Mining your business
10 March 2008
South Africa's mineral wealth has enabled it to be a global leader in diamonds and precious metals such as gold, platinum and chromium and it is the sixth-largest coal producer worldwide. It is estimated that South Africa has more than 40 per cent of the global gold resources and has resources to produce in excess of 40,000 tonnes of gold in the future, although it does not have large resources of base metals.
South Africa's mineral exports only comprise approximately 10 per cent of its gross domestic product. South Africa has used the mining industry to accelerate its economy by providing valuable export items and a reliable source of employment across the different societies and cultures of the country. The South African mining industry now has a substantial skills and knowledge base on which it can rely. The big challenge for the country is to replicate the success of the mining industry in other sectors.
Growth of the mining industry
The South African mining industry is regarded as being less regulated compared with other developed mining countries. This has allowed mining companies to establish themselves quickly and for the industry to grow. Unfortunately, the development of key infrastructure has not necessarily kept pace and this has meant that the full potential of the mining industry has not been realised. For example, the current power shortages are a result of there being insufficient generation infrastructure to match the demands of a growing economy and increased consumer demand.
At the start of this year South Africa had some of the cheapest electricity prices in the world, largely due to the fact that most of the electricity is generated from burning low-grade domestically produced coal. The public sector electricity generator Eskom was granted permission to raise prices by 14 per cent this year and has stated that it will continue with similar increases for some time. The current energy market operates as a monopoly, with Eskom providing more than 95 per cent of all electricity and independent power producers representing only a small percentage.
The recent power shortages have had a significant financial impact on industry and led the mining industry to institute a week-long forced shutdown. However, mining has now resumed, although at less than 90 per cent of full production. Companies such as Rio Tinto have stated that they will not proceed with new projects until there is a guaranteed minimum supply of electricity.
Mineral and Petroleum Resources Development Act
Previously the mining industry did not have a sufficient proportion of black participants engaged in owning or managing mineral assets, but the Mineral and Petroleum Resources Development Act has brought about many changes to address this imbalance.
The act has changed the way in which rights to minerals are held, as the bulk of mineral rights were previously controlled by the large mining houses. Under the act all mineral rights reverted back to the state. The state has the rights to the minerals and is able to grant licences to explore or mine for minerals. The licences have standard conditions, including 'use it or lose it' provisions.
Various black economic empowerment (BEE) organisations have evolved throughout South Africa to increase social integration across the economy and, particularly in the case of mining, share the financial and social benefits of the industry. As part of the reversion of mineral rights, the act requires the government to apply the royalties it receives in the communities where the associated mining activity takes place. The funds must be applied in ways to advance the community welfare and also provide measures to protect and rehabilitate the environment.
The act contains a comprehensive list of BEE objectives with which companies are required to comply. However, several trade and industry bodies have also established their own BEE objectives contained in their codes of best practice. These objectives are additional to the requirements contained in the mining charter and the act.
The BEE regime has proven to be successful in integrating communities in the mining industry and some BEE companies have established reputations as being preferred partnership companies. As part of the BEE process, mining companies are required to hand over 26 per cent of the economic ownership of mineral assets to BEE investors by 2014.
One of the first large mining benefaction deals was Anglo American's sale of its subsidiary JCI. In 2005 De Beers sold 26 per cent of its South African mines to Ponahalo to form De Beers Consolidated Mines (DBCM). Shareholders of DBCM included three broad-based trusts benefiting disadvantaged women, people with disabilities and the communities living around the DBCM mines. Recently De Beers has outsourced its bulk fuel supply to three BEE companies.
These deals are intended to diversify ownership and spread more widely the economic benefits of a fast-growing economy.
Mining is an inherently dangerous industry. The act contains provisions addressing safety concerns about mine sites and working conditions. The Department of Minerals and Energy has conducted more than 50 mine safety audits since December 2007, leading to the temporary closure of some facilities, including the Elandskraal gold mine.
One of the primary areas of concern in relation to working conditions is dust inhalation. Many miners have developed silicosis due to inhaling crystalline silica dust, a known problem in the South African mining industry. A number of mining companies are currently engaged in litigation relating to whether their workers are entitled to sue for contracting silicosis even though the workers received compensation from the Compensation Commissioner for Occupational Diseases when they contracted the disease and ceased working. Many more companies across the industry could face similar class actions if such claims are made possible.
Raj Karia is a partner at Norton Rose