For more than a century, South Africa's mining industry has been one of the main driving forces of its economy, which is generally considered to be the wealthiest in Africa. This state of affairs is attributable to a number of factors, including the country's extraordinary mineral wealth, relatively good access to infrastructure, a well-developed financial sector and relative political stability and predictability.
In recent years, South Africa's mining industry has come under some pressure, as a result of creeping regulatory uncertainty (especially in relation to the manner in which existing laws are implemented and enforced), a shortage of electricity and reduced spending on infrastructure maintenance and development.
The government's formal position on mining and international investment is that South Africa is 'open for business' and that investment in the mining sector is to be welcomed. In practice, the situation is rather more complicated, as the promotion of investment in mining is often subordinate to the domestic agendas of black economic empowerment, affirmative action, land restitution and redistribution, and decolonisation.
One example of changing government policy (and legislation) on international investment is to be found in the promulgation of the Protection of Investment Act 2015, which was put into force on 13 July 2018. Despite its title, which suggests a positive impact on investment, the legislation has been criticised by investors, commentators and academics as reducing the level of protection afforded to international investors, especially as the legislation is intended to replace South Africa's bilateral investment treaties, which the government is allowing to lapse. This development should be seen against the backdrop of South Africa's embarrassing involvement in the late 2000s in an international investment dispute brought in the International Centre for Settlement of Investment Disputes under South Africa's bilateral investment treaties with Belgium and Luxemburg.2 The issue in question was the allegation that South Africa's Mineral and Petroleum Resources Development Act 2002 (MPRDA) constituted an indirect expropriation of the mineral rights held by Finstone Sàrl and its subsidiaries prior to the commencement of the MPRDA on 1 May 2004.
Nevertheless, foreign investors continue to hold the majority of mining interests in South Africa, including large mining projects owned by Anglo American, AngloGold Ashanti, BHP Billiton and the like. A number of smaller mining companies, especially Canadian and Australian, are also developing new projects in South Africa.
II LEGAL FRAMEWORK
Mining legislation is based on a system of state 'custodianship' of mineral resources, in which the state, acting through the Minister of Mineral Resources, issues different types of licences to applicants on a first-come, first-served basis and upon satisfactory demonstration of an applicant's ability to comply with the financial, technical, environmental, health and safety and socio-economic development requirements set out in the legislation. The most important legislation concerned is the MPRDA, which came into force on 1 May 2004. Other important legislation includes the Mine Health and Safety Act 1996, the Mining Titles Registration Act 1967, the Mineral and Petroleum Resources Royalty Act 2008, the Precious Metals Act 2005 and the Diamonds Act 1986.
The most important licences relating to mining are:
- prospecting rights, which authorise invasive exploration work, on an exclusive basis, but not mining;
- mining rights, which authorise mining and exploration on a large scale and for long periods, on an exclusive basis; and
- mining permits, which authorise small-scale mining on areas of less than five hectares and for short periods, on an exclusive basis.
Other mining-related authorisations include reconnaissance permissions (which authorise non-invasive exploration activities on a non-exclusive basis) and retention permits (which protect the exclusivity enjoyed by prospecting right-holders during periods when it would be uneconomical to apply for a mining right or mining permit because of, for example, adverse economic conditions).
The commencement of the MPRDA signified an important departure from the preceding regulatory environment, which had existed for more than 100 years, whereby the right to mine was based on a system of private ownership of 'mineral rights' (being essentially limited real rights and servitudes in respect of land), which could be freely traded. In order to accommodate the transition, the MPRDA contains detailed provisions allowing for the conversion of 'old order rights' into prospecting rights and mining rights regulated by the MPRDA. This process seems to be largely completed, with old order rights and conversion having a less important role in the mining industry and, indeed, legal practice. However, a small number of old order mining rights are yet to be converted into new mining rights.
