead to more disputes about who can mine what mineral. However, we understand why it’s being done based on the criticism that existing processes are not being followed properly.’

    Well worth a mention, says Beech, is beneficiation, which is being widened. ‘This amendment has both a good and a bad component in terms of the proposed changes. The emphasis is on beneficiation in South Africa, which shows just how determined the country is to encourage local beneficiation. But by the same token, if you don’t obtain ministerial approval to export certain minerals, it is the international groups that are going to be impacted.’

    Beech is fairly optimistic that Minister of Mineral Resources Mosebenzi Zwane will follow through on his promise that the MPRDA amendments will be resolved by June, though it doesn’t bode well that the revised Mining Charter, which was also promised by March/April this year, has yet to be published. This charter (the second of the mining industry challenges) has also been fraught with stumbling blocks, particularly in its interpretation and application. According to Beech, however, the key unknown is whether empowerment ownership will remain at 26%, and if it will be required per mine.

    ‘What is going to happen to existing empowerment transactions and will the scenario of “once empowered, always empowered” remain? The sooner we have clarification, the sooner mining companies can look at compliance,’ he says. ‘This is hanging over the industry and impacting on investment decisions.’

    The third issue, which also involves the fourth, is the National Environmental Management Amendment Bill – and the changes to environmental regulations that were passed into law in April. ‘South Africa’s environmental legislative framework is considered one of the most progressive in the world but it is also extremely complex, so mining houses, big and small, are going to have to commit significant resources to the impacts of their operations. Not that they haven’t but those on shoestring budgets are going to find the going rather tough.

    ‘These are significant amendments that increase the regulatory enforcement structures and the types of enforcement that can take place. They impact the MPRDA too, and with this comes a huge new cost implication.’

    This may be a bigger problem than is obvious. For one thing, with a very positive outlook predicted for mining last year, many investors who had put projects on hold during 2014 and 2015 started them up again. ‘Once the amendments are enforced, some of those restarted projects may not prove to be viable,’ says Beech. These projects cannot easily be stopped again once started up, despite the ongoing uncertainty that prevails around mining legislation.

    ‘There’s a second impact, relating to those mines that went into care and maintenance in 2014/15 during the commodity cycle downturn. With the positivity of last year, many such mines were brought back on-stream, with a promise of jobs. This is another situation that can’t just be switched off easily.

    ‘New investment is also compromised, although we are seeing companies like Sibanye Gold putting its money where its mouth is. They have made massive investment acquisitions from Anglo American Platinum, for example – and more recently that of Stillwater Mining – as have a number of smaller players, particularly in iron ore, coal and platinum. However, Sibanye Gold recently announced that it would no longer invest in South Africa given the uncertain political climate.’

    Does this mean other developing nations in Africa and South America are considered preferential mining investment destinations? ‘Not really,’ says Beech.

    ‘There are good uptake operations in Ghana, the DRC and Guinea, for example, and even Ecuador, whose recent confirmation of a large gold deposit certainly makes it attractive.

    ‘Ecuador, however, does not have the mature mining industry that we have, and looks to South Africa for lessons in how to bring in major players and formalise its illegal and small-scale mining operations.’

    Various concerns have been raised by potential investors regarding South Africa’s infrastructure (roads, rail, ports, electricity and water) but that is true for most mining operations. Generally, a good rate of return will mitigate some or all of these risks, says Beech, and South Africa has always provided a good rate of return. ‘Provided this continues, in comparison to other countries in Africa, South Africa should still see a good level of investment.’

    For those that do envision a clear future, there is the smaller yet not unimportant challenge in gaining a mining licence. Applicants appear to be struggling to complete applications and supply quality supporting documents, resulting in the decision-making process being exceedingly difficult for those in the approval chain.

    The attention to detail in this regard is best handled by a professional law firm such as Hogan Lovells, given that one of its main activities entails guiding and advising clients on how to complete such applications – something it has considerable knowledge of as a result of being actively involved in government consultations and advising on regulatory changes.

    While the South African mining sector has historically enjoyed a profitable experience and gained much respect for its mature mineral industry, as soon as the fraternity gets to grips with the current reality, that reality changes. While change is good, it requires mining companies to be nimble and for CEOs to ‘look up from their desks’, says Beech.

    ‘It’s a changing landscape. If you can’t respond to it and anticipate change based on previous experience, you’re going to struggle. Mines and investors need to strategically change their approach to accommodate this landscape. That said, there is still good money to be made from mining in South Africa – and phenomenal opportunities and returns on investment.’

    By Kerry Dimmer
    Image: Chris Bezuidenhout