Mineral and Petroleum Royalty Draft Bill [B59-2008]: public hearings

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Finance Standing Committee

18 March 2008
Chairperson: Mr N Nene (ANC)
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Meeting Summary

The Committee continued to hear public submissions on the draft Mineral and Petroleum Resources Royalty Bill. The Chamber of Mines welcomed the progress made, supported the direction to the formula based system and the provisions on smelting. However, the Chamber suggested that the B factor of the formula must be changed and suggested that a generic level of 20 might be appropriate. Consideration should be given to deductions for capital expenditure. The Chamber further commented that some companies did not separate out mining and smelting, and they would be penalised by the current formula. There was a need to clarify this in the Bill. Gold producers were arguing for a differential B factor, and a once-off election possibility for the 1.5% fixed rate originally proposed. The position of pre-Minerals and Petroleum Resources Development Act (MPRDA) dumps and tailings was addressed. Exemption from such dumps was necessary. Sales of dumps as a whole should be treated by shifting the royalty obligation to the acquirer. Community royalties were dealt with in some depth. Conversions might not be practical or achievable. The Chamber was not suggesting that community royalties be abolished, but that double royalties be addressed and that the community royalties perhaps be deductible from state royalties.  Fiscal guarantees would be more attractive to investors if the rights could be enjoyed as property under Section 25 of the Constitution.

The Bopo ba Mogale Community submitted that it regarded the Bill as limiting the right to royalties. Communities were dependent on these royalties and were most concerned by the veiled implications of a statement by the Chamber of Mines and Anglo American that seemed to suggest that they wished to press for abolition of community royalties. This community noted that conversion was often difficult because of the reluctance of mining companies to give full value for the royalties. The Community had had some poor experiences with the Department of Minerals and Energy and did not believe that it had the skills to act as mediator or arbitrator, nor to evaluate values properly. If there was any suggestion that community royalties were to be abolished or limited, then the Community would be seeking an interdict.

COSATU and the National Union of Mineworkers (NUM) felt that the Bill fell short in imposing long overdue royalties, and complained of lack of consultation with NEDLAC and other stakeholders. The Unions suggested that there should be ring-fencing of some of the revenue from the royalties, directed to benefit miners and communities. There was a need to review the royalty rates and make an adjustment for the economic impact of negative social consequences. Specific provisions to be amended included the tailings of the mine dumps, the preamble, which should more clearly state the intention, the “connected persons” definition. They suggested that the allowance of costs might be a loophole for exploitation that might have the effect of lessening the royalties. The clause on stockpiles should be expunged. Relief for marginal mines should be allowed. There were queries on how the clauses on fiscal guarantees had been drafted.  It was suggested that the Department of Minerals and Energy should conduct monthly assessments and give Treasury the figures in terms of different commodities. There was finally a need to convene a national dialogue forum to deal with redistribution of wealth in the country.

Anglo American noted that the draft had taken most of the concerns into account. However, there were some differences between the drafts. The removal of the dual royalty rate and the introduction of a formula were welcomed. It was important to reconsider the factor of 12.5 used in calculating the royalty rate. The current forecasts would result in higher rates being paid. Anglo America noted that the proposed formula was based on historical data and the formula should be different.  The concept of saleable products should be defined in the Bill, and provision made for exemption of penalties when this would amount to double taxation.

The Gold Producers Committee of the Chamber of Mines noted that the industry was in decline with many ageing mines, and many of the resources were deep-seated, with other external challenges in power sources and labour also having an impact. There were also drops in mine head grades, resulting in much smaller margins. The gold sector would have to pay much higher royalties in terms of this new Bill, despite having to put in significant investment into prolonging the lives of the mines. The B factor of the formula needed to be reconsidered. The assumptions for the gold industry had not taken into account the higher prices nor the refining. Gold deductible expenditure was negligible relative to the other commodities, exacerbating the overall impact of the royalty on this sector. Imposing additional royalties in line with the formula now proposed would result in discouraging new investment and shortening the life of the industry. The Committee therefore recommended amending the formula applicable to gold, allowing capital expenditure to be deductible, and adjusting the B factor in the formula to be higher. Alternatively it suggested that the gold companies be offered a once-off opportunity to elect, as the basis for future royalty payments, the royalty rates on revenue as proposed in the second draft.

Impala Platinum noted that it produced around 25% of the world supply. Royal Mafikeng was the biggest shareholder, as a result of conversion of royalties to equities. Other Black Economic Empowerment was found throughout the group. The group supported the comments of the Chamber of Mines, acknowledged the fundamental principles and objectives and agreed with the shift to a profit based formula. It agreed with one rate for all companies in the mining industry. However, it made suggestions that some costs be taken into account, and that Treasury consider options recognising significant capital commitment. It would like to ensure that its shareholders, including the community, were in no worse position than they would have been in the calculations made in the second draft. There was a need to clarify the Platinum Group Metals in the bill.