In the international sphere, the most important treaties from the perspective of foreign investors are the bilateral investment treaties concluded between South Africa and various foreign states. However, as mentioned before, the South African government has adopted the Protection of Investment Act 2015, and has announced that it is not renewing its bilateral investment treaties. The net effect of this development is the watering down of protection for foreign investors in the South African mining industry.
Other notable international treaties include a variety of trade agreements with various countries, the Treaty on the Non-Proliferation of Nuclear Weapons, various treaties relating to climate change and South Africa's involvement in the World Trade Organization.
Mineral reporting requirements are largely regulated by the rules of the JSE Limited, South Africa's premier stock exchange. Under the terms of the JSE rules, mineral resources and reserves are to be reported in accordance with South African Code for Reporting of Exploration Results, Mineral Resources and Mineral Reserves.
Mining legislation is administered and enforced by the Department of Mineral Resources (DMR). The DMR is further divided into five main branches, namely, mineral policy and promotion, mineral regulation, mine health and safety, corporate services and the chief financial officer. The mineral regulation branch is primarily responsible for the processing of applications, awarding of licences and enforcement of the MPRDA. The mine health and safety branch is primarily responsible for the administration and enforcement of the Mine Health and Safety Act 1996 (MHSA), including investigations into safety incidents, injuries and fatalities occurring at mines in South Africa. In both cases, there are regional DMR offices in each of the nine provinces of South Africa, which are primarily responsible for the administration of the MPRDA and the MHSA. However, especially in the case of mineral regulation, the ultimate decision-making, including the granting of licences, consideration of internal appeals and decisions to suspend or revoke licences owing to non-compliance, are taken at national level by officials in the DMR head office in Pretoria.
III MINING RIGHTS AND REQUIRED LICENCES AND PERMITS
For all practical purposes, the state could be regarded as the 'owner' of underground minerals. However, to avoid large numbers of claims for expropriation of mineral rights as a result of the transition from the old system of private ownership, the MPRDA does not refer to the state as having 'ownership' of underground minerals. Instead, the MPRDA provides that the mineral resources are the 'common heritage' of all South Africans and that the state is the 'custodian' thereof for the benefit of all South Africans.
The right to mine underground minerals is conferred on (private) third parties by the state, acting through the Minister of Mineral Resources (or his or her delegate), based on a first-come, first-served application system and upon satisfactory demonstration of an applicant's ability to comply with the financial, technical, environmental, health and safety and socio-economic development requirements set out in the legislation.
For the duration of the mining right in question, the holder of the mining right may, for all practical purposes, be regarded as the owner of the minerals. In any event, the holder of the right to mine becomes owner of the minerals at the latest upon extraction of the mineral from the land where it naturally occurred.
Once a private party holds a prospecting right or mining right, it is possible for the private party to transfer that right (or a portion thereof) to another private party, subject to the consent of the Minister of Mineral Resources under the terms of Section 11 of the MPRDA. The requirement of consent for transfers also applies to the transfer of a controlling stake in the business entity that holds the right, unless the business entity is a listed company.
ii Surface and mining rights
As described in Section II, the most important licences relating to mining are prospecting rights, mining rights and mining permits.
Other mining-related authorisations include reconnaissance permissions, which authorise non-invasive exploration activities on a non-exclusive basis, and retention permits, which protect the exclusivity enjoyed by prospecting right-holders during periods when it would be uneconomical to apply for a mining right or mining permit because of, for example, adverse economic conditions.
Under the terms of Section 5 of the MPRDA, prospecting rights and mining rights are limited real rights in respect of the land and minerals to which they relate. In simple terms, this means that prospecting and mining rights constitute limitations on the rights of ownership of the person who owns the land. Moreover, Section 5 of the MPRDA expressly authorises the holder of a prospecting right or mining right to enter the land in question, with his or her employees, and to bring onto that land any plant, machinery or equipment and build, construct or lay down any surface, underground or undersea infrastructure that may be required for the purpose of prospecting, mining, exploration or production, as the case may be.
In other words, a prospecting right or mining right encompasses not only the right to exploit the minerals in question, but also the surface rights necessary for exercising the right.
