Mining Charter Third Version: What are the legal issues?

This brief provides an overview of some of the main legal issues in arguments made by the Chamber and the Minister of Mineral Resources, Mosebenzi Zwane. 

Introduction

With South Africa dropping in investment index ratings in the 2016 Survey of Mining Companies conducted by the Fraser Institute [[1]] and significant employment losses within the industry over the past few years,[[2]] the latest Mining Charter [[3]] gazetted by the Department of Mineral Resources (Department) in June will add further stress to an already struggling yet vital industry.  The Chamber of Mines (Chamber) reacted to the publication almost immediately, by filing an urgent application in the North Gauteng High Court to stop the application of the Charter pending a review.  While the current application does not speak to the review itself, it does touch on aspects of the review to demonstrate the need for an interdict.  Amongst the requirements for an interim interdict, the Chamber must prove a reasonable apprehension of irreparable harm if the interdict is not granted.  The current application comes on the back of an earlier application filed by the Chamber in 2015 for a declaratory order on ownership issues, including the “once empowered, always empowered” principle.

Background

Following the line first enunciated in the Freedom Charter, that the country’s mineral and petroleum resources belong to all South Africans and that the State is the custodian of these resources, Parliament enacted the Mineral and Petroleum Resources Development Act [[4]] (MPRDA) in 2002.  Apart from the need for sustainable development in the industry, one of the primary reasons that the MPRDA was enacted was to provide for equitable access to South Africa’s mineral and petroleum resources.[[5]]  The objectives of the MPRDA include promoting equitable access to mineral resources to all South Africans, meaningfully expanding opportunities for historically disadvantaged South Africans, promoting economic growth and employment, advancing social and economic welfare in South Africa, and ensuring that holders of mining and production rights contribute to the socio-economic development in the areas in which they operate.[[6]]  To ensure transformation in the industry, the MPRDA placed an obligation on the Minister to develop a Charter which set a framework for the entry and active participation of historically disadvantaged South Africans into the mining industry.[[7]]  It was also aimed at ensuring that they benefit from the exploitation of minerals.

The original Charter was gazetted in October 2004 and has been amended twice.  In terms of the MPRDA, it must be considered when granting mining and production rights and must also be included in annual reports on compliance submitted by the mining industry to the Minister.  After the first amendment to the Charter in 2010, the Chamber filed an application in the High Court seeking a declarator on whether or not there is a continuing obligation on a holder of a mining right to top up any reduction in ownership levels held by historically disadvantaged South Africans.  This became known as the “once empowered, always empowered” principle.  Before the case was heard in court, the application was placed on hold following an agreement between the Chamber and its members, on the one hand, and the Department, on the other, to negotiate the issues.  However, the declaratory application has again been placed on the court’s roll following the gazetting of the 2017 Charter and will be heard in November.

It is against this backdrop that the current interdict application (and review application that is yet to be filed) should be viewed.

Legal issues before the Court [[8]]

Procedural issues: Proper consultation with stakeholders

The Chamber says that the latest Charter differs materially from the draft published in 2015 for public comment and that it was not consulted on the ownership aspects of the 2017 Charter.  These include aspects with serious financial, structural and internal regulatory implications for the shareholders and the mining industry as a whole.[[9]]  The Minister vehemently denies that the Chamber was not properly consulted.  Although he admits that the Chamber was not consulted on ownership issues and the application of the “once empowered, always empowered” principle, the Minister points to several meetings between the Department and the Chamber that involved the Chamber for purposes of consultations.  However, it is clear that some of the most far-reaching issues in the Charter that potentially have the greatest material effect on the mining industry arise from ownership provisions.

Nature and ambit of the Charter

The Chamber submits that the MPRDA only allows the Minister to “develop” a once-off Charter and therefore contends that the Minister is not empowered by the MPRDA to amend, review or substitute the Charter.  In effect, the Chamber argues that both the 2010 and 2017 amendments to the Charter fall outside the MPRDA as the empowering legislation and are therefore unlawful.[[10]]  The nature of the Charter is a further point of disagreement between the parties.  The Chamber argues that the Charter is simply a statement of policy that is intended to guide the Minister’s discretion in the decision-making process in applications for mining and production rights.  It does not have the binding effect of legislation or regulation.  Nor does the MPRDA empower the Minister to impose additional obligations on holders of mining rights through the Charter.

The Minister’s stance on the nature and ambit of the Charter is less clear.  He contends that the Charter is binding law and has been implemented in practice as such by all parties since the original Charter was published.  However, he also argues that the Charter was intended to constitute a “flexible measure implemented by the Minister . . . that was to be incrementally built as and when the occasion arose” and “respond to a fluid and constantly evolving situation regarding methods for the achievement of the relevant objects set out in the MPRDA”.  This was to avoid the more onerous and rigorous process followed when amending legislation.  However, it is difficult to see how the Charter can be binding on the mining industry but, at the same time, be flexibly applied by the Department.  The uncertainty that this creates is exacerbated by the consequences of non-compliance, which is regarded as a breach of the MPRDA.

