Think of African countries whose mining sectors carry worrying political and security risks, and the Democratic Republic of the Congo (DRC), Guinea and Ivory Coast spring to mind. Alternatively, think of those African countries with less severe risks, and Botswana, Namibia and Tanzania fit the bill.
But what of South Africa, the continent’s traditional mining hub? The country cannot be placed alongside the likes of the Ivory Coast because it is not a pariah, but neither is it an exemplary mining environment any longer.
Slipping crown
Persistent uncertainty over the likelihood of South African mine nationalisation, and a ban on mineral exploration from September 2010 to February 2011 because of alleged corruption in the allocation of prospecting rights, account for the rising political and security risks in the country’s mining sector.
In February, the government extended the mineral-exploration ban until September 2011 in the eastern Mpumalanga province, and to the end of March for the rest of the country. The government claims that it needs more time to review mineral exploration applications, which are believed to number approximately 25,000.
Although postponing the resolution of mineral rights irregularities undermines investor confidence in the regulatory system, it is worth mentioning that a thorough review is necessary if full confidence is to be restored over the longer term. There are significant discrepancies in the award of mineral rights. These include:
Administrative failures, such as the simultaneous granting of mineral rights in the same areas to different mining companies;
Covert and illegal exploration activities by some mining companies;
Allocation of mining rights without due consideration of the environmental risks posed by mining ventures;
Selling of mineral rights without state sanction; and
Failure by regulators to follow up on whether those mining companies granted rights have actually started operations.
Such problems result from systemic failures in the regulatory environment and corruption stemming from lack of transparency. Efforts to clean up regulations for mineral-rights allocation are progressing in the context of a nationalisation agenda, led by the African National Congress Youth League (ANCYL), which is never far from the centre of debate when the issue of future mining policy arises.
President Jacob Zuma and mining companies have to contend with an ANC contingent headed by the ANCYL leader, Julius Malema, who is strongly in favour of nationalising the country’s mines.
The president has publicly stated on a number of occasions that the nationalisation of mines is not an ANC policy. This, alone, would be adequate assurance for mining investors were it not for the strong divisions in the congress over the nationalisation agenda.
The ANCYL is not alone in driving this agenda. The other members of the ruling tripartite alliance – the South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU) – are also in favour of nationalisation.
However, even in the pro-nationalisation camp there are stark divisions. While the ANCYL’s demands focus on mines, labour bodies such as the National Union of Metalworkers of South Africa (NUMSA) are clamouring for nationalisation to be broadened to include banks and some economically strategic companies.
The key effect of ANC divisions regarding nationalisation is the creation of uncertainty in South Africa’s mining sector, thereby discouraging potential investment.
The ANCYL does not direct government policy, but is nonetheless a powerful group within the ANC. The strength of the youth league’s position in the party, and the popularity of its calls for economic redistribution (the country ranks as the most economically unequal in the world), are underlined by the fact that the ANC national general council policy review conference (September 2010) agreed to establish a committee to study the viability of mine nationalisation.
The results of the study will be presented to the ANC’s elective conference in 2012, for debate and decision. A nationalisation research committee is currently being assembled, but the ANCYL and its union sympathisers continue to stir the debate, unsettling investors.
Is nationalisation feasible?
South Africa’s budget deficit is projected to be 5.3% in 2011-12.
The treasury hopes to reduce this to 3.8% by 2013-14 on the back of economic recovery, but South Africa continues to falter in meeting its annual GDP growth target of 6% – growth was 2.8% in 2010.
South Africa’s figures are indicative of an underperforming economy, indicating that the government does not have the financial means to nationalise mines.
President Zuma’s launch of African Exploration Mining and Finance Co (AEMFC) in February 2011, suggests a more likely result is greater government involvement in the mining of strategic resources through a state company.
In the president’s words, “the ultimate goal would be to consolidate all state mining interests in one vehicle”.
Partnerships with foreign companies and increased state shareholding in mining ventures are the more probable outcomes.
Still, uncertain times lie ahead, and much depends on the recommendations of the research iteam investigating the viability of nationalisation.
The question of whether to nationalise the mines will be a fiercely contested topic at the ANC’s 2012 elective conference, where the agenda will also be used by ANC political rivals to outmanoeuvre one other as they jostle for nominations and party positions. The debate bequeaths immense political capital because economic inequality is a widely felt grievance in South Africa.
Owing to the uncertainty caused by this debate and unresolved chaos in the mineral rights regulatory system, South Africa’s pedigree as the mining invest-ment destination in Africa is no longer unassailable.