In order to make sure that the landowner or lawful occupier of the land in question does not suffer undue hardship as a result of prospecting or mining activities on the land, the MPRDA provides that the holder of a prospecting right or mining right must compensate the landowner or lawful occupier for any loss or damage suffered by the landowner or lawful occupier as a result of the prospecting or mining activities. The amount of compensation payable may be agreed contractually between the parties, or it may be determined by the court or by way of private arbitration. It has become common practice for mining companies to enter into surface leases or 'surface use agreements' with landowners or lawful occupiers, which set out the parties' respective rights and obligations, and fixes a compensation amount for purposes of the MPRDA.
Neither payment of compensation nor agreement between the mining right holder and the landowner as to the quantum of compensation are prerequisites for access to land for the purposes of mining or prospecting activities.3
Prospecting rights and mining rights are obtained by means of an application submitted in prescribed form to the Regional Manager of the DMR in the province or region where the proposed mining operation is to take place. The application must be submitted online, must be accompanied by the prescribed application fee and must be motivated by means of detailed documents describing the manner in which the applicant proposes to conduct the prospecting or mining operations in question and comply with the other requirements set out in the legislation. These documents include, for example:
- a programme of work containing a detailed description of the geology of the resource being mined, the method and time schedule according to which the resource will be mined and a finance plan setting out the economics of the operation and the proposed method in which it will be financed;
- documents demonstrating how the applicant will comply with black economic empowerment requirements;
- a social and labour plan, indicating how the mine will contribute to the sustainable socio-economic development and empowerment of its workers, surrounding communities and labour-sending areas; and
- an environmental impact assessment and environmental management programme.
The environmental impact assessment is not submitted with the other documents when the application is first submitted to the DMR, but is conducted and developed during the time when the mining right application is being processed.
Many applicants have expressed great frustration at the amount of time it takes to finalise mining right applications and prospecting right applications – periods of up to five years from the date of application until the date of grant are not unheard of. These delays may be ascribed in part to the massive backlog created upon the commencement of the MPRDA, when thousands of old order right-holders submitted their rights for conversion within a period of two to five years. Further, the DMR does not have sufficient staff to process all the applications efficiently. In practice, it very often occurs that applications in respect of large, well-known projects are attended to first (we have seen examples of large mining right applications taking less than a year to finalise) while applications in respect of smaller projects are repeatedly overlooked for several years. This has also led to a proliferation of litigation between smaller applicants and the DMR in the form of administrative law reviews.
The duration of rights granted under the MPRDA depends primarily on the motivation submitted in support of a specific time period, subject to certain statutory limits. For example, if an applicant can demonstrate a mine life of only 20 years, that applicant cannot obtain a mining right for 30 years. As regards time limits, a prospecting right may be valid for a maximum of eight years (an initial period of up to five years and one renewal for up to three years), a mining permit may be valid for up to five years (an initial period of two years and up to three renewals for one year each) and a mining right may be renewed an unlimited number of times for up to 30 years at a time.
Prospecting rights and mining rights are generally subject to conditions that are little more than restatements of the legal principles applicable to these rights in terms of the legislation. The most important of these terms and conditions include (in the case of a mining right) the duration of the right, the payment of royalties to the state, the black economic empowerment requirements under the MPRDA, limitations on the transferability of the right and the undertakings made in terms of the mining work programme, the social and labour plan and the environmental management programme. In some cases, statutory conditions are further circumscribed by the terms and conditions of a specific right. For example, some mining rights are subject to a limitation on the transfer of any shares (not only a controlling interest) in the holder (whereas the MPRDA only limits the transferability of a controlling interest in the holder). Many commentators believe these conditions are ultra vires and therefore invalid. However, they are seldom if ever tested in South African courts.
