Sibanye an early casualty of Mining Charter 3
The government has introduced shock new rules, toughening existing requirements and implying hefty dilution for shareholders
Executives at Sibanye Gold, SA’s biggest gold miner, were in Los Angeles in the final stages of a road show with US bond fund managers in June, when a bombshell hit from back home.
The government had introduced shock new rules requiring local mines to be 30% black-owned in perpetuity, toughening existing requirements and implying hefty dilution for shareholders.
South African stocks tumbled and bond yields rose that day. The measures in Mining Charter 3 put at risk funding for Sibanye’s $2.2bn acquisition of Stillwater Mining of the US, the biggest foreign takeover by a South African mining company in 16 years.
"We had to hold back the financing, find out what the charter meant and rebrief all our potential investors," CEO Neal Froneman says.
"A number of institutional investors pulled out of the bond process, saying the risks in SA were just too high and it’s becoming uninvestable."
Companies and investors say the new rules and uncertainty will starve the industry of much-needed capital, shortening mine lives, reducing profits and adding to existing challenges of declining reserves and increasing costs.
Most mining companies offloaded 26% stakes and even entire mines to black investors at preferential rates in the 2000s to comply with previous rules, believing they were a one-off deal.
President Jacob Zuma backed the charter in Parliament in June as part of his "radical economic transformation" agenda, intended to boost black participation in the economy.
But ANC members, including Deputy President Cyril Ramaphosa, have signalled their doubts, saying the government and industry should go back to the drawing board and reach a negotiated settlement.
UNCERTAINTY WILL SCARE OFF INVESTORS IN A COUNTRY ONCE SEEN AS MODEL OF … OPEN MARKETS IN AFRICA.
Mining groups have begun fighting the charter through the courts and say the uncertainty will scare off investors in a country once seen as model of democracy, reconciliation and open markets in Africa. The first lawsuit seeking to block the charter while it winds through the legal process has an initial hearing on July 18.
"We’re not going to accept it," Froneman says. "It’s unconstitutional to abuse shareholders retrospectively."
The legal cases "could potentially take three years to conclude", says Victor von Reiche, an analyst at Citadel Wealth Management in Cape Town. Meanwhile, the mining industry "will suffer most as investors will take a wait-and-see approach".
The charter imposes numerous extra levies on mining, the country’s biggest export industry, at a time when the economy is in recession and suffering from 28% unemployment. It also directs payments that the industry estimates could amount to R3.5bn into a government-controlled fund that will manage communities’ stakes in mines.
Sibanye completed the bond sale, but at a cost. It is paying coupons of 6.125% and 7.125% on two bonds worth $1.05bn, 50 basis points higher than if the government had not published the charter, according to Froneman. The extra interest is $5.3m a year.
"This is bad news for mining, which was already shrinking due to the commodities cycle," says Old Mutual Multi-Managers chief strategist Dave Mohr. "It’s going to scare off investment while they go through the courts."
The Chamber of Mines has taken the government to court to block the charter and argues it is in breach of company law, international agreements and the Constitution.
The most controversial of the new rules is ownership; according to the charter, mining companies must "top up" to 30% within the next 12 months. But firms are unclear whether they must increase from 26% or the current direct black ownership level.
A rule requiring 1% of revenue to be paid to black investors before other shareholders would have consumed 95% of the R6bn paid in total dividends if applied in 2016, the chamber says. "We are struggling as everybody else to try and make sense of this charter," says Chamber of Mines vice-president Andile Sangqu. "That’s why we’ve opted to go to court."
Sangqu is also executive head of Anglo American’s South African operations.
Mineral Resources Minister Mosebenzi Zwane says the new rules are necessary to resolve the inequities of apartheid. As the world’s biggest gold producer for a century to 2007, SA’s mining industry was a key beneficiary of white minority rule, which ensured cheap labour and few environmental regulations.
More than two decades after that ended, average earnings for black households are a sixth of those of their white counterparts, according to Statistics SA.
The regulations’ timing could not be worse. The economy unexpectedly tipped into a recession in the first quarter, and business confidence reached a more than three-decade low in September, amid political uncertainty. Though the June reading improved, the new mine rules pared its gain.
While SA’s mining industry is a shadow of its former self, it still represents 21% of exports and employs 457,000 people, about 7% of total employment.
Many mine workers migrate from rural areas and have as many as 10 dependants.
Investors are not waiting for the court decision to make a call on South African mining securities. About $3bn was wiped off JSE-listed mining companies’ market value on June 15, when the charter was announced, although a US rate rise the previous evening also hit commodities stocks globally.
Mining stocks have traded at a price-to-book discount for the past five years.
If the charter is implemented, shareholders are likely to push back on providing more equity to fund additional black empowerment deals, according to Douglas Rowlings, a Dubai-based analyst for Moody’s Investors Service.
That means mining companies would be forced to use existing cash reserves or borrow money. "That’s a credit negative…. The market response was hugely negative and contrary to the ANC’s policy of fostering inward investment into SA. "The effect of the Mining Charter is totally opposite to that and would result in job losses," Rowlings says.