On 15 June 2018, the Minister of Mineral Resources released for public comment a draft version of the new Broad Based Socio Economic Charter for the Mining and Minerals Industry (2018) (the Draft Charter). The Draft Charter seeks to replace: (i) the current Broad Based Socio Economic Charter for the Mining and Minerals Industry (2010) (the Current Charter); and (ii) the previous version of the Draft Charter which was released for public comment in 2017 (the 2017 Draft Charter).
Existing Prospecting and Mining Rights Holders
The Draft Charter increases the black ownership requirement from 26% (as set out in the Current Charter) to 30% (the 30% Ownership Requirement). Existing prospecting and mining rights holders are afforded a period of five years in which to comply with the 30% Ownership Requirement.
Importantly, the Draft Mining Charter clearly endorses the “Once Empowered Always Empowered Principle” (the OEAE Principle), which enables a prospecting or mining company to retain its black ownership status even if its black shareholders later exit the mining or prospecting company. The Draft Charter references and endorses the OEAE Principle by stating that “the recognition of continuing consequences shall include historical transactions concluded on units of production, share assets including all historical BEE transactions which formed the basis upon which the new order mining rights were granted.”
Although it is open to interpretation, it appears from the Draft Charter that existing mining and prospecting right holders will be protected in circumstances where they met but have subsequently fallen below 26% ownership requirement on the exit of their black shareholders. The apparent inclusion of the OEAE Principle in the Draft Charter, gives effect to the recent South African High Court decision (April 2018) which handed down a judgment in favour of the inclusion of the OEAE Principle in relation to the mining industry.
New Prospecting and Mining Rights Holders
The holders of new prospecting and mining rights are required to comply with the 30% Ownership Requirement from the outset and the 30% Ownership Requirement is required to be apportioned and/or distributed as follows:
(a) a minimum of 8% to qualifying employees of the mining right holder (and 5% of that 8% is required to be a non-transferrable free carried interest (which means that 5% of the 8% must acquire the shares for nominal cost));
(b) a minimum of 8% to communities in the local district, metropolitan municipality or traditional authority within which the mining area is located (and 5% of that 8% is required to be a non-transferrable free carried interest); and
(c) a minimum of 14% to black enterprises that are at least 51% owned by black persons and in terms of which black persons own 51% of the exercisable voting rights and economic interest (being BEE entrepreneurs).
The Draft Charter makes provision for an equity equivalent mechanism. The equity equivalent mechanism is one which permits a mining or prospecting right holder to offset certain other equity equivalents (listed below) against its BEE entrepreneur ownership obligations as provided for in the Draft Charter.
In order for a prospecting or mining company to be permitted to make use of the equity equivalent mechanism it must comply with the following:
(a) the equity equivalent may only be claimed against a portion of BEE entrepreneur shareholding;
(b) a mining and/or prospecting right holder must submit the equity equivalent plan to the DMR for approval (in accordance with the Draft Charter’s implementation guidelines);
(c) only be undertaken by the prospecting and/or mining right holder in relation to the following activities, which will entitle the prospecting and/or mining right holder to apply for equity equivalent credits:
i. mineral ore or mineral products supplied to independent local beneficiation entities at a discount to the mine gate price;
ii. a portion of an integrated producer’s production that is beneficiated;
iii. mineral ore supplied to black owned beneficiation entities at a discount to the mine gate price;
iv. investments in locally based mineral beneficiation entities; and
v. any other existent beneficiation related activities undertaken or investment made since 2004; and
(d) the prospecting or mining right holder must submit a progress report against approved equity equivalent plan to the DMR at the end of each calendar year.
Procurement of Mining Goods
A minimum of 70% of total mining goods procurement spend must be on South African manufactured goods. The 70% procurement spend is required to be apportioned in the following manner:
(a) 21% of total mining goods procurement budget must be spent on South African manufactured goods by black entrepreneurs;
(b) 5% of the total mining goods procurement budget must be spent on South African manufactured goods by BEE women entrepreneurs or 51% youth owned and controlled enterprises; and
(c) 44% of the total mining goods procurement budget must be spent on South African manufactured goods by BEE compliant company(s) (being a company with a minimum BBBEE level 4 status in terms of the BBBEE Codes of Good Practice and minimum 26% black ownership).