The Legal Resources Centre noted that the issue of community participation in mining was topical and important. The Centre pointed out that the MPRD Amendment Bill had proposed to amend sections 17 and 23 of the Act and the principle of conversion in Schedule II. There was the question whether community royalties should not be a set condition. Existing royalties were protected. However, communities were being encouraged to convert to equity where appropriate. The Centre believed that this Act needed to be amended and that communities should be given assistance to apply for preference rights under section 104. Consultation should be supervised by the State or an independent non interested party. State assistance should be available to communities who gave their consent to negotiate fair agreements and compensation. Supervision could include publication and more transparency in regard to the financials to ensure that best practice prevailed. Similar provisions should be carried over into the Royalties Bill. Existing royalties must be specifically retained and managed according to a strict regime.

Members asked questions of clarity from the various presenters. National Treasury, commenting briefly on the inputs so far, clarified that it was not the intention to do away with community royalties. Some technical issues must be considered. There had been references made to the second Draft Bill, but this had contained some incorrect assumptions. There must be clarity from industry as to what was required. Different rates for each industry could perpetuate problems.

The Chairperson noted that the Minister may have been quoted out of context. It was clear that this Committee was not pre-empting the public hearings and would go through the full process giving due weight to every submission. There would be a report back from National Treasury on 9 May.

Meeting report

Draft Mineral and Petroleum Royalty Bill (the Bill): Public Hearings
Chamber of Mines (COM) Submissions

Mr Roger Baxter, Chief Economist, Chamber of Mines, noted that the Chamber of Mines (COM) welcomed the progress made and appreciated the willingness of Treasury and Parliament. It supported the direction to the formula based system and the smelting. However, the proposed royalty formula needed to be adjusted to provide an appropriate balance between government and investors. There should be a clearer separation between the mineral extractor and processing activities. The formula presented challenges for the mature gold sector and the issue of double royalties required resolution. Although this was a taxation Bill it was clear that more thoughts were needed.

Governments and investors had differing objectives. Governments favoured methods that were stable, transparent and equitable. Companies preferred royalties that were stable and predictable, and based on the ability to pay, which could respond to downturns, did not distort production decisions, and could be deducted from taxable income. The critical issue was how to achieve the balance. The COM had focused on the State's sovereign right to introduce a royalty. The system must be competitive, stable and predictable. It should however also be responsive. There should be ring fencing of proceeds for sustainable activities. He indicated how mineral potential was related to policy potential. South Africa was in a similar situation worldwide to Russia, China and Papua New Guinea. Anything on the policy side should be geared to pushing South Africa higher on this scale. Most respondents to a survey believed that the quality of infrastructure was generally good, but that there were some discouraging regulations.

Mr Baxter pointed out that the specifics of the formula were based on data for 2002 to 2006, which may have captured a period when the rand had appreciated against the US dollar. The royalty rates would not be appropriate compared to a full commodity cycle. COM had looked at data for the top 5 minerals, for a 10 year period, and had concluded there was a substantial difference in the rates to those originally envisaged. That had huge implications for cash flows. Most of the benefits of high commodity prices had been reinvested back into the mining sector. More than 70% of the gold sector had been reinvested back, which was crucial to open up new areas in the future. COM therefore suggested that the B factor of the formula (which could reach around 20 at a generic level) needed to be changed and serious consideration should be given to taking off capital expenditure (capex). He illustrated this by way of a graph. Improving competitiveness was a major interest.

National Treasury had stated that the royalty would apply to the mineral extractor, not the beneficiator. This was a welcome development. However, some companies did not separate out mining and smelting, and the profit angle on the smelting side was not taken into account. This would have to be dealt with in regulations and COM would work with NT in this regard. There was no wish to penalise companies who had invested millions in smelting and refining. The gold sector was still crucially important. However, remaining gold resources were very deep and required significant capital investment to extract. There were important ramifications in the new formula. The sector, despite investing back into Capex, would be paying double to treble the rates originally envisaged under the fixed formula rate. That had huge implications for both the gold and the broader mining sector. The gold producers were therefore arguing for a differential B factor, and a once-off election possibility for the 1.5% fixed rate originally proposed.

The double royalty issues required resolution. NT had not provided relief in this Bill. It was difficult for companies to convert royalty streams into equity stakes. Whilst this may not necessarily be in the realm of NT, companies having to pay double royalties created sustainability issues.

On the issue of ring fencing, COM thought that the practice of dedicating royalty revenues and applying them to major mining and labour areas to develop long term capital was something applied elsewhere, which should be seriously considered in South Africa. Mr Donaldson of National Treasury had indicated his willingness to engage with this point.

Professor Michael Dale, Legal Advisor to COM, dealt with pre-MPRDA dumps and tailings. He pointed out that many companies had purchased equipment and employed people to mine.  If the State levied a resource rent, people were likely to claim ownerships. The dumps were estimated as worth billions of rands. The royalty was a state resource rent. Minerals were owned by the holder of the right to mine, and not the State. There was no justification for the resource rate. The bill did provide that royalties would be payable by holders of mining rights. However, the Court had recently held that old dumps fell outside the scope of the Minerals and Petroleum Resources Development Act (MPRDA). However, there were two instances where this could change; the case was on appeal, and the MPRD Amendment Bill proposed to amend the definition of stockpiled residue dumps to include this. The COM urged that exemption from royalty on these dumps was necessary. In regard to some dumps, state consideration had already been paid. An exemption would promote sustainability of development of dumps. There should be an express exemption for old dumps

In respect of new dumps or stockpiles, these should have been won or recovered by the extractor from the earth. That would constitute a transfer by the extractor of the entire mineral content. A sale of a dumps as a whole would prematurely trigger the royalty. COM here suggested that the royalty obligation should be shifted to the acquirer if the dumps were sold as a whole.

