South Africa mines dispute pits inequality against investors

A landmark South African court case that starts Tuesday will ask a judge to rule whether the need to reduce racial inequality trumps shareholder rights.

The Chamber of Mines of South Africa is asking the High Court to back its view that the Mining Charter stipulates that companies should be credited with disposing of a minimum of 26 percent of their assets to black investors even if those stakes were later sold. The original charter agreed to by the government and the mining industry took effect in 2004. The Department of Mineral Resources updated it in 2010 to make the minimum requirement permanent.

“It is going to be huge — if the chamber loses, everybody who’s been disempowered will have to be re-empowered,” Andrew Mitchell, a partner at the Johannesburg-based legal firm Fasken Martineau LLP, said by phone. “The shareholders are not going to like it because it means they’ll get rediluted again.”

South Africa’s push for increased black ownership of the mining industry, which accounts for almost half of the country’s exports, is part of an effort to address the legacy of apartheid that locked the black majority out of key industries. The charter also sets targets for companies to boost the numbers of black people in management and improve training and benefits for communities near mines. No black South Africans lead the country’s eight biggest precious-metal companies, all of which are headquartered locally.

The industry remains “dominated by white males,” the mines department said last year.

Black Control

While the chamber says black control in mining averaged 38 percent by the end of 2014, the government maintains just 20 percent of companies had complied with the minimum requirement. The two parties used different criteria.

The chamber plans to argue that the mines ministry breached the charter by making the 26 percent requirement permanent, and if the government’s arguments are upheld, it could have “devastating” economic and reputational consequences for the companies, the court documents show. The group declined to comment on questions submitted by Bloomberg.

The chamber’s members include Anglo American Platinum Ltd., the world’s biggest platinum producer, South32 Ltd., AngloGold Ashanti Ltd. and Glencore Plc. South Africa is the world’s biggest source of platinum and manganese and the continent’s largest gold and coal producer. It also produces iron ore, vanadium and chrome.

Measurement Criteria

The chamber says that while its members would’ve met or exceeded the 26 percent shareholding target if all their black economic empowerment, known as BEE, deals worth 205 billion rand ($13.5 billion) since 2000 counted, a quarter could miss the required threshold if sold-down stakes are disregarded.

Companies that may fall short of meeting these conditions include Anglo American Platinum and Sibanye Gold Ltd., the largest producer of the metal from South African mines, the Johannesburg-based chamber said in a letter to the mineral resources department that was included in the court papers.

During white-minority rule, the majority of citizens were confined to “the role of suppliers of cheap labor to the mining industry,” the department said last year when it announced it was in dispute with the chamber. “Meaningful participation in the broader economy by the country’s historically disadvantaged remains critical for the sustainability of our democratic ideals.”

The court case will show what the law requires from mining companies, the ministry said in an e-mailed response to questions. Clarity on issues of “compliance will be beneficial to all stakeholders,” it said.

Onwership Target

The chamber argues that since the ownership target was a one-time requirement before the mineral resources department’s revisions, penalizing companies whose black investors sold their stakes shouldn’t be a reason to consider stripping an operator of its mining rights, according to the court documents.

“This will force mining companies to perpetually dilute other shareholders if the required partners cannot be found in the open market,” the chamber said in a letter attached to court papers. “The consequences will be a shareholder revolt, significant divestment from mining companies and a significant constraint on companies to raise capital in the future.”

Both the ministry and the chamber are opposing a separate application by a Johannesburg-based law firm, Malan Scholes Inc., to declare the Mining Charter unlawful. The firm wants the High Court to hear both applications together because it says some of the issues overlap.

Empowerment Deals

BEE deals in South Africa have been financed by methods including raising cash from shareholders as well as companies and banks lending money to black investors. While some black investors reduced their shares, others saw their stakes diluted when they were unable to service loans as the slump in commodity prices dried up dividends.

The chamber also plans to argue that if the permanent requirement stands, it would cut the value of black investors’ investments because they wouldn’t be able to freely exchange them if companies sold the stakes on condition they weren’t traded. The government is also ignoring the economic empowerment that mining companies have brought about, it said.

“The fact that some of the BEE companies have sold out of their equity stakes — and so empowerment has been created in other areas of the economy due to mining — or that equity prices have fallen so as to challenge BEE deals, does not take away the significant efforts the industry has invested in meeting the requirements on transformation,” the chamber said.

Resolving the dispute of shareholding obligations will take years to finalize because the losing party will probably appeal to higher courts, Fasken Martineau’s Mitchell said.

“If you try to do it now, for some companies that will be the end,” he said, referring to a second round of empowerment deals. “They won’t be able to raise the money.”

– Bloomberg