The above mining goods procurement spend requirements must be complied with by mining companies within 5 years. The Draft Charter increases the mining goods procurement spend as set out in the Current Charter.
Procurement of Services
A minimum of 80% of the total spend on services (excluding discretionary expenditure) must be sourced from South African companies. The 80% total procurement services spend must be apportioned in the following manner:
(a) 60% of total services budget must be spent on BEE entrepreneurs;
(b) 10% of total services budget must be spent on BEE women entrepreneurs or 51% youth owned and controlled enterprises; and
(c) 10% of the total services budget must be spent on BEE compliant company(s).
The above services procurement spend requirements must be complied with by mining companies within 5 years. The Draft Charter increases the services procurement spend as set out in the Current Charter.
Enterprise and Supplier Development
A mining right holder may invest in enterprise and supplier development against which it may offset its procurement (the above mining goods and services obligations) in the following manner:
(a) with respect to mining goods, up to 5% of the total procurement budget on mining goods may be offset by supplier development (the Mining Goods Percentage);
(b) with respect to services, up to 10% of the total procurement spend on services may be offset using supplier and enterprise development (the Services Percentage); and
(c) the Mining Goods Percentage and Services Percentage must be implemented in the following manner:
i. supplier and enterprise development must only be invested on BEE entrepreneurs with a turnover of less that ZAR 50 million per annum;
ii. investment on supplier development may not be claimed as expenditure on enterprise development;
iii. there must be written agreement between a mining right holder and the recipient supplier or enterprise developer; and
iv. the contract between a right holder and the recipient supplier (or enterprise developer) must be for a minimum of 5 years.
The Draft Charter requires the following composition of the board and management team of a mining and/or prospecting right holder:
(a) a minimum of 50% black persons, to be appointed on the board of the mining right or prospecting right holder, with exercisable voting rights proportionally represented, of which 20% must be black women
(b) a minimum of 50% black persons appointed at executive director level as a percentage of all executive directors, proportionally represented of which 15% must be black women;
(c) a minimum of 50% black persons appointed at senior management level, proportionally represented of which 15% must be black women;
(d) a minimum of 60% black persons appointed at middle management level, proportionally represented of which 20% must be black women; and
(e) a minimum of 70% black persons appointed at junior management level, proportionally represented of which 25% must be black women.
It is important to note that with respect to new prospecting and mining rights holders, the Draft Charter further provides that the host communities and qualifying employees shall have representation on the board or advisory committee of the mining right holder.
The Draft Charter introduces the concept of the “Trickle Dividend” (Trickle Dividend).
Clauses 220.127.116.11. and 18.104.22.168 of the Draft Charter provides as follows:
(a) a right holder shall pay a Trickle Dividend equal to a minimum of 1% of earnings before interest, taxes, depreciation and amortisation (EBITDA) from the sixth year of a mining right to qualifying employees and host communities respectively, until dividends are declared; and
(b) the annual 1% of EBITDA payment referred to in (a) above shall be payable to qualifying employees and host communities at any point within a period of 12 months where dividends are not declared.
The definition of Trickle Dividend is defined in the Draft Charter as follows:
(a) in relation to host communities and qualifying employees, it refers to a dividend that has a fixed dividend rate contributed to a trust for host communities and a structure elected by qualifying employees and is redeemable by a right holder (in the host community trust or selected qualified employee structure) when ordinary dividends are declared;
(b) in relation to BEE Entrepreneurs, a trickle dividend which is based on the cash flow to the BEE entrepreneurs through the term of the investment where a percentage of the cash flow should be used to service the funding of the structure while the remaining percentage is paid to the BEE entrepreneur.
Status of the Draft Charter
The period to receive public comment on the Draft Charter closes on 27 July 2018. The Minister of Mineral Resources has further indicated in a press statement dated 17 June 2018 that once the Draft Charter is finalised it will be subjected to the South African Government’s Socio-Economic Impact Assessment System to assess the likely impact of the Draft Charter on the South African economy in general.
Until such time as the Draft Charter is promulgated into law, the Current Charter remains in force.
Should you require any further clarity or additional information on the Draft Charter, please do not hesitate to contact us.