Community royalties were perpetuated in Item 11 of Schedule II of the MPRDA. Some communities held royalties prior to the Act, and this would continue. The Bill said that further royalties would be payable. Community royalties were not to be set off against State royalties, which resulted in constitutional inequality. Where a company let from a private lessor, there would be only one royalty. Where the community was a lessor, there would be two royalties. NT had given a Canadian example and had said that other countries did recognise a multiplicity of royalties. However, COM thought that there were not necessarily exact parallels. Other pre-existing royalties in other countries were not perpetuated. NT had suggested conversion of community royalties to equity. That would not remove the duplication and may not be achievable in practice. The COM submitted that community royalties should be deductible from State royalties. It was not suggesting that community royalties be abolished.

In relation to fiscal guarantee, COM thanked NT for clauses 13 and 14. The reason for the guarantee was to provide long term certainty and stability. The underlying philosophy revealed a balancing of State sovereignty while attracting mineral investment. However, there was still perceived vulnerability to legislative change. There had been examples of the old OP26 leases, which were to be overridden by the MPRDA. After representations were made, there were amendments in 2006 to preserve fiscal guarantees and produce a new regime. Financial guarantees would be more attractive to investors if governed by international law and subject to international arbitration. This would need an authorising provision in the Bill. In the domestic context, they would be more attractive if the rights acquired were to be enjoyed as property under Section 25 of the Constitution.

Professor Dale indicated that there were other important issues mentioned in the written submission. There were also some substantive issues because of the wording issues. The COM requested that the NT and COM be given the opportunity to discuss this in greater detail.

Bapo ba Mogale Community (the community) Submission
Ms Harriet Maimane, a member of the Bopo ba Mogale Community, made an oral submission and noted also that the community had made some written submissions.

Ms Maimane noted that the community regarded the Bill as limiting the right to royalties. Sixty grassroots members had travelled today to indicate how seriously they took the Bill. The community wished to stress cooperation and constructive support. However, it needed to focus on the condition of the community. It was confident that all communities in South Africa were in a situation similar to their own. The community was poverty-stricken, notwithstanding having received, since 2000, significant contractual royalties. These had gone to redressing the accumulated deficit caused through decades of neglect in the past.  Any tampering with the royalty situation in this Bill would contradict the State’s philosophy of uplifting communities. If the contractual royalties were abolished or limited, this would be tantamount to reversion to apartheid times. The community had only finally been paid out some twenty years after the royalties should have been paid. The funds were desperately needed to build schools, and maintain and refurbish those already built. In addition the funding was needed for lighting, roads and upgrading residential areas to enable the community to move from shacks to decent housing. Tampering with the royalties would sink the community into worse poverty, at the expense of the mining companies and shareholders.

Mr Phillip Moerane, Educator, Bapo Ba Mogale Community, noted that "business unusual" was to prevail in the country. He noted that the imperatives of Section 25 of the Constitution dealt with expropriation, not limited to land. This Bill was not to undermine the objects of the MPRDA. The Community had welcomed this principle, and supported that the State having a royalty on mineral resources was supported. However, it believed strongly that the abolition of contractual royalties would undermine the objects. Retention of state and community royalties would not have an adverse effect on the mining companies.

The COM had indicated that it would lobby for abolition of contractual royalties. Those who argued for abolition of contractual royalties could only justify it on the basis that it would lead to lower returns for the mining companies.

Mr Moerane indicated that he was the President of the Platinum Stream of the Community and Platinum Group Minerals (PGMs) were by far the most valuable of the Community’s assets. He had read the written submissions and had noted the option of conversion of royalties to equity. If conversion was possible the community would achieve this. However, it had had severe difficulties, as set out in the written submission. Mining companies did not want to give full value for the royalties and the community insisted on full value. The same was being experienced with the chrome miners. It probably applied to all minerals.

The COM had not said openly that it wanted the royalties abolished, but instead made veiled references to "resolving the double royalty issue" or "mitigating the impact of double royalties". This reticence did the Chamber no credit. The Chamber was not alone in this disguised request for abolition; this was also reflected in the submission of Anglo American. It too had asked for relief in instances of double royalties. If it was set off of contractual and State royalties that was being requested, then it should have asked for this. However, it had done so, and therefore the implication was that COM wanted to have the contractual royalties abolished. The Community suggested that even if time limits were placed on the conversion to equity, this would give the companies a gun to hold to the communities' heads. Invoking the assistance of the Department of Minerals and Energy (DME) would not be acceptable. Removal of royalties would amount to unlawful expropriation, and the Community did not want to be precluded from seeking compensation from the State. The DME did not have the skills to act as mediator or arbitrator. If royalties were converted to equities, the DME did not have the personnel to evaluate the contentions of the mining companies. The Community’s experience with DME had been poor. There was litigation in process at the moment.

The Community was also concerned on the slow progress of the Land Claims Commission in processing land claims.

