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Why South Africa's Mining Rules Are Drawing Fire: QuickTake Q&A

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South Africa is far from the egalitarian rainbow nation envisaged by Nelson Mandela when he ushered in democracy in 1994. A prime example is the mining industry. Its highly paid, mainly white male executives oversee hundreds of thousands of mostly black workers laboring in some of the world’s deepest and most dangerous operations. The government’s updated rules for so-called black economic empowerment, including more stringent ownership requirements, seek to reverse the imbalances. The new regulations have the mining industry up in arms, as producers protest what they say was a disturbing lack of consultation on changes that are likely to require dilution of their existing shareholders.

1. What are the new regulations?

A new national Mining Charter, published in a government gazette by Mineral Resources Minister Mosebenzi Zwane, aims to involve more black groups and women in the mining industry and ensure that more of the proceeds from mining flow to the black majority. Mining companies are being asked to comply with a black-ownership threshold of 30 percent within 12 months, up from a previous 26 percent. The charter doesn’t include the "once empowered, always empowered" principle, which allowed companies to claim credit from past deals even if black investors sold out. They must also contribute 1 percent of annual revenue to community development, allocate 80 percent of total spending on services to black-owned companies and ensure more than half of senior management are black.

2. Why are the rules changing?

The Mining Charter was first implemented in 2004 and later revised in 2010, making this the third iteration. President Jacob Zuma’s government says companies have been too slow to share South Africa’s mineral wealth with black people, whose average household earnings are a sixth of whites’. Speeding up the transformation also makes sense politically. Zuma is embroiled in numerous scandals, and the ruling African National Congress, which last year lost key local elections, has a leadership contest in December. Zuma and his allies are pushing a policy that they call “radical economic transformation.”

3. What’s the industry’s view?

Many companies already met the 26 percent ownership requirement by selling shares or assets to black investors, usually in complex transactions that include elements of community and employee ownership. In some cases, the buyers have since exited the investment. While that didn’t matter under the previous rules, the new version means companies may have to meet the requirements all over again. Producers have yet to comment on the new rules and the industry has argued that prior deals should count. They say continual dilution will deter foreign investors.

4. Was industry involved in writing the new rules?

No. The Chamber of Mines, which represents producers, was in the dark as recently as the day before Zwane published the new rules. Relations were already strained after Zwane shocked the industry last year with a draft version that excluded the "once empowered, always empowered" provision. The lack of communication was in stark contrast to the 2004 and 2010 versions of the charter that deeply involved the industry.

5. How successful were previous empowerment efforts?

Many wealthy black South Africans today can trace their success to mining empowerment deals in the 1990s and 2000s. Yet critics say the deals have benefited the politically connected elite over poor South Africans who need it most, and that the requirements deter foreign investment. Many of the community-development pledges made by mining companies have gone unfulfilled.

6. Which companies are affected?

Glencore Plc, Impala Platinum Holdings Ltd., Kumba Iron Ore Ltd. (majority owned by Anglo American Plc), and South32 Ltd. would need to sell the biggest stakes in local assets if historic deals are not taken into account by the new charter, according to Avior Capital Markets (Pty) Ltd. The country’s two largest gold miners, AngloGold Ashanti Ltd. and Sibanye Gold Ltd., would also be affected.

7. What’s likely to happen next?

The Chamber of Mines says it will take the government to court, which may delay the regulations. The group called the process for developing the charter flawed, but added that it’s committed to a “meaningful transformation” of the mining industry. It also highlighted its past success in supporting black empowerment. Peter Leon, the global co-chairman of Herbert Smith Freehills’ Africa practice, has said the revised charter may be challenged over procedural issues and/or if it can be proven as an unconstitutional document, while Malan Scholes Inc., a Johannesburg-based law firm already has an application to declare current and previous charters unconstitutional because they lack definition and are inconsistent.

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