The hostile and uncertain investment environment for mining has seen its contribution to employment and the broader economy shrink – a concern that will doubtless be at the heart of the imminent engagement between mining and Cyril Ramaphosa’s administration.
The signs are positive: the judicial review of the controversial Mining Charter, due this week, has been postponed by the mutual agreement of the Chamber of Mines and the Department of Mineral Resources to make way for a discussion on the best way forward.
This is the expressed objective of newly inaugurated president Cyril Ramaphosa, who said in his maiden State of the Nation Address on Friday that he wished to intensify engagements with all stakeholders on the Mining Charter “to ensure that it is truly an effective instrument to sustainably transform the face of mining in South Africa”.
Ramaphosa went on: “By working together, in a genuine partnership, underscored by trust and a shared vision, I am certain we will be able to resolve the current impasse and agree on a Charter that both accelerates transformation and grows this vital sector of our economy.”
The core issue is that as long as the mining environment is shaped by hostile sentiment and regulation, mining companies are much less likely to invest in South Africa, and most enterprises will focus chiefly on care-and-maintenance rather than new greenfields projects. This has implications for mine employment as well as companies which rely on the mining industry, such as suppliers and consultants.
The business community has often been accused of being on an investment strike, and although a plethora of research has shown that this is not the case across the broader business community, it is true of mining. South African mining houses have been reluctant to invest in the country, and for good reason.
Mining Minister Mosebenzi Zwane’s proposed Mining Charter has not been the sole cause of this, but it is certainly a symptom of the disease.
As Bonang Mohale of Business Leadership notes, the mining industry is under increasing strain, burdened as it is by inflation, and high wage and electricity increases. Couple policy uncertainty with these factors and it is no surprise that mining companies are reluctant to invest, or struggle to raise money from investors.
Analysis from Datta Burton and Associates, a management consulting firm with offices in Australia and South Africa, showed that investment by South African mining companies was on the decline. Between 2008 and 2016, there was a yearly drop of eight percent in real terms in capital expenditure by South African mines. The firm lays the blame for this squarely at the door of the mining minister, noting that amendments to mining legislation, especially the Minerals and Petroleum Resources Development Act, ‘are almost dictatorial’.
Datta Burton and Associates goes on: ‘It gives the Minister powerful decision rights, including setting pricing and imposing export permits. This not only opens it up to corruption but makes for a frightful investment setting. How can an investor create a financial case when they are unsure of what price to use or market to target? These factors will be dependent solely on the mining minister. Investors are forced to demand higher returns for that risk, or simply invest elsewhere.’
The firm’s analysis from 2016 was written before the Mining Charter’s third iteration, but it flagged the lack of consultation with regard to the second charter, where many mining companies felt their contributions had been ignored.
Indications today are that that is about to change. The mining industry will not be alone in welcoming a new spirit of partnership.
Mining companies are already operating in a tough environment. Profits are plummeting. Industry profits over five years up to 2017 have declined by 48%, while dividends paid to shareholders have fallen lower – declining to 52%. Furthermore, according to Roger Baxter, the CEO of the Chamber of Mines, 60% of platinum mines are unprofitable – and this is unlikely to change in an investor environment that is hostile to mining.
The Chamber also estimates that the additional levies and costs that mining companies will have to pay if the new Charter is approved could come to as much as an additional R700 million a year for the industry.
Transformation in South Africa would be far better served without onerous regulations which create a hostile environment for companies looking to invest in the country. If companies could invest without being told who they had to sell their shares to, that they had to give more than a quarter of their company away to others simply on the basis of their race, and pay levies which often fulfil no purpose, South Africa would create an investment environment capable of expanding job creation, generating more procurement, and increasing spending by mining companies.
All of this would boost the economy, and lead to real transformation that has a positive effect on the lives of poor South Africans, rather than merely the enrichment of a handful of politically connected individuals.
* Terence Corrigan is a Policy Fellow at the Institute of Race Relations, a liberal think tank that promotes economic and political freedom.
** The views expressed here are not necessarily those of Independent Media.