Mining rights are protected by various means. For example, interfering with the lawful mining activities of the holder of a valid mining right constitutes an offence under the MPRDA and may be punishable by imprisonment or the imposition of a fine. The DMR further maintains a public registry of all prospecting and mining rights, so that the public is deemed to have knowledge of the existence and extent of all prospecting and mining rights. In civil law, the holder of a mining right may obtain an interdict (injunction) prohibiting all third parties, including a landowner, from hindering or interfering with its mining activities, and may enforce its rights against any third parties.
At the moment, there is no special restriction on the surface rights or mining rights that may be acquired by foreign parties, save to note that all mining rights are subject to the requirement that historically disadvantaged South Africans (HDSAs) must have at least 25 per cent plus one vote participation in the economic benefit and voting rights of the holder of a mining right.
iii Additional permits and licences
In addition to a mining right, a party wishing to conduct mining activities requires at least the following additional permits or licences:
- an environmental authorisation authorising in detail the listed activities that will form part of the mining and mineral processing activities;
- a waste management licence in respect of management of tailings;
- a water use licence in respect of the use of any natural water sources, as well as to make provision for the treatment, storage and disposal of water in the mine itself and in tailings dams, etc.; and
- air quality licences.
Other licences depend on the nature of the mining activities to be undertaken, or the natural, social or cultural environment where the mining activities are to take place. The most notable are:
- licences for the possession, processing and beneficiation of precious metals;
- licences for the possession, processing and beneficiation of uncut diamonds;
- licences for the possession, beneficiation, transportation and exporting of nuclear materials and radioactive materials;
- licences for the destruction or relocation of archaeological sites or graves; and
- licences for the zoning of land for mining purposes in areas subject to town planning schemes.
Depending on the circumstances, many other licences, permits or authorisations may be applicable. The above list is not exhaustive and only serves to illustrate the most important and most commonly issued licences.
iv Closure and remediation of mining projects
Under the terms of Section 24 of the National Environmental Management Act 1998 (NEMA), the holder of a prospecting right, mining right or mining permit must provide acceptable financial provision for the rehabilitation, closure and post-decommissioning management of negative effects on the environment. The financial provision may take the form of a cash deposit in a rehabilitation trust account, a bank guarantee or an approved insurance product provided by a recognised financial institution.
The manner in which rehabilitation is to be done is prescribed in terms of a closure plan, which must be developed by the mining right-holder and approved by the DMR after the cessation of mining activities. The contents of the closure plan will be dictated by the attributes of the environment, the nature and extent of the disturbances to be rehabilitated, the likely consequences of not rehabilitating (or partially rehabilitating) the disturbances concerned, the commitments and mitigation measures set out in the environmental management programme, and a value judgement as to the acceptable level of environmental degradation that may remain after the conclusion of rehabilitation.
In theory, the MPRDA makes provision for the issuing of a closure certificate upon successful finalisation of the remedial action set out in the closure plan. The issuing of a closure certificate terminates the holder's statutory liability for rehabilitation and potential claims arising from environmental degradation remaining as a result of mining activities. We are yet to see a successful application for a closure certificate, given that it is not in the government's interest to release mine owners from liability for environmental degradation, even if rehabilitation seems to be complete.
IV ENVIRONMENTAL AND SOCIAL CONSIDERATIONS
i Environmental, health and safety regulations
In South Africa, mining activities are regulated under NEMA. NEMA sets out a number of core principles, aimed at sustainable development, sustainable exploitation of natural resources, management of environmental impacts from economic activities and emphasising the right of people to live in an environment that is not detrimental to their health and well-being. Under the terms of Section 2(2) of NEMA, 'environmental management must place people and their needs at the forefront of its concern, and serve their physical, psychological, developmental, cultural and social interests equitably'.
To obtain a prospecting or mining right, an applicant must demonstrate that the prospecting or mining activities will not result in 'unacceptable' pollution or environmental degradation. To this end, the applicant must perform either a basic assessment or an environmental impact assessment, and obtain an environmental authorisation (authorising the prospecting or mining activities concerned) that incorporates an environmental management plan or programme.
Health and safety in South African mines is also closely regulated under the MHSA and certain detailed regulations (some dating from before the commencement of the MHSA).
