In May it became clear that Mr. Kevin Rudd, Australia’s prime minister at the time, would make the overhaul of the Australian tax system a centre-piece of his campaign for re-election at a ballot to be held later in the year. One of those proposals included a 40% super-tax on the profits of mining companies. It was speculated that the proposed tax could cut mining earnings by up to 30%.
Miners in Australia embarked on a public campaign to point out the economic damage that the proposed mining tax could do to investor sentiment in that sector. There was talk of the tax prompting a decline in new mining investment in Australia as mining companies looked elsewhere for new projects.
If South Africa’s political leadership was inclined to do so, this would have been the moment to re-position South Africa as a friendly and secure investment alternative.
Much damage has been suffered by the South African mining industry since the Government nationalised mining rights in the country. The Mineral and Petroleum Resources Development Act of 2002 (MPRDA), came into effect on 1st May 2004 and repealed the Minerals Act of 1991. The new Act transferred ownership of privately held mineral rights to the State to enable any third party to apply to the Department of Minerals and Energy (DME) for new order prospecting rights or mining rights over previously privately held mineral rights. Miners were given five years to submit applications for the conversion of old order mining licences to new order mining rights by 30th April 2009. Under the Act the State may grant, control, administer or refuse mining rights, mining permits, retention permits, permissions to dispose of or remove any minerals, and other related rights to land.
Against this background and amid the global commodity boom of the mid 2000s, South Africa saw its production of minerals fail to keep pace with expanding production in other parts of the word.
Despite the recent opportunity to exploit the Australian mining tax South Africa’s DME made two critical mistakes:
First was the questionable manner in which the department used the MPRDA to grant prospecting rights to Imperial Crown Trading 289 (ICT), which led to a dispute with Kumba Iron Ore. Kumba operates two opencast mines in South Africa: the Sishen Mine in the Northern Cape province and the Thabazimbi Mine in the Limpopo province. The group exports to China, Asia, and Europe. Opened in 1947, Sishen is Kumba’s flagship operation and one of the largest open pit mines in the world. According to Kumba, the mine has a mineral resource of 2 455 million tons, translating to a life of more than 27 years at the current rate of production.
ArcelorMittal, with a production capacity of approximately 7.8 million tons of liquid steel per annum, and the largest steel producer on the African continent, held 21.4% of the mineral rights at the Sishen mine until 30th April 2009. An agreement with Kumba allowed ArcelorMittal access to 6.25 million tons of iron ore per year on a cost plus basis. (Cost plus contracts fix the amount to be paid to the contractor based on costs incurred, plus an agreed percentage thereof as profits. Such contracts are used when the costs of production or construction are unknown or difficult to ascertain in advance.) Kumba therefore assumed the position of a contract miner for ArcelorMittal, since the latter had rights to minerals at Sishen. After the contract had expired, ArcelorMittal’s rights reverted back to the State, in line with the new Act.
Following the expiry of the contract between the two companies, the department of mineral resources awarded the now vacant rights as a 21.4% prospecting right to previously unknown ICT. Incidentally, Kumba had also applied for the rights on the same day as ICT, and disputed the basis upon which the latter had obtained the rights. It emerged that ICT is not a mining company and has very close affiliations with the family of Jacob Zuma.
The department claimed that ICT had been awarded the rights on the basis that it was a company belonging to ‘previously disadvantaged’ persons. Kumba has lodged an objection and two appeals to the department and has refused Imperial Crown Trading access to the deposit.
Second was an announcement last week by the DME that mining industry investors in South Africa had failed to racially transform their businesses at the rate stipulated by the Government. Miners were meant to have reached an equity ownership target of 15% by 2010 but have reached only 9%. The mining companies were “let off” with a warning that their business interests would have to demonstrate at least 26% black ownership by 2014. On announcing the new empowerment targets, the minister of minerals and energy warned that companies that failed to comply with these targets could have their licences revoked after 2014.
It is hard to imagine two more damaging considerations for future investors than whether their mining licence will renewed, and if it is not renewed, whether it will simply have been snatched by a politically connected ‘empowerment group’. Potential mining investors will therefore have to commit resources and capital to South Africa without knowing whether they will be able to mine for long enough to see a return on that investment. There is a slim chance of them doing that.
While the South African Government seems oblivious to the damage it inflicts on investor sentiment, its Australian counterparts moved quickly to limit the damage caused by Mr Rudd’s proposals. As concern grew at the economic damage that Mr Rudd might cause to industry and the political damage this might cause to his party, Julia Gillard deposed him. She immediately set about reassuring the mining sector in the country, saying that she was “throwing open the government’s door” to negotiate with the mining industry on the proposed tax. This quickly led to a new tax proposal that was broadly welcomed by the industry and saw them re-commit themselves to investment in Australia.
In a joint statement following those negotiations, BHP Billiton, Rio Tinto, and Xstrata said that revised taxation proposals from the Gillard government showed "significant progress" and that, "the companies will continue to work constructively with the government to ensure that the detailed design of minerals taxation maintains the international competitiveness of the Australian resources industry into the future".
The difference in the manner in which the two countries handled themselves over recent weeks is striking and provides a rare concrete insight into how South Africa is compromising economic growth and investment in the pursuit of racial targets, and possibly political favouritism. It is an example that could probably be extrapolated to the manufacturing, medical, and agricultural sectors as well.
- Frans Cronje and Thuthukani Ndebele