The Community therefore pleaded that community royalties not be abolished or limited. This was not a question of competitiveness but an attempt to enrich the mining companies further. If this was to be done, then the Community would apply to interdict the State from putting the Bill into operation. It would also seek compensation in terms of Section 25 of the Constitution. This would not be in the best interests of the country. Finally, since drawing the written submission, the Community had become aware of a statement by the Minister of Minerals and Energy, on 17 March, that the Bill would be reviewed in the light of the double royalty payments.

Congress of South African Trade Unions (COSATU) / National Union of Mineworkers (NUM) Submission
A delegation consisting of representatives from both COSATU and NUM made some submissions on the Bill, also referring to their presentations made in 2006. COSATU and NUM felt that the Bill fell short of the goal of imposing a long overdue royalty for depletion of the State resources. For too long the private owners had benefited and denied the nation the right to share in profits. The Bill had some contradictions with the spirit and intention of the MPRDA, which had clearly acknowledged that the mineral resources belonged to the nation and the State was the custodian. Many of the issues in the draft had resulted from consultation with big business, and COSATU and NUM believed that there were other stakeholders who should have been consulted.

COSATU and NUM believed that there should be ring-fencing of some of the revenue from the royalties, directed to benefit miners and communities. No provision had been made for this in the Bill. Many mining towns had become ghost towns once the minerals were exhausted. In labour areas the economy had come to an end with high levels of retrenchments. Ring fenced funding would benefit those who had made a contribution to the substantial economic benefit to this country through their work as mine workers.

There was a need to review the royalty rates and make an adjustment for the economic impact of negative social consequences. When previous drafts were considered there had been concern that no provision had been made for ring-fencing. This was despite earlier agreements with DME and Treasury in a meeting of 2004. There was further agreement on this issue during a workshop in 2007. Still nothing was included about ring fencing in this draft. The same mining companies were now crying foul in respect of the losses perceived to be lost through the royalties. Higher royalty rates should be expected.

It was suggested that specific provisions be amended. An area excluded from the draft Bill was tailings of the dumps. There was currently a legal battle between DME and De Beers. The Bill should have dealt with the matter. Recoveries from the dump tailings were estimated at large amounts. These should be considered for inclusion. The Bill also did not state the intention of the Bill in the preamble. A number of provisions in the previous drafts were omitted.

The reference to the "connected persons" definition was queried. Provision was made to general anti-avoidance and dealings on arms length value. If there was not provision for connected persons, then this would allow the extractors to manipulate the system. NUM was also concerned with the charging provisions. It noted that the new system would aggregate the gross sales value of the companies. The Bill suggested that the profitability levels of the extractors were being taken into account, and that costs for transport, transfer and beneficiation were being allowed. This was a loophole for exploitation, would avoid payment of the royalties, and downgraded what was provided for in the previous bills, which at least had given certainty in terms of the percentages of levels applicable to each formula.

Provision was made in Clause 7 of the Bill for reference to credit for bad debts. The NUM did not understand the need for this provision. The preamble and objectives required taxation to compensate for commodities extracted from the land, which were non renewable. He queried whether the Nation would not be compensated. There was a question what would be done with stockpiles. This did not deal with demand and supply. It was a matter of compensation for the mineral extraction, which was non renewable. NUM therefore called for the clause to be expunged.

Provisions were made for exemptions in the small mining business. This Bill would put more clarity on the amounts and turnover that would constitute a small mining business. Provisions for the marginal mine relief rates were excluded. NUM believed this decision had been informed by the introduction. It called on the drafters to reintroduce the provision on relief for marginal mines, otherwise the possibility of immediate closure for those mines would be high.

The Bill also made provision, in clauses 12 and 13, for fiscal guarantee. The principle was not problematic, but there was a problem about how this had been drafted. There were no conditions attached to this provision. NUM believed that at least a minimum of ten years would have to serve as a barometer, so that there would be a review after that period of the guarantee.

NUM also raised the division of the responsibility and administration of the law. It was a money bill and was in the domain of NT. However, DME was central to assisting in enforcement of the legislation and therefore NUM would prefer to have seen shared responsibilities. DME should conduct monthly assessments and give NT the figures in terms of different commodities.

NUM then mentioned the clauses excluded from the second and third drafts. In those drafts there had been provisions around the purchases of unpolished diamonds, to deal with evasion of royalties. The withholding regime for diamonds was no longer included in this Bill. The second area that was vital was the publication of monthly statistics. This was provided for in the first draft, but was no longer included. NUM would like this to be reinstated, as otherwise it would be impossible to enforce the provisions.

NUM concluded that the drafting of the Bill had also missed the very important step of New Economic Development and Labour Council (NEDLAC) processes. The approach seemed to be a piecemeal one, which was not appropriate to the solving of fundamental problems facing society. He asked how all could share in the wealth of the country. They called upon Parliament to convene a national dialogue forum to confront the issue of redistribution of wealth in the country. This involved minerals, land, and other natural resources. The fact that these were still remaining in a few hands while the majority of the people were still poverty stricken was a major issue.

Discussion
The Chairperson noted that all three submissions had raised an issue around conversion of royalties to equity. COM had confirmed that there were challenges and the community had named some also. He asked what those challenges were.

Mr K Moloto (ANC) asked COM and NT about the call for royalties to be tax-deductible. He found that might defeat the purpose.