Definitional issues

The 2017 Charter introduces, omits and replaces several definitions that may have material implications to the application of the Charter.[[11]]  Most notably, the latest Charter has replaced the term “historically disadvantaged South Africans”, which included any South African citizen disadvantaged by unfair discrimination before 1994, with “Black Persons”.  The Chamber argues that this change impermissibly broadens the scope, from the empowering legislative definition, of those who may benefit from empowerment targets to include Africans, Coloureds and Indians who became citizens by naturalisation after 27 April 1994 and who would have been entitled to obtain citizenship before that date.  It is not surprising that, given the current issues about state capture, comments on this change focus on the question of whether it has been formulated to benefit the Gupta family.  The Minister argues that the definition of “Black Persons” accords with the BBBEE Act.  However, it is unclear how this helps the Minister’s case as the MPRDA, and not the BBBEE Act, is the empowering legislation.  He is not empowered to broaden the definition in a manner that is outside the scope of that given by the MPRDA.

Ownership issues

The 2017 Charter introduces new ownership aspects with major economic, structural and functional implications for holders of mining rights.  When the original Charter came into effect in 2004, the Chamber and its members applied the Charter on the understanding that once historically disadvantaged South Africans were empowered through ownership, it would continue to count towards the ownership targets for empowerment purposes.  The holder of the mining right would not be obliged to top up the ownership level, set at 30% in the third version of the Charter, if it fell below that target.  This came to be known as the “once empowered, always empowered” principle.[[12]]  Essentially, the Chamber argues that once the BEE transaction has successfully led to empowerment, the transformation objectives have been satisfied even if the shareholder that was empowered decides to withdraw from ownership.

However, the Minister holds the view that there is a continuing obligation on holders of mining rights to maintain the new 30% ownership level and that failure to maintain that level of ownership contravenes the MPRDA.  The 2017 Charter requires those holders who do not have a 30% ownership level to top up their empowerment transactions within 12 months and maintain that level.  This top-up will come into effect by a reduction of the remaining shareholders who are not Black Persons.  The Chamber contends that this reduction amounts to an expropriation or at least an arbitrary deprivation of property, which the Minister denies.  While the Chamber further argues that 12 months is an unreasonably short time period in which to effect these shareholding and financial structural changes, the Minister argues that the successive Charters have, in effect, incrementally led to an increase of only 4%.  This interpretation is, of course, subject to the court’s view, and the coming determination on whether or not the “once empowered, always empowered” principle applies.

A further 1% of a mining rights holder’s annual turnover must be distributed to Black Person shareholders in any financial year over and above any other distributions.  The Chamber contends that this discriminates between classes of shareholders in a manner that is unreasonable and not permitted by the Companies Act.[[13]]

The Charter also looks to increase the Black Person ownership level to 51% for holders of prospecting rights.  The Chamber argues that the difference between ownership levels for mining and prospecting rights will unnecessarily complicate the transition from prospecting projects to mining projects.  It is further unclear why the ownership target is substantially higher for prospecting rights that are highly risky, capital intensive in nature, rendering little real short or medium-term returns.  According to the Minister, however, the threshold for prospecting rights is higher than the threshold for mining rights because it ensures entry of Black Persons into the industry at a lower cost than the cost of entry after minerals have been confirmed in an area.

Non-ownership issues

The 2017 Charter also includes several non-ownership obligations that relate to procurement, employment equity, human resource development, community development within mining areas, housing and living conditions and sustainable development.  These obligations have led to issues between the parties.  A notable development is the establishment of the Mining Transformation and Development Agency (Agency).  The Charter authorises the Agency to manage the shareholding of the mining communities, [[14]] directs foreign suppliers to contribute a minimum of 1% of their annual turnover generated from local mining companies to it, and also directs holders to invest 5% of the “leviable amount” on essential skills development, 2% of which must be a contribution toward the Agency.  The Chamber takes issue with this because, amongst other things, the Minister is not empowered to impose a tax or levy on foreign suppliers or holders, much less a contribution to an agency which is yet to be established.[[15]]  Although the Minister does not seem to address the nature of the contribution in his pleadings, he does defend the establishment of the Agency.  Accordingly, the Minister is confident that the Agency will be established within 12 months, as directed by the Charter.

Conclusion

The current interdict application is only the beginning of what can be expected to be a protracted legal battle.  With the important mandate of the Charter – to give effect to the transformative objectives of redressing historical, social and economic inequalities as stated in the Constitution – there should undoubtedly have been far more coherent consultation between the Minister and the industry, regardless of whether the Charter is seen as binding or not.  This could have avoided several ownership and non-ownership issues from now being presented before the courts.  While the foundation and intention of the Charter supports the transformative directive of the MPRDA, the economic and sustainable development objectives of the MPRDA should not be overlooked.  The MPRDA clearly promotes both – not one at the expense of the other.

The publication of the new Charter demonstrates a serious lack of understanding by the Ministry of the major issues in the mining industry.  Economic factors, such as fluctuating commodity prices and exchange rates, which determine the environment in which the industry functions, have not been taken into account.  Major investments often take years to recoup and technical and safety risks are often high.  The mining investment world is global and companies do not have to invest in South Africa.  A much closer consultative process with the industry would have produced a markedly better outcome.

As things stand, the Minister’s actions have provoked litigation, and testing of the rationality of his decisions is bound to follow.  Meanwhile, mining policy uncertainty, increased by publication of the third version of the Charter, continues to hang over the industry and the economy.

Michelle Toxopeüs
Legal Researcher
michelle@hsf.org.za