Miners say free carry will kill new projects

The biggest threat posed by South Africa’s new Mining Charter may be to mines that haven’t been dug yet.

The draft rules, published Friday by Mineral Resources Minister Gwede Mantashe, lay out several requirements for new mining rights, including that nearby communities and employees each get a 5% free-carried interest in either the asset or the company that owns it. The charter is aimed at distributing the industry’s wealth more widely among South Africans to make up for racial discrimination during apartheid.

New mines are already scarce in the country, which has been mined commercially for more than a century and where producers have struggled with rising costs, regulatory uncertainty and a restive labour force. The industry argues that the free carry — which means the respective groups don’t have to buy their shares or pay their way — will make new developments even less likely.

“We consider much of the South African resource base to be in sunset,” analysts at Morgan Stanley including Brian Morgan wrote in a note received Monday. Many potential projects have marginal economics to begin with and “higher hurdle rates could equate to lower future mining investment,” they said.

The free-carried interests for new mining rights are included in a mandatory 8% each to be held by workers and communities, while a further 14% must be owned by black entrepreneurs, according to the draft Mining Charter, which was published for public comment.

Read more: Minerals council against 5% free carried interest

Another requirement for new rights is that the workers and communities be paid 1% of earnings before interest, taxes depreciation and amortisation in years when a regular dividend isn’t declared.

While existing producers have an easier time, they will still have to increase their black-ownership percentage from the current minimum of 26% to 30% within five years.

The changes might not weigh on current equity valuations, but could be a potential negative for South Africa’s mining industry in the future, Morgan Stanley said.

South Africa is seeking to spread the mineral wealth more equally in an industry in which highly paid, mainly white male executives oversee hundreds of thousands of mostly black workers laboring in deep and dangerous operations. The Mining Charter, first introduced in 2004, laid out rules and targets for areas such as black ownership, and was later updated in 2010.

Mantashe published the latest draft following months of negotiations with mining companies, unions and communities. A version published last year by his predecessor drew opposition and legal challenges from the industry. South Africa has the world’s biggest reserves of platinum and manganese, and its mineral deposits also include gold, iron ore, coal, chrome and zinc. Anglo American, Glencore and South32 are among companies operating in the country.

To be sure, the concept of a free-carried interest isn’t new for the mining industry. Countries including Mali, Tanzania and the Democratic Republic of Congo require mining companies to provide government with a free stake.

While the new version is an improvement on last year’s, “many of its provisions remain problematic,” said Peter Leon, co-chair and partner at law firm Herbert Smith Freehills. “It is unlikely to result in much-needed investment in the already embattled South African mining sector.”

Read: The revised Mining Charter fumbles and crashes 

Mature Sector

The Minerals Council of South Africa, a lobby group representing most producers that used to be known as the Chamber of Mines, said it’s opposed to the free-carry interest.

“Given South Africa’s mature mining sector, a 10% total free-carried interest on new mining rights will materially undermine investment, by pushing up investment hurdle rates and ensuring that many potentially new projects become unviable,” the group said. It also complained that the dividend to communities and workers wasn’t included in recommendations by a multi-party task team on the charter.

Mantashe defended the free carry on Sunday, saying that companies should view it as an investment to ensure employees and communities are part of mining projects. The percentage “is not a big call,” for producers, he said.

South Africa’s general elections scheduled in 2019 probably mean that appealing to voters is a priority for the ruling African National Congress, said Rene Hochreiter, an analyst at Noah Capital Markets.

“They have to keep voters happy while killing the industry,” he said.