SA mining is ripe for foreign direct investment
The recent increase in demand for commodities has led to a concurrent increase in demand in mining, which will undoubtedly lead to a rise in FDI in mining
Foreign direct investment (FDI) in SA fell by almost half in 2020, in line with the worldwide downturn caused by the global Covid-19 pandemic, according to UN Conference on Trade and Development (Unctad) figures. The country attracted only R2.5bn of new investments in 2020, a sharp 45% drop from the 2019 figure of R4.6bn.
However, with many of the Covid-19 sanctions on doing business being lifted since mid to late 2020, FDI is seeing signs of recovery. With its good business climate, strong focus on production and financial services, and a tourism and retail sector showing great potential, SA remains attractive to investors.
A particularly strong area for investment in SA is the mining sector, which is a major part of the economy, being the world’s largest producer of chrome and platinum, and the second largest producer of palladium and zirconium. Our country also exports significant amounts of coal, diamonds and iron ore. In 2020, the SA Reserve Bank reported that mining and quarrying was the second-largest sector to secure investment during 2018 at 25.5%.
The recent increase in demand for commodities has led to a concurrent increase in demand in mining, which will undoubtedly lead to a rise in FDI in mining. Worldwide the need for palladium and platinum is high given that these materials are key in controlling vehicle emissions, which are becoming more stringent for China and Europe.
When speaking broadly about FDI in mining, ministerial approval of the change of control in those businesses is needed. This we usually refer to as section 11 approvals, which take an average of nine to 12 months but can take as long as 18 months. This requirement does not extend to listed entities, however. What does apply to all mining acquisitions in SA, including FDI, is that the mining company must comply with all of the conditions of its mining right.
Firstly, the business must comply with the Mining Charter in terms of the following: 30% of ownership must be in the hands of historically disadvantaged groups, of which 5% of those shares must be held for the benefit of the mine’s host communities and 5% of shares must benefit the company’s employees. These shares usually come in the form of a community trust and an employee benefit trust, while other companies create a share pool. The guiding principle here is that there has to be a real benefit, which all comes down to dividend flow.
The department of mineral resources and energy encourages trickle dividends, so the money received by beneficiaries is not only governed by profit but also ensures there is a regular flow of funds to communities and employees. Equity in transactions is also dealt with as part of broader social and labour plan compliance to ensure community and employee projects benefit from the company, so a more sustainable economy is built within the communities that sit around the mining entity.
For example, the company is required to build up small business around the mine, which often fall into the categories of security and logistics, both important for the mining entity. These stipulations do not apply to the rights that were granted under the previous Mining Charter, but they do reflect a real drive by government to try to broaden the equity base of mining companies so that it doesn’t benefit just one person.
For example, mining procurement is also more specific in the mining industry to meet BEE requirements, such as capital goods and operational expenses being differentiated. The equity requirement of ownership transfer in the case of a mining entity usually takes nine to 12 months to finalise and, in the case of FDI, can only be implemented once ministerial approval of the transaction has been obtained.
If the FDI does not involve a change of control but rather involves buying out assets and putting them into a new entity, then what flows from that is a change of licence or licence holder. This can be a complicated process because of environmental approvals, for example water licences, atmospheric emissions licences and environmental authorisations, all have to move across. There is therefore a part of the project that has to focus on bringing the regulatory compliance into line, and this is where the right kind of legal advice becomes crucial. A few of the change of licences can be done post implementation of the sale, but it is an ongoing process thereafter.
Some change of licences can take time. What often happens is that certain mining operations were approved under a certain environmental plan, and the new owner might want to change the scope slightly. The mine would then have to undergo a formal environmental impact assessment, which can take 12-24 months, and then only after ministerial approval.
Although the SA economy, and the mining sector specifically, have taken a bit of a knock with Covid-19 and existing hurdles before the pandemic, it is undeniable that now is a good time to invest in mining given that it is a buyers’ market.
• Badenhorst is office managing partner at Hogan Lovells.
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