Mr Moloto noted that the Community submission was that fair value should be given for conversion. He thought that community conversion could be regarded as a credible formula for Broad Based Black Economic Empowerment (BBBEE).  He asked why there was perceived to be a problem

Mr Moloto asked COSATU whether the suggestions around diamonds should not be removed to another Bill. He did not believe it belonged properly with this Bill

Mr Moloto also asked why no mention was made of mineral rights in the State.

Mr B Mnguni (ANC) noted that COM had listed the problems and deterrents to development of black communities in one of the slides, and asked for further explanation.

Mr Mnguni noted that the contractual and state royalties were recognised by the Community as being allied to government purposes. He asked if there was a suggestion that government objectives be changed.

Mr Mnguni noted that there would be times that the gold price would drop, and if the Community would be prepared to take a middle road, and what that would be.

Mr Mnguni asked COSATU about the royalty rates. The mining industry had indeed benefited when commodities were high. The overall impact of dropping rates would be job losses and other knock on effects.

Dr D George (ANC) commented on the formula, which he thought should be relevant at all stages of the cycles. He asked if there had been any modelling on the B factor and what the proposal was.

Ms N Mokoto (ANC) noted that capital returns would have been met, and she asked what was regarded as "unachievable". She also asked for clarity on the suggestions that the Bill was one sided. She said that the Portfolio Committee would not be bowing to pressure from big business, and it was prepared to take submissions from a wide range The Committee would be achieving a balanced Bill. She noted that Members also held mandates from their Constituencies, and that members of the public could be assured that all submissions would be fully considered in an impartial manner.

Each of the institutions making the submissions responded in general terms to the issues raised.

Mr Baxter, COM, noted that there was a statement made around the transfer of the benefits of high commodity prices to the shareholders. That was not quite correct. Most of the benefits from high prices were in fact being ploughed back. COM research showed that 70% of the benefits of high prices had gone back into reinvestment to the industry. In fact the margins left behind were fairly small. He noted that the challenges in the conversion of royalty to equity were largely concerned with how to calculate and commutate this to a present value. It had to be resolved in a negotiation process. Often no one solution presented itself. The companies and communities had sometimes worked out good deals; in other cases there had been challenging cases. The issue could not be forced and this was in fact the major challenge. In terms of the formula, COM had done some numbers and differing calculations. It had looked at possible B-factors, looking at both the bear and bull market sides of the formula. Although the suggestion was made that a calculation of 20 might be more appropriate, this was something further to be looked at.

Mr Paul de Mare, Head of Tax, Africa: Anglo American, touched on the tax / royalty question. A royalty was one of the indirect taxes. By deducting the royalty cost, the company would in essence be converting the cost to an after-tax cost. Assuming that the tax was 28%, the company would thus still be bearing 78% of the cost.

Mr Anton van Achterbergh, Legal Advisor, Chamber of Mines, added that there seemed to be some confusion about the double royalty. The COM did make reference to previous comments, presented in respect of the first and second drafts. It was clear from these and the current comments that in fact the COM had never advocated abolition of the community royalty, but had suggested a set off. That remained the official Chamber position.

Mr de Mare explained the position further in relation to tax. Assuming that the royalty payable to government was R100 and that to the community was R70, the company would be asking that R30 be paid to government. There were in fact two issues, and one related to tax deductions. The royalty payment to the State would be seen as a business cost, and would be claimed as a deduction to reduce the profit on which tax was paid. The net effect was thus the tax rate. The cost to the company would be 72% of the royalty cost. The benefit to the company would be relief  of the 28% tax, but it would still be taking the 72% cost. Community royalties were currently tax deductible.

Mr Baxter noted that the slide referring to problems and deterrents showed the result of a survey around the world. Companies had indicated what they thought were weak issues, and the regulatory regime in South Africa was perceived as a problem. There were indeed challenges around permits as three different government departments were dealing with them. The taxation regime for exploration companies in South Africa saw this as more negative than positive.

Mr Hugh Eiser, Attorney for the Bapo Ba Mogale Community, noted that the net effect of the tax deduction was that the Community was receiving less. As far as the Chamber's statements were concerned, he noted that the reason why the Community had made the submission was in answer to a specific statement on a radio programme in which the COM had stated that it would be lobbying for abolition of the royalty. The Community further took issue with the Chamber's views. Mining companies could receive tax relief. He had been involved in negotiations with PMG Mines from the beginning. The COM, in his view, was setting up a skittle that did not exist. One of the members made the comment about conversion being the most effective BEE solution. This was covered in the Community’s written submission. It was submitted that the royalty holders had no real stake, nor did they share in the appreciation of the company value. Some had been given the opportunity to acquire a 2.5% stake; this had appreciated fourfold in four years. A royalty recipient, however, would get nothing. The income stream for shareholders would continue in the form of dividends. The question was asked whether the community would accept reduction during bad times. In 2003 and 2005 they received minimum royalty not only because of “bad times”, but because of the payment of the royalty after deductions of Capex. Participation in management was a vital part of the BEE codes. The Community could be exposed to improving skills. He therefore wanted to emphasise the fact that conversion to equity was the most effective form of BEE. Values could easily be determined if the mining company gave a full disclosure of the claims. If, however, the mining company was reticent, then problems would arise. He noted that there was no “best compromise" position.

