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JOHANNESBURG - The contentious draft mining charter proposal for a 10percent free carry for communities and employees on new projects is set to be hotly debated at the mining summit to be held next month after Minerals Council South Africa (MCSA) flatly rejected it.

The MCSA, formerly the Chamber of Mines, said yesterday that the draft Mining Charter contained elements that were unconstitutional and contrary to company laws.

A spokesperson for the MCSA, Charmane Russell, said the imposition of a free carried interest must be weighed against the need to attract investment for growth and employment creation. “Given South Africa’s mature mining sector, a 10percent total free carried interest on new mining rights will materially undermine investment, by pushing up investment hurdle rates and ensuring that many potential new projects become unviable,” Russel said.

Maarten Ackerman, Chief Economist Citadel said the markets would not like the 10 percent free carry on new mining project. “For an industry that’s under severe pressure - an industry that needs to be kick-started to get new projects going and to attract foreign direct investments to help us create jobs - to be required to give away 10 percent on any new project will be viewed unfavourably.”

The 10percent free stake on new mining rights is part of the proposed 30 black economic empowerment (BEE) equity ownership target within the next five years.

The detail on the free carry requirement is that new and renewal of existing mining rights will require 8percent for both communities and employees, 5percent of which is defined as free carry ownership. The charter also calls for 14percent ownership for BEE entrepreneurs.

Department of Mineral Resources Minister Gwede Mantashe said the summit will discuss the latest version of the Mining Charter with the industry and social partners.

Mantashe said the department was prepared to engage with the council and industry over their concerns over the free carry rule. “We agree in principle that 5percent must be free carry. And if the council says this can be in kind, it must the articulate what it means by that. Does it translate into ownership or is it just a profit-sharing scheme?” said Mantashe.

“When they (MCSA) bring the model they want to propose we will engage with it and if it makes sense we will appreciate it, but if it doesn’t make sense we will not accept it readily”.

The drawn-out charter has been largely blamed for creating uncertainty in a sector that has underperformed in the past six months. The decline in mining production in the first quarter was a significant contributor to the 2.2percent decline in the gross domestic product in the second quarter.

The mining sector fell 9.9percent during the quarter, mainly due to lower production of gold, platinum group metals and iron ore. The World Bank in April said an amicable resolution on the contentious mining charter may increase investments in the sector by 25percent.

The council said that it was surprised by some clauses in the charter that were not agreed to by the Charter Task Team. These include the proposal to top up existing right holders BEE ownership to 30percent within five years and that a mining rights holder would be compelled to pay a trickle dividend equal to 1percent of earnings before interest, tax, depreciation and amortistion to communities and labour.

Chief executive of the Council for Geoscience, Mosa Mabuza said mining companies would be able to “claim back” the trickle dividend once they start to pay dividends. “The intention of the trickle dividend is to say that both communities and workers should not be subjected to the vagaries of the market,” said Mabuza.