Uncertainty has hampered President Cyril Ramaphosa’s efforts to lure foreign investors to South Africa, writes Leon Louw.
Growth in the South African mining industry remains sluggish, almost a year after President Cyril Ramaphosa took over as leader of the ruling African National Congress (ANC) and president of the country. Despite significant reforms to lure foreign investment, and candid attempts to eradicate corruption, Ramaphosa’s ‘New Dawn’ does not seem to be enough to entice foreign mining companies to explore the abundant South African deposits.
The biggest concern (apart from all his other worries) for Gwede Mantashe, the South African Minister of Mineral Resources, should be the lack of new exploration projects. In a country that boasts first-class infrastructure and spectacular geology, this means that exploration companies consider South Africa as high-risk territory, and that the level of uncertainty trumps the good geology. Mining jurisdictions in other parts of Africa have become more attractive to junior mining companies, despite their shortcomings in terms of infrastructure and, often, political, social, and security risks.
The health of a country’s mining industry — and its attractiveness to foreign investors — should be measured in terms of the number of geologists active in the field. Moreover, the number of new, greenfield projects that are developed from scratch is an indication of where the country’s mining industry is heading. Sadly, South Africa falls short. Compared to the rest of the continent, the country’s share of new junior mining companies actively involved in greenfield exploration is meagre. Although there has been some movement in South Africa in terms of mergers and acquisitions, a very small number of new mines have come online.
The main factors that keep foreign investors away are political instability and regulatory uncertainty. Ramaphosa’s attempts to grow the economy is laudable, but a fractious ANC and political rivalry are hampering all the good intentions. In the race to win votes, populist rhetoric is now the flavour of the day. The South African political landscape has become a battlefield of ideologies, even within the ruling party. A faction closely linked to former President Jacob Zuma has allegedly been plotting to topple Ramaphosa; something that the country can ill afford. Ramaphosa has been pressurised to push through contentious policy resolutions accepted at the ANC national conference in December 2017, when he was chosen as leader in a neck-to-neck race with Zuma’s preferred candidate, Nkosazana Dlamini-Zuma. Policy proposals like expropriation of land without compensation and the nationalisation of the Reserve Bank are radical interventions in a country’s economy that does little to build confidence among foreign investors. Security of tenure is non-negotiable, especially in the mining industry, which is a long-term investment.
Mantashe’s appointment was a welcome relief after the disastrous tenure of the previous Minister of Mineral Resources, Mosebenzi Zwane. His approach to amend Zwane’s Mining Charter III prompted applause, which soon faded though, as its implementation date was extended again and again. The Mining Charter has become a thorn in the side for both the mining industry and Mantashe. And still, foreign investors wait, not sure about what Ramaphosa and his government will do next.
In the meantime, China, usually not as concerned about policy issues as the rest of the world, heeded Ramaphosa’s call, and has pledged to invest billions to dig the South African economy out of its hole. Ramaphosa, juggling balls and eager to see South Africa regain some respectability, has announced a stimulus package and continues to garner support from the business community. His conundrum, though, is that he has to retain the majority vote for the ANC come 2019, and most of his votes will have to be from people not as business friendly as the president. The unions and leftists played a critical role in his election in December and would expect at least some form of centralised approach to the economic development of South Africa — and a few political appointments as a reward.
A challenging mining environment
Within this political and socio-economic timebomb, the mining industry in South Africa has been ticking over, trying to cut costs and grappling with its own challenges. Deeper mines; rising input costs; and union, labour, and productivity concerns, have plagued a once thriving sector of the economy. Last year’s safety record has been appalling, and Mantashe has been quick to rebuke mining bosses for chasing profits rather than considering safety.
Although all is not lost for South Africa, questions remain, and the Charter and expropriation of land without compensation dominate the national discourse.
According to Gary Felthun, partner at law firm White & Case and head of Mergers and Acquisitions (M & A), there has been a notable drop in the number of mergers and acquisitions in the past four years. “There is no doubt that legislative uncertainty plays a major role,” says Felthun. “But we cannot only blame politics and regulations for the mining industry’s woes,” he adds. “The platinum industry has really been in the doldrums for at least the last eight to nine years. The reality is that it is very difficult for platinum mines to run profitable operations at current market prices,” he says. South Africa is heavily dependent on platinum production and produces the majority of the world’s platinum. To make things worse, large new projects like Ivanhoe’s Platreef Mine, and several new mines in Zimbabwe, will push additional stock into the market, potentially increasing the supply and demand gap.
Felthun says margins do not appear to be great in the gold mining sector either. “We haven’t seen a lot of foreign investment in gold or platinum, which is a concern. It is therefore imperative that mining is made more attractive for foreign investors,” says Felthun.
Attracting more foreign investment
“The Mining Charter is a critical component of mining in South Africa. It is important that decision-makers make the right decisions to assist with enticing global mining companies to come sink shafts in our country,” says Craig Atkinson, local partner in Global M & A at White & Case.
