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The Monitor: August 2012

World Coal,

The conference at which South Africa’s ruling African National Congress (ANC) gave initial endorsement to its State Intervention in the Minerals Sector (SIMS) report was to be the one that would finally silence the nationalisation debate. SIMS did dismiss nationalisation, although the underlying debate continues. The ANC agreed it remained an option.

Debate behind closed doors ruled on “a broad policy option that would not be considered in the mining industry”. When this came to the general meeting, it only just survived. The nays had to concede that if nationalisation came off the table for now, the industry must increase its contribution to national – and regional – development.

SIMS sparked a new debate. Its proposals represent what mining companies fear most as Governments go beyond taxation to bump up national revenues.

First fear

“The uncertainty and destruction of value caused by sudden changes in policy by the Governments of resource-rich nations cannot be understated,” said Mike Elliott, global mining and metals leader at Ernst & Young (E&Y), in the firm’s 2012/13 report. “We are observing trends of resource nationalism which we will believe will continue throughout 2012/13,” he said.

Opening the conference Jacob Zuma, president of South Africa, called upon delegates to “go deeper” than the debate over nationalisation. Mining should have a developmental impact and promote job creation. “The time has come to do something more drastic to deal with the triple challenge of poverty, unemployment and income inequality,” Zuma said.

Super taxes for super profits

Sims wants a 50% resource rent tax (RRT) on “super” profits. Also, alleging that most mining profits are expatriated, it wants to triple withholding tax on dividends destined for perceived tax havens. And to prevent “squatting” on mining rights to keep them out of circulation, it proposes tighter regulations and a 50% capital gains tax on transfers. It defines super profits as the price at which a resource can be sold, less extraction cost, which can include “normal” returns. Normal returns are wages and salaries returned to workers and management at par with those that would be paid elsewhere in the economy, plus a competitive return on capital, illustrated as a current 15% (the Treasury Long Bond rate plus 7%).

More beneficiation, with mineral feedstock supplied at cost-plus and levies on the export of non-beneficiated minerals considered strategic to the policy, is proposed. Coal would qualify: licences to mine it would be conditional on first satisfying national power needs before the coal is exported. Private mining infrastructure would have to be open access. Users would pay – at cost-plus prices.

There is some good news. All mineral royalties would drop to 1% of revenue, although the Government would be compensated from the new tax.

Sovereign wealth fund

A sovereign wealth fund would route 40% of the RRT to a minerals development fund (MDF), but half of that would be swallowed by royalty compensation and beneficiation projects. A regional development fund would spread 30% of the RRT around towards political and economic integration and improving infrastructure within the Southern African Development Community.

The remaining 30% would constitute a fiscal stabilisation fund, which would be used in the short-term to reduce revenue instability and, in the longer-term, to replace mineral revenue as resources run out.

There are no suggestions that the regional or fiscal funds will be monitored by the mining industry – or mining ministry.

Mineral spend

The MDF spend as shares of total RRT is:

  • 2.5% on more geo-mapping, but the state minerals company would get a three-month lead on new data.
  • 5% to fund exploration risk and promote investment in locating new resources.
  • 10 – 12.5% to boost human technical resources.
  • 5% to compensate the Government for loss of royalties.
  • 5% to fund mineral R&D.
  • 15% to pay retrenched miners 90% salaries for three years, reskill them and create beneficiation hubs to employ them.

Downgrade fears

The three major credit rating agencies – Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) – have placed South Africa on negative outlook. “The failure to put a nail in the coffin of nationalisation and agree a way forward for mining will continue to harm a sector that has already suffered from a lack of policy clarity,” said Carmen Altenkirch, director of Fitch.

S&P’s Konrad Reuss added that a continuing discussion on nationalisation would be negative to confidence-sensitive investment. “South Africa does not have the luxury of going through any policy experiments or adventures. There is no room to manoeuvre,” he said. Current ratings are a BBB+ investment grade rating from Fitch and S&P, while Moody’s is slightly higher at A3.

Analyst argument

Mzukisi Qobo, a political risk analyst, argued that the report compounded confusion: “The ambiguities around the RRT, the nature of strategic minerals and the slew of regulatory institutions compound confusions,” he said.

To Gavin Keeton, a Rhodes University economist, the report seemed inherently foolish: “The tax and other projections are based on the belief that the boom in commodity prices will continue indefinitely. Recent developments challenge the wisdom of this,” he said.

Echoing its pre-conference remarks, Anglo American said SIMS was a fundamentally wrong approach to achieve some laudable goals. Its proposals, if adopted, would harm the industry without securing the envisaged benefits. Anglo questioned that most mining profits were expatriated: its experience was that 71% –  89% stayed in South Africa.

The South African Chamber of Mines (CoM) said the RRT amounted to the nationalisation of 50% of investors’ returns without compensation.

No way to quiet a storm

As the storm of criticism broke, the ANC attempted damage control. It sent its head of economic transformation to a national radio station to explain. “I do not know what kind of clarity people want,” Enoch Godongwana told listeners – nationalisation remained as a “weapon” for the ANC. On the same day, Business Day, a national newspaper, reported that various ANC factions had claimed victory in “the fight to screw more rent out the mines”.

This article first appeared in the August 2012 issue of World Coal. Subscribers can log-in to view the issue online.

Written by Barry Baxter, World Coal correspondent.

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