Charter is a sure way to shrink mining
Should the mining charter be implemented as is, it will constrain the ability of banks to fund the mining industry and newly created BEE entities.
Consequently, the charter could achieve exactly the opposite of its professed vision - to "facilitate sustainable transformation, growth and development of the mining and minerals industry".
Although the latest charter lacks detail on important issues, several aspects will negatively affect the ability of mining and BEE companies to source commercial bank funding - and hence potentially damage the prospect of achieving its vision.
First, the range of additional charges imposed on the industry, most importantly the 1% of annual turnover to be paid annually to black shareholders, will reduce cash flows available to service debt and will directly affect the amount of debt the industry can service and sustain.
For an industry with long-dated, capital-intensive projects, this will limit its financing options, raise its cost of capital and raise the return hurdle rates at which projects are judged. Hence the charter will limit the number of investment opportunities and potentially reduce the life of mines.
Second, the charter limits the ability of black shareholders to sell their shares on the open market by confining sales to black people only.
Although intended to secure continuous empowerment for future mining BEE transactions, these shares will become far less liquid, affecting their value as security against bank funding.
BEE parties will have less capacity to raise commercial bank debt independently, and funding future empowerment deals will rely largely on vendor financing by the industry. This will affect the quantum of commercial debt the industry can attract and sustain.
Third, the charter has introduced a requirement that BEE debt, used to acquire the requisite 30% equity ownership interest, be written off after 10 years if dividend payments are insufficient to repay the outstanding debt and interest, while vesting at a minimum rate of 3% a year.
This would mean that banks would require a debt guarantee from the mining company for the commercial portion of the BEE debt - thus limiting the company's corporate debt capacity. Alternatively, for BEE debt raised independently, structuring options for transactions would be severely constrained.
Fourth, mining companies would have to ensure that the black shareholders' 30% interest is not diluted when raising equity capital. It is unlikely that the other 70% of shareholders will support future rights issues, knowing that for every rand injected into the company they could expect their returns to be capped at 70c.
The BEE contribution to the capital raised will have to be funded through vendor financing of their portion by the company, with the combination affecting the overall capacity of the sector to raise capital.
With banks often relying on shareholders to stabilise balance sheets in commodity down-cycles, this weakened equity base will make the commercial banking sector more cautious about extending credit.
The mining industry remains a very important part of the South African economy. It is a large direct and indirect employer, pays significant taxes and royalties, and sustains a large, often empowered, supplier industry as well as surrounding municipalities. It is also a significant power consumer and export earner. Allowing this industry to grow again will have enormous and acutely needed economic spin-offs.
Perhaps it is time to reconsider whether it is the right model for an industry empowerment model to focus on empowering every prospecting and mining right through passive minority interests.
It may be better to aim to create sustainable, well-funded stand-alone black mining companies, perhaps through asset and cash contributions from the industry, to achieve the empowerment levels envisaged by the charter. Such transactions formed the basis for successful companies such as African Rainbow Minerals and Exxaro.
This should create a far wider range of benefits to the industry as a whole: it would create black entrepreneurs; would allow for significant community participation; it would free up capital for where it is really needed (in the ground); and it would hopefully return the industry to growth as it allows management to better focus on mining efficiently and profitably.
The mining sector requires constant investment for the value sitting below the surface to be realised sustainably for generations to come. It is important that policies ensure that the industry can access all pools of capital, including equity and commercial bank debt, for these investments to continue and for this value to be realised.
Also, sustainable transformation requires funding either independently or via company support, but the mining charter provisions in their current form will not increase the sources of capital available to fund it. An empowered piece of a growing cake because of a thriving industry is far preferable to the alternative - a bite of a muffin. - BusinessLive
- De Hoop is business development director resources and Mbulawa is head of resource finance at Rand Merchant Bank
free to read for a
limited period! SIGN UP