The COSATU / NUM delegation noted that the royalty rate was a dynamic issue, and it was clearly not the intention that there should be negative impacts by way of job losses. It was encouraging that the Committee would be considering all inputs so fully. In regard to the preamble, it was noted that this should inform the public about the intentions of the legislation. This contained only two sentences, but the body of the Bill did wear down that intention. On the issue of withholding, the reference to diamonds was made because this was included in the previous drafts. There should be protection of all minerals.

Anglo American (Anglo) Submission
Dr Dineo Ramokgopa, Regulatory Affairs Advisor, Anglo American, hoped that the final legislation would benefit mining as a whole. The current draft Bill did take into account most of the issues raised by the Mining industry. Anglo supported the intent behind the draft royalty bill and the submission was viewed in the context of it being a major investor in the mining industry.

Anglo was one of the leading mining and natural resource groups worldwide, with presence in 64 countries. It was the largest private sector investor in South Africa. Investment to date amounted to R184 billion in 2007. SA operations generated 45% of the Group's earnings. BEE procurement-spend since 1993 was R55 billion.

Dr Ramokgopa set out the differences in the various drafts of the Royalty Bill. The royalties based on deemed revenue had been out of line with global competitors. The second Bill had introduced a two-tier regime, with higher rates for unrefined minerals. There were positive changes in the third draft Bill. Anglo American had been consulted on the formula, which was to allow for a fairer compensation. The removal of the dual royalty rate and the introduction of a formula were welcomed. It was important to reconsider the factor of 12.5 used in calculating the royalty rate. The current forecasts would result in higher rates being paid. Anglo America noted that the proposed formula was based on historical data and the formula should be different.

The concept of a first saleable product had not been defined in the Bill. Anglo suggested it should be included, otherwise asked that Anglo be allowed to comment on the Regulations. Provision should be made for exemption of penalties when this would amount to double taxation. It noted that tax deductibility was allowed, but also noted that in some cases the Courts had found royalty to be a capital payment. Anglo therefore suggested that there be specific clarification of this in the draft Bill.

Chamber of Mines Gold Producers' Committee (GPC) Submission
Mr Terence Goodlace, Chairperson, Gold Producers Committee, & Head of Operations, Goldfields, noted that the industry was in decline with many ageing mines, and many of the resources were deep-seated. Gold was a key contributor to the economy, with 160 000 direct employees. However, South Africa had 40% of the world’s gold resources. The challenges included gold productivity, the depth and power challenges. Only three years ago the industry had run at a loss before taking capex into account.

While the gold mining companies understood the reasoning, the impact on the gold sector meant that the sector would pay much higher royalties, despite having to reinvest significantly into prolonging the lives of the mines. The ability of the sector to generate cash flow necessary to sustain production could be compromised. This could result in reduction of gold production and could result in acceleration of the decline.

The Bill's most significant feature was the Profit/ EBITDA formula. The B factor of that formula was currently at 12.5. The proposal by NT to change the base against which the royalty would be applied was also important. Deductions would be allowed. For most minerals, this materially reduced the base. However, gold would only get about 0.4% deduction, as opposed to iron ore at 28%. The table in the slide indicated the different rates applying to the various mining sectors. The assumption of 2.1 for the gold industry did not take cognisance of higher prices, nor the fact that it was only selling refined gold. Unrefined portions would not apply. The gold industry had assumed in its calculations that the royalty proposed in draft 2 was 1.5%.

Mr Mark Cutifani CEO, Anglo Gold Ashanti, noted that the term 'mature and declining" was applied to the gold industry. However, many would like to turn that around. The average rate of 2.25% was not applicable to gold as all of the product sold was refined. Gold deductible expenditure was negligible relative to the other commodities, exacerbating the overall impact of the royalty on this sector. Depths were peculiar to the gold mining industry. It therefore had to spend much more on sustaining capital. Virtually all the improvement in the gold price had gone back into trying to sustain production. This was to be invested year-on-year. There was a need for significant investment, but the challenges were increasing. Gold mines had to contend with a continuing drop in mine head grades. Mining head rates had dropped from 14g per ton to around 4g per ton. There were now much smaller margins.

Mr Nick Holland, CFO, Goldfields, tabled graphs showing the consequences of the draft Bill to gold. Imposing additional royalties in line with the third draft Bill’s formula would discourage new investment and potentially shorten the life of the industry. There was a steep rise in revenue per kilogram, but this was matched by the cost per kilogram. There was also a lead-lag effect of rising steel, and fuel, which was not yet fully seen. The latest quarterly results were analysed. R2.7 billion had been invested into the industry in the last quarter. Before any royalties, there was a net deficit in cash flow of R2.1 billion. That demonstrated the key importance of considering capital expenditure. If there was a royalty on top of that, it would add another R231 million to the total deficit.

The recommendations of the GPC were therefore either to amend the formula applicable to gold, to allow capex to be deductible, and to adjust the B factor in the formula to be higher than 12.5.  The other alternative would be to offer the gold companies a once-off opportunity to elect, as the basis for future royalty payments, the royalty rates on revenue as proposed in the second draft.

