Mining Sector Stuck In Limbo

The redrafted Mining Charter has far-reaching implications for the country’s mining sector. Instead of bringing some much-needed certainty, it will just deter investors even further.

- David McKay

South African mining shares were roundly penalised on 15 June following the publication of the third Mining Charter, a redraft of the 2010 version, but which has far-reaching implications for the country’s mining sector; unanimously bad ones.

According to Investec Securities analyst Andrew Snowdowne, mining shares may offer “near-term attractive buying opportunities”, but in the longer term it is almost impossible to make a case for holding them.

This is based on an expectation that the charter redraft won’t see light of day in its current form. At the time of writing on 20 June, the Chamber of Mines was preparing litigation to have the document taken on review, set aside and then interdicted. It may well be that given the lack of consultation with the industry, the courts will send all parties back to the negotiating table.

In addition, an application last year for a declaratory order by the Chamber of Mines on the principle of “once-empowered, always empowered”, which had been held in abeyance, will be lodged with the High Court.

This is the question as to whether previous empowerment deals will be recognised in the event the black-owned partner company sold its shares or the transaction failed. The issue is yet more critical because the Mining Charter seems to indicate previous empowerment deals won’t be recognised; in fact, only direct BEE shareholdings will be considered for credits.

Shareholder dilution

The outcome for mining stocks is potentially disastrous as it will require re-empowerment and shareholder dilution. In the case of Lonmin in particular, this is a clear case of government shooting itself in the foot considering the Public Investment Corporation (PIC) underwrote the platinum producer’s $4bn rights issue in 2015, which makes the PIC its largest shareholder with a 14% stake.