14/01/2014
The looming review of mining companies' achievements in terms of the mining charter's goals for 2014 will, inevitably, throw up some disappointing performances.
Few would dispute that the traditionally hierarchical, white-male-dominated mining industry needed to change, but many of the goals have been difficult to achieve, for various reasons.
Some general targets did not allow for the differences in mining companies' operations or ability to beneficiate their minerals locally. For instance, mines closer to urban areas can source and retain skilled black staff more easily than remote mines. The electricity needed to add value to chrome ore to make it ferrochrome is not available, whereas washing and upgrading coal is less energy-intensive and easier to do.
More important, most of the charter's targets have been costly to implement, at a time when many companies are struggling simply to survive.
Some mining companies which vendor-financed the purchase of large stakes by broad-based empowerment groups now have nonperforming loans on their balance sheets, not a good position to be in when seeking more finance. The loans were usually repayable from dividend flows, but with costs rising and commodity prices falling, dividends have been far less than expected five or 10 years ago.
One example is Lonmin. It extended a £200m loan to Shanduka in 2010, repayable in 2015, to help Shanduka buy 50,03% of Incwala, a BEE consortium which holds 18% of Lonmin's two main operating subsidiaries. The loan to Shanduka was to be repaid from dividends, but there have not been any substantial dividends from Lonmin in the past few years, as it has battled weak platinum prices, rising costs and labour unrest at its mines.
In Lonmin's latest annual report, CEO Ben Magara said there was a risk this loan would not be repaid in 2015. At September 30, the carrying value of the HDSA (historically disadvantaged South African) receivable was $399m, up from $381m in 2012.
Lonmin has also made other, noninterest-bearing loans to Incwala Platinum, including R110m in 2013 and R120m in 2012, bringing the total in advanced loans to R493m. This will be recovered by reducing future dividends due to Incwala, it says. Lonmin has committed to providing an additional loan facility to Incwala of R160m which Incwala can use to meet its funding obligations in March 2014.
Lonmin said recently it planned to establish employee and community trusts to bring its black empowerment shareholding up to 26%.
Another major cost for big mining companies is the imperative to phase out mine hostels. It is costing the most labour-intensive companies millions of rand to build housing for employees but several have still not eliminated the backlog.
For example, Harmony Gold Mining said in its latest annual report that although it expected to achieve the charter's target of converting all its hostels to single rooms by the end of 2014, it was only 46% there last year. The cost of all these conversions will total R132m.
A third obstacle for mining companies has been in achieving the charter's targets on training and black representation in management at a time when companies have been retrenching and trying to reduce staff costs.
Mining services company Sentula said in its latest annual report that about a third of its directors were black. Historically disadvantaged South Africans make up 49% of management in total and 14% are women. But black representation at Sentula's management level has dropped as a result of the restructuring of the business, said CEO Robin Berry. In the past year Sentula's employee numbers have fallen to 2308 from 3321.
Another challenge for mining companies has been in procurement from black-owned businesses. For example, Anglo Platinum reported in its latest annual report that its procurement of capital goods from BEE entities was 40% in the 2012 financial year, which meets the charter target but is below its internal target of 51,7%, though procurement of services was 70%, well above the internal target of 53,4%.
Sentula, whose preferential procurement spending was 41%, against a target of 62%, said it was difficult to achieve this target because most of the equipment it needed was not made in SA.
The review of the 2014 charter targets needs to take a more holistic approach. Mining companies know they need to train and promote black people continuously to senior and middle management level. But this needs to be through having the right culture inside their organisations, not by poaching people who were trained by other organisations, like the department of mineral resources or their smaller competitors.
The philosophy behind the emphasis on black equity ownership also needs to be revisited, as it has largely failed to do more than further enrich a small group of people who already had access to finance. At the same time it has restricted companies' ability to raise capital for growth and job creation, which would benefit a much broader group of previously disadvantaged people.
BEE equity ownership has created expectations of short-term gain, but turbulent stock and commodity markets have shown this was unrealistic.
