The eagerly awaited new Mining Charter was expected in March 2017. March, however, has come and gone and there is no further news as to when we can expect the Charter.
Despite having a diversified economy, South Africa is still very dependent on the mining and resource industry. From an investment perspective, mining stocks make up a significant proportion of the JSE All Share Index, and feature in many investment funds and unit trusts, as well as many of our private portfolios. Any material changes in the Charter are therefore likely to have significant implications for mining companies and for the investment industry.
As we await the new Charter, let’s have a closer look at the draft Charter and the likely changes, as well as the current BEE credentials of mining companies and which are likely to be impacted by different scenarios.
What is the Mining Charter?
Minister of Mineral Resources, Mosebenzi Zwane describes the revised Mining Charter as the ’regulatory tool governing transformation in the sector’. In April 2016, a draft Mining Charter was proposed that would alter the empowerment ownership requirements that were previously stipulated in 2004 and 2010 legislature. The Chamber of Mines and many SA miners felt that they were not adequately consulted or involved in the process.
The 2016 Draft Mining Charter:
The reviewed charter would essentially require BEE ownership of 26%. In addition:
- All existing mining right holders must align BEE transactions within 3 years of the publication of the 2016 Mining Charter.
- Where BEE partner/s have existed, lapsed or transferred shares to non-BEE, the mining right holder has 3 years to align its empowerment credentials.
- BEE procurement levels and employment equity levels for South African miners are also increased. Miners must procure 60% (up from 40%) of locally manufactured capital goods from BEE suppliers and 70% (previously 50%) of consumables and 80% (previously 70%) of services.
As a base case scenario, let’s assume the above proposals were to be signed into law, many of the of the mining companies would have to redo their empowerment transactions. The notion of ’once empowered, always empowered’ would no longer apply and empowerment would thus be continuous. Since 2004, many BEE empowerment partners have exited their deals. Additional empowerment transactions would be costly and lead to further shareholder dilution. The proposed Charter would very likely disappoint the market.
Companies that may be impacted under the following scenarios:
1. If the continuous rule of empowerment, which would require a continual 26% BEE ownership target (if once empowered, always empowered, is not upheld) - the following companies would be most impacted:
- Kumba Iron Ore
- Merafe Resources
2. If BEE ownership targets were increased from 26% to 30%, then the following companies may at least have some assets that will be impacted:
- Anglo American
- Sibanye Gold
- Impala Platinum
- Anglo Gold Ashanti
- Harmony Gold
3. The remaining is a list of the most empowered companies and BEE ownership is currently in excess of 30%
- BHP Biliton (not subject to transformation - no operations in SA)
- African Rainbow Materials
- Royal Bafokeng Platinum
- Northam Platinum
- Anglo American Platinum
Investing in the sector:
Currently, it is still only speculation as to what the final Charter will contain and what will be signed into Law. However, we can use the draft Charter as guidance and if we make certain assumptions about transformation goals and BEE ownership, then the above analysis should help one mitigate the risk caused by the uncertainty.
I don’t believe the policy uncertainty should deter investors from buying into the sector. On the contrary, SA mining companies are currently at very attractive price levels and present a good buying opportunity. There has been a general sell-off in the sector over the last 2 weeks (as can be seen in the Mining Index below), particularly since the rand started to strengthen.
credit: Graph Provided by Sharenet Advanced Online Charts
My preference is for companies with good current BEE credentials and which offer diversification and broad exposure. Commodity prices are likely to be supported by the expected increase in global GDP growth. Iron ore prices have fallen steadily since mid-March 2017, but the price has since stabilised. I believe there are a few bargains to pick up at current price levels. Of the diversified majors, BHP Biliton (R201.75) and Anglo American (R185.99) are my picks.
Portfolio Manager and Securities Trader
Cheyne has spent the last 10 years working in London, holding numerous positions within Equity and Equity Derivatives at various Investment Banks. His main focus has been on South African and Emerging Markets and also gained good exposure to global equity markets and products. He completed both his BCom degree in Economics and his BCom. Honours in Financial Analysis and Portfolio Management at the University of Cape Town. After completing each of the rigorous exams, Cheyne became a CFA Charterholder in 2014.