The three things SA needs to get right to open floodgates of mining investment
Concentrated, overregulated asset management industry discourages flow of money into small companies
While there is consensus that a thriving exploration and junior mining industry is a vital component of any sustainable mining sector, and despite claims of an outbreak of regulatory certainty, large question marks still hang over the prospects for junior mining and exploration in SA. And with good reason.
S&P data show that SA’s relative share of Africa’s exploration budgets crashed from 35% in 2002 to 8% in 2018. Interestingly, this is the period in which the Mineral & Petroleum Resources Development Act has existed and provided the industry with its first three mining charters. Five other African countries now attract more exploration investment than SA: the Democratic Republic of Congo, Burkina Faso, Ghana, Ivory Coast and Mali.
Mining jurisdictions such as Canada and Australia, whose mining industries were once dwarfed by SA’s, today each attract about 14 times the total exploration spend of SA. I believe three main ingredients lie at the heart of the mining and exploration success achieved by these two thriving junior mining and exploration regions.
This unfortunate perception of widespread incompetence and corruption is now supported by an increasingly large number of court documents.
The first is an internationally competitive policy environment overseen by competent administrators using world-class systems. Importantly, in the Canadian and Australian jurisdictions, the policy environment is not shaped by bargaining between incumbent senior mining companies and government. Instead, policies are the outcome of a process undertaken by technocrats, taking account not only each jurisdiction’s unique circumstances but also appropriate international precedent and expert outside advice.
In SA, the policy environment is markedly different; the administration of prospecting and mining rights is not at all transparent and it is widely regarded as both incompetent and corrupt. This unfortunate perception of widespread incompetence and corruption is now supported by an increasingly large number of court documents. This is despite recent clean-up efforts where certain administrative offices have been summarily closed.
Noteworthy is the fact that SA is the only top 10 African exploration country that does not have an accessible, online mining cadastre. And it’s not because we don’t have the technology or expertise in this country. In fact, the Flexicadastre system, which is now used by seven of the other top 10 African mining countries, including some of those out-competing SA, was developed right here.
The second component that differentiates countries that have thriving junior mining and exploration industries is that they have governments that recognise the value of investing significantly into their country’s geological endowment. Governments either do it themselves or persuade international organisations to do it for them.
This includes financially supporting primary geological research, regional surveys and mapping, and the curation of historical exploration data, which is then made freely available to all prospective explorers. In SA, there has been encouraging talk that the Council for Geoscience is to receive significantly more funding, but there is still no indication if, or how, the resulting knowledge and insights will be shared with all mining stakeholders.
The third success requirement is arguably the most important, and the sad reality is that SA is far from ensuring it is in place. I’m referring, of course, to access to capital. For junior mining in SA to have any hope of surviving, let alone thriving, participants have to be attractive to both local and international investors.
The three most proven international junior mining public capital markets are undoubtedly the TSX in Canada, the ASX in Australia and the AIM market of the London Stock Exchange. These three markets provide risk capital to all the world’s geologically prospective countries provided they have investible policies in place. A policymaker needs only to look where these markets are investing to work out which policies work.
For one, these markets all benefit from investment incentives that not only serve to direct investment into smaller companies but also actively develop the public capital markets and attract a diversity of market participants. Canada is a prime example. Flow-through shares afford retail investors generous tax incentives to invest and participate directly in the market while raising money for Canadian exploration.
In the UK, capital gains tax advantages are available to retail investors in AIM, which ensures the flow of capital to smaller companies. And Australian smaller companies, including junior mines and exploration businesses, benefit from forward-thinking initiatives like self-managed superannuation funds that encourage diverse participation in the public markets and from direct grants from Australian states to exploration companies.
Therein lies the key to effective investment incentives. They must benefit and develop the public markets while deliberately directing funding to smaller companies, including junior miners and explorers. Unfortunately, in SA the opposite is true at present. In the past 20 years, the sheer weight of regulation applied to how the savings and investments of South Africans are managed has served to disincentivise direct investment in the public markets and has disadvantaged smaller investment management companies. It is well understood that big firms benefit from greater regulation at the expense of smaller firms, which simply don’t have the people or expertise to cope with the regulatory burden.
As a result, we now have a situation in which 90% of all the country’s savings are managed by the 11 largest asset management firms. Generally, these managers won’t invest less than 1% of a fund in any single company and also cannot hold more than 10% of a single company. Given the sheer size of the funds under management, these restrictions mean that most funds are unable to invest in roughly two-thirds of the smaller companies listed in SA. Small companies need small investors.
This investment industry concentration is just one of many challenges. Retail stockbrokers, who were previously often viewed as the lifeblood of smaller company investing, have in effect been regulated out of business. And while many of the individuals involved have been “reincarnated” as wealth managers and financial planners, the regulations make it very difficult for them to promote a single company investment to their clients.
The introduction of investment incentives such as tax-free savings accounts has done little to rectify the situation. The stringent regulations around these vehicles have in effect ensured that the same concentrated asset management industry benefits from them by specifically excluding self-managed equity portfolios from the incentive. Likewise, the section 12J incentive, as much as it was intended to promote investment in smaller companies, does nothing to incentivise participation in liquid public markets as retail investors are required to hold their investments for at least five years to lock in the tax benefit.
And finally, we have seen the end of public offers in SA as private placements have largely become the order of the day, preventing most smaller investors from becoming aware of, or directly accessing, opportunities. Compliance with the so-called market spread requirements has been contrived by new issuers and their advisers, public promotion is restricted, and minimal information is made available ahead of technical listings “by introduction”, which has a negative impact on public market participation, liquidity and post-listing price discovery.
Ultimately, all of this means that even if SA succeeds in creating a regulatory and policy environment that is supportive of junior mining and exploration, the local capital markets do not stand ready to provide the financial support companies involved in these industries so desperately require to succeed.
The bottom line is that if SA is to have any hope of rebuilding a thriving junior mining and exploration sector, the country needs incentives that serve the dual purpose of attracting investment into smaller companies while at the same time developing our public markets.
• Miller is MD of CCP 12J Fund.