“One of the key questions to consider is whether the provisions of the new Mining Charter are positively or negatively impacting on investment into mining in South Africa,” says Felthun. “We need to be cognisant of the fact that South Africa has to be competitive in the international environment and investors will generally want certainty around things like the new Mining Charter before they will be willing to invest,” Atkinson adds.
“What South Africa needs is greenfields projects. New mines create more jobs, and that is what South Africa needs,” says Felthun. He remains positive about the outlook for the country. “Politically, most people believe that South Africa is heading in the right direction,” says Felthun.
Burning question about land
The expropriation without compensation issue, now referred to as EWC, has become an albatross around Ramaphosa’s neck. He has on many occasions said that the ANC’s decision to amend the constitution will not result in land grabs, and has promised that if the constitution is altered, restitution will take place in an orderly manner. Regardless, the business community remains pessimistic and the issue has reverberated around the world, with even US President Donald Trump getting involved. A number of CEOs trying to raise funds at international ‘roadshows’ for projects in South Africa, tell African Mining that the first concern raised by international investors is about expropriation. It seems that EWC has seriously dented Ramaphosa’s mission to wow global investors.
According to Martin van Staden, a legal researcher at the Free Market Foundation, private property rights are an imperative in any free and developing society. “On every index of human development, for example freedom, the rule of law, and ease of doing business, countries that rank highly have entrenched systems of secure property rights. Invariably, the countries at the bottom of these indices have virtually no, or very weak, protection for private property,” says Van Staden.
“If South Africa wishes to attract foreign investment and develop into a prosperous first-world country, section 25 of the Constitution, if anything, must be strengthened — not weakened — to promote legal certainty,” he adds.
Section 25(3), which the ANC has pledged to change, currently provides that “just and equitable” compensation must be provided when property is expropriated, and section 25(8) provides that no other part of section 25 may impede the State from redressing the results of past discrimination, on condition that such departure from the provisions of the property provision complies with section 36. Section 36 allows for the rights in the Bill of Rights, including the right to compensation, to be limited in pursuit of a legitimate government objective. These two provisions — section 25(3) and 25(8) — it is argued, thus already hypothetically provide for lawful EWC, and it is thus not necessary to change the constitution.
What about foreign investment?
“It is important to consider the effect EWC may have on not only foreign direct investment (FDI) but international law, says Peter Leon, partner and Africa co-chair: Africa Group at law firm Herbert Smith Freehills.
“FDI is the lifeblood of any developing economy, and South Africa cannot afford to forego it. From 2013 to 2017, while FDI inflows into the country declined from USD8.3-billion to USD1.3-billion, its annual GDP growth fell from 2.5% to 1.3%,” says Leon.
“The proposed amendment of section 25 of the Constitution — the property clause — even while it is still being debated, may well affect the pricing of investment risk, which can lead prospective as well as existing investors to turn their attention to more hospitable investment destinations. Existing foreign investors, in particular, will need to consider what rights and recourse might be available to them under international law to mitigate the risk of expropriation without compensation,” Leon adds.
So where does this leave the international investor? In a document authored by Leon, Hannah Ambrose, professional support consultant at Herbert Smith Freehills, and Ernst Müller, associate at Herbert Freehills in Johannesburg, they state that it is an accepted principle of international law that a country cannot simply implement domestic legislation to avoid its international law obligations. Because of this, regardless of what domestic legislation prescribes (which includes the Constitution), foreign investors can still rely on the protection afforded by the existing bilateral investment treaties or BITs (that is, concluded between two states) if they can show that they qualify as ‘investors’ in terms of those treaties.
The report states that many of the BITs include ‘sunset clauses’, which provide that the protection afforded under the BIT will remain in place for a specified number of years after the BIT is terminated. As a consequence, a foreign investor’s rights under these treaties remain in place even after it is terminated. Article 14 of the BIT between the United Kingdom and South Africa, by way of example, provides that investors who invest in either country before the BIT is terminated, will continue to enjoy the rights under the agreement for a further 20 years after the agreement is terminated.
Although foreign investors who currently own property would have a legal foot to oppose expropriation, there is nothing that scares potential investors more than knowing that your property rights might be in danger of being revoked a few years down the line. However, changing the Constitution would not be as easy as some in the ANC would like to believe. According to Professor Robert Vivian, professor of finance and insurance at the Wits School of Economics and Business Science, amending the Constitution will require a 75% majority vote in the South African National Assembly.
“The South African Constitution is based on the supremacy of the rule of law and the advancement of human rights. The right to enjoy undisturbed ownership of own property is achieved through the rule of law and is a basic human right protected by section 1 of the Constitution. Changing section 25 to allow general expropriation without compensation would violate section 1 and render any legislation derived from this, including the mere changing of section 25, to be unconstitutional and open to legal challenge,” he says. Therefore, amendments to section 1 would require a 75% vote, and not 66% as some might believe.
So, whether for or against the amendment, EWC has increased the pressure in the South African cooker exponentially and has kept eager investors at arm’s length. While exploration and junior mining companies flock to the rest of Africa in search of big deposits, South Africa remains in limbo.