Moody's Slates Mining Charter, Believes ANC Will Force Its Withdrawal

Moody's joined Fitch Ratings in slating the controversial charter.
A miner returns from his shift in Nkaneng township outside the Lonmin mine in Rustenburg.
A miner returns from his shift in Nkaneng township outside the Lonmin mine in Rustenburg.
Siphiwe Sibeko / Reuters

The rand lost ground on Tuesday morning as ratings agency Moody's released a report criticising the new Mining Charter which increases black ownership requirement to 30 percent.

Moody's joined Fitch Ratings in slating the controversial charter as harmful to the South African economy.

Moody's said the document is not properly drafted and believes the ANC is likely to ask for it to be withdrawn. The rand jumped from R13.03 to R13.13 instantly on the news, before easing to R13.08 by 11:00, a 0.14 per cent drop in the price since Tuesday.

South Africa's consumer price index for May came out at 5.4%, within the target band of between 3% to 6%. But analysts attributed the rand's jump to Moody's comments.

Moody's published the research report on Tuesday after Mineral Resources Minister Mosebenzi Zwane launched the revised Mining Charter last week. It requires South African mining companies to increase black shareholders' equity holdings to 30% from 26% within 12 months.

ANC not in favour

Analyst Douglas Rowlings, a Moody's assistant vice-president, said the ANC has come out against the revised charter. He believes the charter's policies run counter to what is outlined in the Economic Transformation Discussion Document for the ANC's National Policy Conference, scheduled to take place at the end of the month.

"The ANC's National Policy Conference may recommend that the revised Mining Charter be withdrawn to allow for adequate stakeholder consultation or it may recommend amendments to the current draft," he said.

Commenting on the charter's content, Douglas said the higher black economic empowerment (BEE) equity holding requirement is credit negative because it will likely require miners to use cash or raise debt to facilitate the equity transfer. He said the revised charter is credit negative for South African mining companies because a number of the requirements will add to mines' operating costs and reduce free cash flow generation.

"We expect that current shareholders are unlikely to support a further dilution of their equity interests," he said.

He said the clearest example of this is the clause which forces new mining rights to pay a minimum of 1% of annual turnover to communities.

"In our view, the payments are contrary to the South African Companies Act and will have a material bearing on free cash flow generation, which will likely decline significantly because of the payments.

"In turn, reduced cash flow would reduce mining companies' ability to continue to reduce their debt or invest in expansion, such as developing reserves."

Douglas warned that Anglo American, AngloGold Ashanti, Gold Fields, Petra Diamonds, Sibanye Gold and South32 would be negatively affected if the revised Mining Charter were implemented in its current form.

"Reduced cash flow would reduce mining companies' ability to continue to reduce their debt or invest in expansion, such as developing reserves," Rowlings explained.

A recap on the Mining Charter

The ANC sought an urgent meeting with Zwane last Thursday. ANC spokesperson Zizi Kodwa told News24 that the ruling party's economic transformation committee had raised a number of concerns about the new charter -- specifically about the impact the raised level of black ownership to 30% could have on jobs in the sector.

The bloodbath resumed on the JSE following Mineral Resources Minister Mosebenzi Zwane's announcement of stringent new laws in the mining sector on Thursday.

The Chamber of Mines said it will serve an interdict on the minerals department to force it to immediately suspend the implementation of the charter. It will also take the charter on review.

A veteran black mining executive told City Press that the Department of Mineral Resources may have wilfully plunged itself into months, or possibly years, of lawfare "because by doing so, they think they will be seen to be doing radical economic transformation".

The new Mining Charter contains a number of flaws that are not in accordance with legislation, said mining lawyer Peter Leon of Herbert Smith Freehills.

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