The draft amendments to the Mineral and Petroleum Resources Development Act (MPRDA) – effectively South Africa’s mining code – are attracting huge attention within the country’s mining industry. They were withdrawn last year, even though they had been the subject of an agonisingly drawn-out and complicated negotiating process. Government initially claimed that the purpose of the law was to bring certainty to the sector.
Thus mining regulation in South Africa is currently in limbo with potential investors holding off because they do not know what to expect. Rhodes University academic and former Anglo American economist Gavin Keeton argues that the imbroglio over the MPRDA is effectively a crisis of leadership. Keeton points out that the original draft was painstakingly negotiated between the Department of Mineral Resources and key stakeholders, including the Chamber of Mines.
However, the Department of Trade and Industry, set on an indigenous industrialisation drive, had the law altered to reflect mandatory beneficiation. This meant forcing mining firms to ‘add value’ to the minerals they pulled out of the ground. Miners countered that this was not their core business, it would add to costs and they may turn out to not be terribly good at it anyway.
Keeton says this is where a strong leader should have intervened and chosen between the two departments. What is obvious, with hindsight, is that the priority should have been to legislate a viable regulatory framework for mining. Firms have held off from investment, and the oil and gas subsector has drastically scaled down its operations.
In March, Royal Dutch Shell withdrew its highly rated upstream exploration team from the country. Total South Africa had earlier aborted a deepwater offshore drilling project in the Bredasdorp basin off Cape Agulhas for technical reasons. The company shows no sign of resuming operations there, and it can only be speculated that regulatory uncertainty and the present, near record-low oil price have caused it to rethink its priorities.
Issues that the amended MPRDA were meant to clarify remain unresolved. These include the exact size of the compulsory share (the free carry) the government will take in new ventures; the extent to which past BEE can be carried forward if the original black shareholders cash in (the ‘once empowered, always empowered’ debate); and the legal status of BEE requirements.
Perhaps most pernicious of all is the unspoken feeling among mining companies that they are unsupported and misunderstood, perhaps even regarded as an ‘enemy’ of sorts. The draft of the amended MPRDA was passed by Parliament in the first half of 2014 and later withdrawn. Reasons were only given in January 2015, which reinforced uncertainty.
President Jacob Zuma’s explanations – effectively that the draft legislation might not pass constitutional muster – are so lacking in any clues about the way forward that they provide no comfort at all to the beleaguered industry. And beleaguered it is. Recent gold production figures illustrate the problem.
In 1980, gold accounted for 67% of the country’s mineral sales. In 2014, the figure had fallen to 12.5%, according to Statistics SA, the country’s national statistical office. Last year, South Africa maintained – and, in fact, slightly increased – its 2013 levels of gold production (168 tons in 2014 versus 164.5 tons in 2013). However, this apparent stabilisation is misleading. It was achieved largely thanks to the declining value of the rand. South African gold miners’ revenues are dollar denominated, while their short-term costs are in rands.
The biggest operational problems facing gold miners – rapidly rising costs (including not only electricity and labour but also the imported capital equipment they will need to buy in the medium term in the teeth of rand weakness) – are severe. Similar problems assail platinum mining, which has yet to recover from a four-month strike in 2012.
Both the gold and platinum industries go into the mid-2015 wage negotiation season with considerable apprehension. The turf war between the National Union of Mineworkers (NUM) and its newer rival, the Association of Mining and Construction Union (Amcu) continues unabated. The NUM, in recent years the more moderate of the two, has already signalled its intention to demand a 100% wage increase for the lowest-paid categories of workers. This type of bidding, which raises the stakes, will make labour even less affordable. However, the alternative is probably a complete cessation of mining activity in the face of enduring industrial action.
Keeton points to a lesson from the success stories of recent decades: economies that grow are those that encourage investment. Private investment, he argues, requires above all else regulatory certainty.
Given the present trough in commodity prices, this is a particularly bad time to generate regulatory uncertainty if a national economy wants to attract investment. Commodities, ranging from iron ore to crude oil, are at the lowest prices in a decade. Nor should Chinese growth be expected to bail out the global economy as it did immediately after the 2008 recession.
China, the biggest consumer of commodities in the world, is shifting from a capital-intensive model to one that is driven by consumers. At a recent mining conference in Toronto, Canada, commodities analyst Jessica Fung pointed out that the Chinese boost to commodity prices has already played through. The country’s 2009 stimulus package of US$590 billion maintained demand.
Fung said: ‘Because demand did not decline, neither did supply. [Effectively we] pulled forward demand, taking away from future growth.’ She argued that in 2015, China is ‘no different from the rest of the world, and their miners are also making production cost cuts wherever they can’.
In mining globally, capital investment has been falling since the first half of 2013. Standard Bank noted earlier this year that spending on new mining projects in Africa was ‘limited’. Although the financial institution expects a recovery in the medium term, it observed that ‘in the next 12 to 24 months the outlook is less secure’.
Mining is a long-term game. Not only can a big mine take 10 years from conception to operations, but the initial investment is predicated on a multi-decade view of the years ahead. The uncertainties – including future global commodity prices, the environ-ment and technological changes – are extreme. With so many unknowns in play already, the last thing mining investors want is added unpredictability in the form of unexpected changes to the regulatory environment.
The same sort of regulatory issues seen in South Africa have impacted recently in other mineral-rich African countries, notably Zambia and the DRC.
Last year, as part of an overall tax reform, Zambia announced that it would increase mining royalties from 6% to 8% for underground mines, and from 6% to 20% for open-pit mines. Mining firms reacted with horror. In December last year, Barrick announced plans to close the Lumwana copper mine in response to this.
In April 2015, the government announced that it had compromised on the royalty issue and would now take a flat 9% across both underground and open-pit mines.
However, this has not been the only regulatory issue affecting Zambian mining recently. The implementation of export regulations caused consternation last year. The state refused to pay back about US$600 million in VAT rebates to the industry. In October, after the government had withheld around US$12 million owed to the company, zinc and copper miner Glencore stopped production at its Sable mine and announced that it was curtailing all capital spending.
The DRC has not learned from Zambia. Last year, Prime Minister Augustin Matata Ponyo said the country intended to almost double its tax take from mining by 2016. In April 2015, it released a new draft mining code, which raised corporate taxes from 30% to 35% and introduced a new 50% windfall tax.
There is nothing inevitable or inherently African about these problems. The decline in investor attractiveness of these jurisdictions contrasts markedly with the countries that have regulated well – including Namibia, Ghana and Botswana.
However, there is a pattern. Ghana, Mali and Côte d’Ivoire have all spooked investors in the last couple of years by proposing to raise mining taxes. However, they then backed down after fierce protests and threats of disinvestment.
This has led to some upsides. Côte d’Ivoire proposed a windfall tax on gold mines in late 2012 but revised it within months after an outcry. Now it is one of the continent’s most improved mining jurisdictions, according to the Fraser Institute’s 2014 annual survey on mining, released in February 2015. The new 2014 mining code reforms in that country are part of a package, which includes reforms to business registration, property transfers and taxation.
By contrast, South Africa continued to move down the think tank’s rankings of attractiveness to mining investors. The country dropped out of the top 10 in Africa for the first time and fell from 53 to 64 globally.
Labour issues and electricity problems may be somewhat intractable but poor regulatory decisions are not. These have to be seen as self-inflicted, and the uncertainty they bring could impact countries in the context of low commodity prices and enhanced competition.