HomeFeatures & AnalysisChallenges faced by the South African exploration and mining industry

Challenges faced by the South African exploration and mining industry

Warren Beech, partner and head of mining at law firm Hogan LovellsBy Warren Beech, partner and head of mining at law firm Hogan Lovells

The various challenges being faced by the South African Exploration and Mining Industry are generally summarised into 8 key challenges, namely:

  1. the global financial crisis, and the impact that this has had on global demand,
  2. regulatory and legislative uncertainty,
  3. infrastructure, ports, rails, water, roads and electricity,
  4. labour uncertainty,
  5. health and safety,
  6. environmental compliance requirements,
  7. illegal mining operations, and
  8. community activism.

The cumulative impact of these challenges, cannot be under estimated.  Unfortunately, it is extremely difficult to quantify the cumulative impact.  Mining companies do however accept that there is certain risk involved in the South Africa Exploration and Mining Industry and accommodate this risk, in the business decisions. However, one of the key challenges that has the most significant impact, is regulatory and legislative uncertainty.  Without a stable framework within which exploration and mining companies can obtain prospecting and mining rights and the related environmental authorisations, and exercise those rights within an environment (which at the very least gives a sense of security that the significant investments required will be protected and will, for the duration of the right be certain) investors are extremely cautious when making investment decisions.

Our experience is that many investors from both the historical and traditional investment jurisdictions, such as Australia and Canada and the more recent investment jurisdictions, such as China, express concern at the ever changing regulatory environment in South Africa.  This seems to be one of the key “deal breakers”, when decisions are made regarding South Africa as an investment destination and it is easy to see why: If key legislation such as the MPRDA is consistently subject to review, proper decisions on investment cannot be made, and the long lead times between the decision to invest, and the granting of the authorisations impacts even further.  For example, if it takes four to five years to obtain a water use licence, in the absence of which mining operations often cannot commence, investment destinations which are able to expedite the authorisation process, would be more attractive to the investor.

The current situation and the gaps created by the MPRDA amendments and the NEMA amendments add significant uncertainty. Environmental authorisations are a critical component of the ability to mine lawfully. Even if a prospecting right or mining right is granted, in the absence of the environmental authorisations, and the issuing of water use licenses, the investor is not able to lawfully commence its mining operations.  The delayed return on investment represents a significant additional risk to the investor in these circumstances.

South Africa remains full of opportunity but it is essential for potential investors to form realistic expectations and to manage the expectations accordingly.

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