Impala Platinum (Implats) Submissions
Ms Dawn Earp, CFO, Impala Platinum (Implats) noted that Implats produced around 25% of the world supply. It generated R31 billion and employed several million people The mining operations were located in Bushveld Complex in South Africa and the Great Dyke in Zimbabwe. The Impala Refining Services used the excess smelting capacity for other materials.

The group structure was outlined. The Royal Mafikeng was the biggest shareholder, as a result of conversion to equities. In Marula 22.5% of shares were held by BEE partners, including five communities. Two Rivers was a joint venture with African Rainbow. Implats had a 74% interest in the Leeukop project and 26% of the company was community-held.

Implats supported the COM detailed comments, acknowledged the fundamental principles and objectives and agreed with the shift to a profit based formula. It greed with one rate for all companies in the mining industry.

The capital expenditure for South African operations was set out. Ore resources were deep, and this would require significant capital expenditure and greater certainty for planning. More would be needed on capital expenditure over the next few years.

Implats proposed several options in their suggestions to NT and the Committee, based on the higher capital investment in the mining industry, which should allow for some credit in the future. Implats suggested that some costs be taken into account, but that NT consider options recognising significant capital commitment. Examples were given of what the calculations would be in shifting the B rate. The third draft royalty rate was higher than the second, and Implats would like to ensure that its shareholders, including the community, were in no worse position than they would have been in the calculations made in the second draft.

If there was no clarity on Platinum group Metals (PGMS) in the Bill, it was difficult to see what would be processed beyond "readily saleable condition". This could impact junior companies if the saleable condition was defined at a point beyond PGM concentrates.
 
Legal Resources Centre (LRC) submission
Mr Henk Smith, Legal Resources Centre, noted that LRC had also made a written submission. Historically there had been royalties for white but not for black people. The Community Land Rights Act had contained certain promises insofar as minerals were concerned.

The issue of community participation in mining was at the forefront of he daily news in South Africa. It was no coincidence that the UN Special Rapporteur Report had mentioned large mining developments and the impact on communities. The Human Rights Commission would be considering the relationship between mining companies and the communities shortly.

Minister Buyelwa Sonjica had stated that she did not expect that this Bill would be promulgated in its current form. She was correct in saying that South Africa had to navigate a fine line to ensure that locals saw the benefits of mining. The question was who were the locals who would benefit.

The MPRD Amendment Bill 10B of 2007 introduced a great change in relation to communities. It proposed to amend Sections 17, 23 and the conversion principle of the Schedule II. The Minister was given the right to impose conditions to promote the rights and interests of the community, including conditions requiring the participation of the community. This could relate to issues of ownership, management or royalty. A community royalty might be appropriate. This begged the question whether community royalties should not be a set condition.

Item 11 of Schedule II of the MPRDA was set out. Existing royalties were protected under the MPRDA. However, NT had stated in a media statement of 6 December 2006 that communities and mining companies were encouraged to enter into negotiations to convert to equity, where appropriate. It would be unfortunate if the COM wanted to do away with royalties. The President of the COM, in November 2007, said that he would continue to raise the double royalties sharply with NT. Today, there had been a slightly different attitude expressed. It was important to know whether the State would encourage or discourage community royalties.

Mr Smith referred to the written submissions and the history of royalties. It was noted that historically black people were prohibited from applying for mining and prospecting rights. White landowners and tenants were promoted through affirmative action measures and their bargaining position was given legislative backing. Black people were now allowed to become owners, but could not negotiate. LRC was still looking for money that should have been reserved in the Native Development Trust.  Various pieces of Bantustan legislation allowed for the Minister to provide for community royalties.

LRC proposed that the MPRDA needed to be amended. Communities should be given assistance to apply for preference rights under section 104, to avoid the situation where new prospecting or mining rights were granted on their land, without them being given the opportunity to negotiate. Consultation should be supervised by the State or an independent non interested party. State assistance should be available to those communities who gave their consent to negotiate fair agreements and compensation. The idea of tripartite agreements was recognised in other legislation. Supervision could include publication and more transparency in regard to the financials to ensure that best practice prevailed.

In respect of the Bill now under consideration, there should be a repeat of the provision on community royalties available on applicants, with assistance.   Existing community royalties would be retained, subject to item 11 of the transitional positions. All community royalties should be managed according to a strict regime of planning, budgeting and reporting under the Royalty Bill. The community royalties to be introduced could be partly in lieu of the State royalty.

Discussion
Mr Mnguni noted that the Royalty Bill was attempting to recognise that there should be a benefit in the case of non renewable resources. Secondly it was recognising that there should be benefits to communities. The economy had been liberalised, but at the same time South African large companies were trying to use leverage to access markets. It seemed that some of the major industries were wanting to give away key resources for too little to outside companies. He asked why this leverage was not being used to negotiate other interests. He asked why the large companies were not recognising the needs of communities that for years had been exploited. Implats had stated that it wanted to seek the maximum return, separate from income tax. He noted that the BEE deals were discussed during deliberations on the Taxation Laws Amendment Bill, and it was mentioned that often companies would allegedly do BEE deals, but the BEE partners were not benefited. He asked, if royalties were changed to equity, whether communities would benefit, and benefit immediately.

