Mantashe provides a breath of fresh air – Business Report

May 30, 2018
30 May 2018 - From a mining perspective, the time for the racial formatting of opportunity is over. The Charter should be abandoned.

David Christianson

The budget speech by mineral resources minister Gwede Mantashe and his subsequent media briefing was a breath of fresh air in at least one respect.

The minister showed awareness of problems in the industry beyond the empowerment Charter. His acknowledgement of the regulatory logjam and corruption in his own department – which has seen exploration permits delayed for up to eight years in the worst cases – was in startling contrast to his immediate predecessor.

Mantashe is also aware of the sterilization of assets through inactive permits and, to his credit, shows an awareness of the dangers of simplistically invoking the ‘use it or lose it’ principle to deal with the problem. Many assets are ‘parked’ for good reasons – often related to the international price of the commodity – and reallocating licences would not solve the problem.

In short, Mantashe has demonstrated an impressive grasp of his portfolio. The question is whether he will use this understanding to deal with the hurdles that have constrained South African mining for so long? His insights will hardly be useful if he remains blinded to the biggest constraint of all – the racial formatting of opportunities in the sector.

It is not unreasonable to suggest that Mantashe needs to remind himself of the longer-term history and objectives of the mining Charter. In 2002, the Charter was an industry-initiated process, and was both voluntary and deliberately flexible in its application. That it has subsequently developed into a compliance nightmare and investment disincentive is a result of successive ministers treating it as legally binding and prescriptive.

The mining charter has become an artifice of bureaucratic power. While it is unlikely all of the provisions of the gazetted third draft of the Charter will go forward under Mantashe, it is worth noting that these make sense within the world of bureaucratic objectives even where they are little more than madness from an industry perspective.

The yet to be repudiated clause on ownership of prospecting permits is a case in point. It requires that exploration licences are issued to companies that are 50 percent plus one black-owned. The point that mining exploration is almost ridiculously high-risk and as a result, struggles to attract investors, appears to have entirely by-passed the authors of this clause.

Instead they appear to have proceeded by bureaucratic logic, thinking that imposing more onerous black ownership conditions on the smaller companies in the exploration space means that they will inevitably be creating the big black-owned mining companies in future. So, voila, transformation achieved!

Except that, with an insignificant number of exceptions, small explorers do not grow into big miners. What they do is discover and, sometimes, develop assets, and then sell these to big companies. They have a very specific role in the ecology of mining companies.

This is a high-risk role. It is no coincidence that risk-averse investors like pension funds buy into mining companies with established assets and a track record of effectively working them. They do not buy into exploration ventures under any circumstances. The last thing the exploration sector needs is regulation that raises its already considerable risk premium.

The charter that Mantashe is working on will require that new investors in South African mining effectively start by giving away 30 percent of their investment. There may actually be assets in South Africa that are rich enough or rare enough to carry such a burden. But there are not many and the few that do exist (one platinum mine, one diamond mine and one iron ore mine) are hardly the basis of a sunrise industry.

The time has come to admit that the original charter had one primary objective (to transfer 26 percent of existing mining assets into black hands) and that it has succeeded in meeting that objective. What exists now is a disincentive to investment and, beyond that, has become a cesspit of corruption and inefficiency, which further disincentivises mining investors.

From a mining perspective, the time for the racial formatting of opportunity is over. The Charter should be abandoned. Does Mantashe understand this and, furthermore, can he deliver on it?

David Christianson is a Policy Fellow at the Institute of Race Relations (IRR)





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