Sunset or sunrise industry?
While some countries in Southern Africa have been renowned mining destinations for over a century, such as South Africa and Botswana, others, such as Mozambique and Angola, are emerging mining players with a goal to elevate their mining industries. The regional hegemon, South Africa, is known for its richness in gold, which drove it to development in the late 1800s. The rush for diamond and platinum began in 1860 – 1870s, as well as coal mining which expanded to fuel the region's rapidly growing industries.
Industrial changes sparked social change, which had a huge impact on the industry when coupled with apartheid tensions, which still impacts the industry today greatly under the broad-based black economic empowerment (BEE) regulatory framework. "South Africa’s economy has been continuously hollowing out, the sources of growth exhausted, key sectors in recession, productivity falling, and unemployment, poverty and inequality at record levels," elaborated Claude Baissac, CEO of Eunomix, a quantitative risk analysis specialist with a focus on South Africa. “The tragedy and the opportunity is that South Africa possesses incredible assets, natural, economic, social, and political. Mineral resources are abundant. But the investment climate, however, is extremely poor.”
“New projects and closure applications have been plagued by cumbersome and time consuming regulatory processes, and unfortunately, the Covid pandemic has exacerbated the situation. There is a need for more efficient and effective administration by the department at a provincial level.”
Catherine Warburton, Managing Director, Warburton Attorneys
Even though mining has been an economic cornerstone of the country for more than a century and anchor to many communities, investment in the industry stalled. "The industry lost its shine as its multi-factor productivity continues to decline and extraction is becoming increasingly complex," commented Fanie Prinsloo, managing director of Martin Engineering in South Africa, a bulk and material handling solutions supplier.
The mining industry's contribution to South Africa's GDP grew 6% year-on-year in 2018, according to MCSA, but it witnessed a 2% decrease in 2019, along with a 1.3% decrease in production. Once the darling of the South African mining industry, gold mining has experienced a systematic decline.
An erratic, unstable regulatory framework, unreliable energy provision, and the slow adoption of modern mining techniques as well as lack of exploration and investments in new mines have led to the industry's structural decline. The turbulence also has its roots in external factors, such as the falling global demand for platinum and diamonds. However, the current commodity prices are breathing life back into the industry once again. Nonetheless, bottlenecks remain around the country's lack of political and regulatory stability, which hinder investment.
A particular challenge has been the backlog in licenses and mining rights. A survey of Minerals Council member companies conducted in December 2020 indicated that there are around 170 outstanding mining rights, prospecting rights, change of ownership, renewals and environmental authorizations applications pending. This backlog is holding back investment in projects worth approximately R30 billion (US$2.1 billion). "The Regulator requires the capacity to handle large volumes of work, and it requires people with the required skillset to assess applications to finality and an online cadastral system that works. One of the biggest difficulties has been the defective online Samrad application system," elaborated Ntsiki Adonisi-Kgame, executive for natural resources and environment at ENSafrica, the biggest law firm in the continent. "A lengthy application process has a domino effect and hinders progress in exploration and, ultimately, investment in mining."
The future of the South African mining industry is contested. However, the industry's potential remains enormous and undisputed given its mineral endowment and rich mining history. "South Africa has had its fair share of challenges, but it remains rich with opportunities for investments," explained Peter Flint, managing director of ArmCoil Afrika, a privately owned South African supplier and repairer of transformers and electric motors. "It hosts the experience and expertise in the mining industry to rise again."
“The tragedy and the opportunity is that South Africa possesses incredible assets, natural, economic, social, and political. Mineral resources are abundant. But the investment climate, however, is extremely poor, government presiding over an empire of red tape, collapsing strategic infrastructure, high administered costs and plain bad governance and corruption.”
Claude Baissac, CEO, Eunomix
The South African mining charter has been extensively debated and revised twice since its inception. The last revision resulted in the 2018 mining charter (mining charter III), which came into force on the 1st of March 2019 and significantly increased BEE threshold requirements regarding procurement, employment and ownership. Even though it was a step in the right direction, introducing long-awaited changes, there still remains room for improvement.
One of the concerns with the current charter is centred on the recognition of continuing consequences, since it stipulates that a previously conducted BEE transaction would have to be revisited to comply with the current BEE laws. Another concern is local content obligations regarding mining equipment that is not available in South Africa. "There are still many difficulties. The procurement section of the 2018 mining charter is unworkable and was not adequately thought through when it was gazetted," highlighted Lili Nupen, founder and director of South African mining-focused boutique law firm NSDV. "The fact that the charter is seen as a legislated document, where it is merely a policy, creates issues. The charter should be a guideline on how to transform sustainably instead of box-ticking a specific legislative requirement. This is one of the Minerals Council of South Africa's concerns as well."
Even though the mining charter has been finalized, there are changes on other regulatory fronts. "The regulatory environment in which we operate is very volatile, bringing significant uncertainty," confirmed Francois Uys, CEO of the Siyanda Bakgatla platinum mine.
"There is still great uncertainty within environmental legislation. The government's 'One Environmental System' aims to streamline the licensing processes for mining, environmental authorizations and water use. Still, this legislation has also not been concluded, which adds to the lack of stability," elaborated Hope Tyira, Siyanda's executive head of sustainable development.
Meanwhile, black economic empowerment (BEE) in the mining industry is under the Broad-Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018. While BEE laws in mining have facilitated the growth of local players, they also negatively impacted non-black owned service and equipment providers, according to Fanie Prinsloo, managing director of Martin Engineering: "Service providers are struggling with the BBBEE laws, which significantly increase the cost of doing business. It's becoming increasingly onerous to manage all the requirements of complying with BBBEE legislation," he explained.
"South Africa has failed to promote and support local manufacturers from a regulatory perspective. Even though BEE laws aim to address institutional racial inequality in South Africa, they adversely affect the South African economy's health. The Broad-Based Black Economic Empowerment regulations favouring BEE companies and manufacturers made it challenging for us to compete," agreed Flint of ArmCoil Afrika.
International companies operating in South Africa must invest in navigating BEE laws to ensure compliance. German-owned Loesche, the market leader in designing, manufacturing and servicing vertical roller mills, is investigating the employment equity investment programme (EEIP) as an alternative route to a black ownership structure, according to managing director in South Africa, Christian Gerhard: "The Department of Trade and Industry has an EEIP whereby you can invest 3% of your turnover into a greenfield type project where you beneficiate either the community or the owner of the project. We have identified three projects where we can get involved," he clarified.
On the other hand, Christina Zondi and Mncedisi Makhamba of Drill Rod Specialist (DRS) view these changes from a different perspective. "The local demand for our products, coupled with the local mining charter requiring local procurement and participation of indigenous black South Africans in the economy allowed for DRS to be established and to enter a partnership with Sandvik. Local content laws have significantly facilitated the growth of DRS," they commented.
The obligations imposed under Mining Charter III remain a source of contention, and the lingering regulatory confusion needs to be addressed to prevent the sun from going down on the South African mining industry. "We are in deep engagement with the DMRE Minister and his Director General on ways to resolve these challenges and to re-energize and revive the mining industry," confirmed Roger Baxter, president of the Minerals Council.
Images courtesy of Murray & Roberts and and FLSmidth