Mr Moloto asked Implats what had been their experience in the conversion of royalties to equities. He noted that Implats had requested deduction on capital expenditure, and said that this was a huge amount of money. Companies were currently enjoying deductions for depreciation. He asked why it was therefore now also calling for deduction on capital expenditure, which was an additional benefit. Ultimately no royalty may be paid if the capital expenditure was too huge.

Dr George said that industry needed to survive and therefore there could not be over-taxation. The COM had mentioned a B factor of 20, gold producers had suggested a B factor of 30 and Implats suggested one around 15. He asked if there was any consensus or whether this should be different for each producer. The formula must be determined very closely, as it did not seem to be robust enough to withstand all cycles.

Dr Ramokgopa, Anglo American, noted that she did not have the figures in front of her, but would send them through. It was unfortunate that there was a perception that Anglo was not making investment into communities. Currently it was investing a lot into communities by way of schools and clinics and other matters. There had been equity states entered into, primarily under Anglo Platinum. There was indeed community involvement in the group. She noted, in regard to the DOHA round participation and the questions around negotiations, that Anglo was entirely guided by government and its priorities.

Mr Henk Smith, LRC, responded on the formula. He said that he would like to see part of the royalty being reinvested for the benefit of the local communities. Ensuring that communities were benefited was difficult.  LRC was not sure that the open ended provision in the MPRDA was providing enough certainty to anyone to take the matter further. He felt that there must be more added. It could be that Treasury could give further guidance in the Royalty Bill. He believed that it should be directly addressing the issue of community royalties. During the next two years of the conversion process this would be vital. He thought there should be proper provision for supervision and the State must express its interest in the process of negotiating. Good examples should be promoted and publicised to raise standards in the industry. There was merit in NT's statement that the communities and mining companies be encouraged to enter into negotiations.

Mr Cutifani noted that gold prices had nearly doubled over the recent years. However, gold, energy and labour costs had also doubled over the last four years. The grade of material being mined had dropped. The physical quality of the ore and the unit cost structures meant that the margins, on a percentage basis, had remained constant. The gold industry in South Africa was one of the most difficult in the world. Mining at 4 000 metres posed many challenges. The capital requirements for the industry were huge. A 4.5% royalty represented 20 to 30% tax on the business cash flow. It appreciated that rules should be in place, but the GPC requested that all these issues mentioned must be taken into account when coming up with the final formula.

Ms Earp, Implats, noted that the fundamentals were agreed upon. Many royalties had already been converted. In the newer mines, the community was a shareholder before mining started. The same would apply to a new mine about to be opened. The benefit of equity would be that the community would get dividends immediately in cash. In addition, there would be growth in their investment or capital. There were community representatives on the Board, the Executive Committee and the Operational Committee. Insofar as capex was concerned, the message was that there was high spending on capital. The current formula did not give the benefit of the annual depreciation in the formula. The other factor to bear in mind was that Implats, in its proposals, had called for recognition of capex and had then applied the B factor of 15.  Both must be taken into account. She could let the Committee know later what the B factor would have to be if there was a sense that it would not also get that deduction.

Mr Holland, GPC, noted that if capital expenditure was cut completely, there would soon be a sharp drop in production. Capex was not for long term replacement, but also short term mining ore reserve development costs. If the ore bodies were not prepared there would be a significant decline in production. Capital could not be seen separately. The capex must therefore be taken into account in determining the net base to be considered in paying the formula. Insofar as the B factor of 28 was concerned, bearing in mind the large run up in prices, it might even have to rise to 38. Whilst not all the dynamics of each sector were understood, he did think that each sector should be considered separately. One size did not fit all. A separate consideration would come up with a more equitable and sustainable formula for the gold sector as a whole.

The Chairperson asked National Treasury if it wanted to give any clarity on issues, although this should not be seen as the response, which would be given later.

Mr Cecil Morden, Chief Director, National Treasury, noted that there were some technical issues to be considered, such as the saleable products, and what was deductible. His sense was that the COM and mining houses supported the concept of the formula. It was necessary to engage with COSATU. However, he was worried about the references to the second draft Bill The dual rate the suggested had been based on certain assumptions that were later found to be wrong. The lower rate was not intended to apply at the time. For companies to use this lower rate as the basis for comparisons must be put into perspective. However, he also had a concern that, having supported the concept of the formula, there was now an appeal for sector-specific. That would undermine the formula. There needed to be clarity from the industry as to what was required. Different rates for each industry could perpetuate problems. 

Mr Morden stated categorically that MPRDA preserved community royalties This Bill would not affect the situation..

The Chairperson noted that there had been reference to the Minister's statements. He placed on record that if that statement sent out any wrong messages, it should be taken up. This Committee was tasked with dealing with legislation in the manner that the Constitution provided. It was indeed true that the Bill may not be promulgated in its current form; for the purpose of the public hearings was to provide an opportunity for everyone to air their views and attempt to persuade the Committee that those views had merit. The Committee too was surprised to see a statement that appeared to predict what would happen, before the hearings had been concluded.  He hoped that the Minister had been quoted out of context.

The Chairperson noted that the Committee would return to the Bill on 9 May to receive a report back from NT. He hoped that NT and DME would still be holding discussions on the issues.

The meeting was adjourned.

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