Meaningful economic participation of HDSA ownership in South Africa’s mining industry, as per the ownership element of the Mining Charter, has been 38% on average.
This is above the Mining Charter 26% HDSA (historically disadvantaged South African) target by 2014.
This result follows a comprehensive report by the Chamber of Mines and its members and is an aggregation of company information based on the Department of Mineral Resources (DMR) submissions as at 31 December 2014.
Disagreeing with the DMR
The Chamber and its members do not agree with this DMR Mining Charter interpretation, which suggests that only 20% (on a weighted basis) of mining right holders have met the definition in terms of meaningful economic participation.
According to a statement issued on Friday by the Chamber of Mines,“We note the differences in the DMR report which seeks to cast the industry as not having met its obligations. The DMR states that 90% of the companies achieved the 26% target on an employment weighted basis with an average of 32.5% HDSA ownership.”
“However, the DMR in its own interpretation of meaningful economic participation is now of the view that mining companies have to not only do narrow based empowerment transactions, but have to also include community and employee ownership schemes, which they say on a weighted basis that only 20% of the transactions comply. The Chamber does not share this interpretation and is firmly of the view that 100% of Chamber members have achieved the 26% ownership target.”
These interpretational differences is the reason why a declaratory order process is necessary (and was agreed between the stakeholders) in order to provide certainty on the matter. This in addition to the continuing consequences limitation.
Given the significance of this milestone which sets the 26% HDSA ownership target, the Chamber engaged the services of industry experts SizweNtsalubaGobodo (SNG) auditing firm and Rand Merchant Bank (RMB) corporate finance.
Analysis in detail
The analysis represents the majority of the Chamber membership and also captures a significant portion of the South African mining industry (80% – 90% based on BEE transactions, value and volumes).
Although it is a calculation at end 2014, the analysis has captured the ownership compliance in relation to asset level mining rights’ compliance over the last 12 years.
The results below demonstrate that the industry has met and exceeded the ownership target of 26% HDSA by 2014 and has transferred significant value to HDSAs despite the significant challenges posed by the 2008 World Financial Crisis and the subsequent bear market for commodities.
In addition, meaningful economic participation of HDSAs has occurred with a broad based identifiable beneficiaries and cash flowing to HDSA beneficiaries. This demonstrates the industry’s commitment to transformation and the spirit of the Mining Charter.
The highlights are:
- Since the commencement of the process of transformation in the mining industry, meaningful economic empowerment participation by HDSA has been 38% on average, based on the Chamber of Mines collation. This is above the Mining Charter 26% HDSA ownership target by 2014.
- The various sectors of the South African mining industry have similarly all met or exceeded the HDSA ownership targets –
- PGMs at 38%, gold at 27.3%, coal at 47.2%, diamonds at 26%, iron ore at 35.7%, manganese ore at 42.2% and chrome at 35.1%.
- The composition of identifiable HDSA beneficiaries in the industry that has benefited through ownership, both directly and indirectly, is 63% BEE entrepreneurs (46 BEE companies), 22% communities (6.9 million HDSAs) and 15% employees (210 thousand HDSAs).
- The DMR’s interpretation of the Charter is that the definition of meaningful economic participation has to include all three beneficiary categories to be compliant (this interpretation is not shared by the Chamber). The Chamber has found that the proportion of companies that have all three categories present, i.e. BEE entrepreneurs, communities and ESOPsin their HDSA empowerment structures represent a minimum of 41% of the SA mining industry.
- Over the 12 year period, dividends of a minimum of R47 billion were paid to HDSA beneficiaries, representing 19.6% of the total ‘company’ dividends paid over the period.
- BEE transactions with an initial value of R116 billion were implemented over the period. These transactions created net value of around R159 billion (+207%) over the same period.
- However, based on a through-the-cycle low and high valuation of assets, the net value created represents between R155 billion (+200%) and R282 billion (+444%) or 25% to 46% of the entire industry value (EBITDA multiple basis), respectively.
These results have been achieved by the industry, despite the fact that measurement is occurring at a low point in the commodities cycle. Key lessons learnt include:
- Market volatility has impacted value creation.
- Lock-in provisions have prevented beneficiaries from unlocking value created during the peak of the cycle. Lack of diversification is an inherent risk in BEE transactions.
- Facilitation important in ensuring sustainable transaction e.g. vendor funding, free shares, minimum guaranteed cash flows. Implementing BEE transactions at the height of the commodities cycle resulted in unsustainable high debt levels.