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South Africa miners face ANC fight over black investors

Corporate speeches usually avoid talk of a “difficult and dark” past. But this month Mark Cutifani, head of Anglo American, defended the South African mining industry’s record on opening up ownership to the country’s black majority.

With the government planning to shore up black participation in mining, the next few months are the most critical in the sector’s 150-year history, Mr Cutifani said. Many “still don’t understand” that the modern owners of South African mines are no longer the “Randlords”, he said, referring to the white industrialists who exploited black labour to establish the country as one of the world’s leading miners.

His speech was widely seen as a warning to the ruling African National Congress. Increasingly reliant on populist rhetoric as its support wanes and the economy stagnates, the government wants to consolidate black ownership in an industry that was once the country’s economic bedrock but is now declining.

The ANC introduced black economic empowerment (BEE) to address the apartheid-led exclusion of blacks from South Africa’s economy and it encompassed far more than just mining. Companies had to bring black ownership up to a stipulated level.

But its implementation has been widely criticised for enriching a politically connected elite, such as Cyril Ramaphosa, the deputy president, and Tokyo Sexwale, another ANC veteran. As a result, empowerment had been seen as a narrow “self-enrichment scheme for a few people” connected to policymakers, said William Gumede, chair of the Democracy Works Foundation.

In March the government is to update the 2002 mining charter, the social compact designed to accelerate the industry’s racial transformation. It now wants companies to maintain black ownership at 26 per cent — even if the original BEE beneficiaries sell out. Miners — who say they met the original target three years ago and that the industry-wide level of black ownership is now at 38 per cent — fear this is financially unsustainable. Already struggling to attract capital as corruption scandals and policy uncertainty tarnish South Africa’s reputation, companies warn they would have to dilute existing shareholders repeatedly to sell enough shares to a relatively small base of black capital.

Miners also fear that under the amended charter their mining rights could be confiscated if they fail to comply. This reflects wider concerns that under President Jacob Zuma, the ANC is redistributing shrinking resources to its political allies, rather than enabling stronger economic growth. “The original thinking behind the charter was that it was meant to be a social compact, one very corporatist in philosophy,” said Peter Leon, a mining lawyer at Herbert Smith Freehills’ Africa practice. “What’s happened is, frankly put, rent-seeking.”

The government counters that “radical economic transformation” is overdue. Mosebenzi Zwane, the mining minister, has said the changes to the charter “will talk to the workers of this country who have worked in the industry for decades . . . and go back and live in shacks”.

What’s happened is, frankly put, rent-seeking

The conversation needed to move from “rigid, reductive and restrictive ideas about fixed black equity in white companies” as a measure of empowerment, said Mxolisi Mgojo, chief executive of Exxaro, South Africa’s biggest black-owned miner.

Even for the black investors it was meant to benefit, empowerment had often proved a “recipe for tears and frustration”, he said. The frustration is based on what analysts say is one of the flaws of the empowerment model — black investors have often had to borrow against their shares to buy the stakes. Given the sharp drop in miners’ share prices during the last commodities downturn, many empowerment transactions “collapsed” because of their structure, said Mr Mgojo.

In recent years, there has been a shift to other models of empowerment, such as share trusts for black employees. One scheme at Kumba, an iron ore miner owned by Anglo American, increased so much in value in the previous decade’s commodities boom that workers bought flashy cars and houses with their dividends. But Mr Gumede said the ANC was only “tinkering” with empowerment so that most benefits continued to flow to its elite supporters. “We can be so much more imaginative.”

Via FT