The aim of the MHSA is to make the employer (i.e., the mine) primarily responsible for the health and safety of all persons at a mine (including employees, contractors and occasional visitors).
The MHSA places detailed obligations on the employer to provide sufficient training regarding the health and safety hazards and risks encountered at the mine, and how to deal with any situations that arise. The employer is also responsible for providing sufficient personal protective equipment to all persons at the mine. The employer is further obliged to keep thorough records on the health of its employees, including establishing each employee's baseline health upon commencement of employment, undertaking annual health assessments for all employees and performing final 'exit' assessments upon termination of an employee's employment.
Failure by any person to comply with health and safety regulations at a mine, or to obey lawful instructions relating to health and safety issued by a person responsible for enforcement of the mine's health and safety rules and policies, constitutes an offence under the MHSA. Failure by an employer to take reasonable steps to ensure safe and healthy working conditions for its employees at a mine also constitutes an offence under the MHSA.
The MHSA further empowers the Chief Inspector of Mines and his or her delegates to issue far-reaching directives in relation to health and safety at a mine, including to cease all activity at a mine until an identified risk is sufficiently addressed.
ii Environmental compliance
As mentioned above, mining activities are regulated under NEMA. NEMA sets out a number of core principles, aimed at sustainable development, sustainable exploitation of natural resources, management of environmental impacts from economic activities and emphasising the right of people to live in an environment that is not detrimental to their health and well-being.
To obtain a prospecting or mining right, an applicant must perform either a basic assessment (for prospecting activities and mining permits) or an environmental impact assessment (for mining rights), and obtain an environmental authorisation (authorising the mining activities) that incorporates an environmental management plan or programme.
The procedure for obtaining an environmental authorisation consists, very broadly, of the following:
- an application submitted to the DMR (which administers the provisions of NEMA insofar as it relates to mining activities);
- a scoping phase, when environmental risks are identified at a basic level and remedial measures are suggested. The scoping report compiled at the conclusion of this phase is then published for public comment within a period of 30 days;
- following public comments and consultations on the scoping report, detailed field studies are then performed by experts in various scientific disciplines (depending on what is appropriate in the circumstances), including ecology, biology, hydrology, archaeology, geophysics, etc. At the conclusion of this phase, an environmental impact assessment report and a draft environmental management programme is compiled, which is then published for public comment within a period of 30 days;
- following receipt of public comments on the environmental impact assessment report and draft environmental management programme, a final environmental impact assessment report and environmental management programme is compiled, taking into account (and addressing as far as possible) all comments raised during the process; and
- the final environmental impact assessment report and environmental management programme is then submitted to the DMR for approval.
Timelines for public comments on the above-mentioned documents may (and should) be extended in cases where the reports are complicated and voluminous and any members of the public (including lobby groups) request an extension.
The EIA process may take between eight and 18 months to complete, depending on how sensitive the environment is and how many reports need to be compiled and peer reviewed.
iii Third-party rights
Under the terms of Section 104 of the MPRDA, communities have a 'preferent right' to apply for prospecting or mining rights in respect of communal land. This provision remains largely untested in our courts and it is uncertain how this provision will practically manifest itself. The interpretation of this Section poses myriad potential difficulties in the context of competing applications between communities and other applicants.
V OPERATIONS, PROCESSING AND SALE OF MINERALS
i Processing and operations
There is no general limitation on the import and export of equipment. However, under the Revised Draft Mining Charter published for public comment in June 2018, mining right-holders will be expected to source a certain percentage of their capital goods from local producers, including HDSAs. This plays a part in the level of black economic empowerment credit given to mining right-holders.
Other than the environmental licensing requirements, and special permits required for processing, possessing, transporting or exporting precious metals, diamonds and nuclear materials, there are no general restrictions on processing extracted minerals.
As far as use of foreign labour and services is concerned, we note that under the Revised Draft Mining Charter, mining right-holders would be expected to source certain minimum percentages of their services from local producers, including from HDSA service providers.
Use of foreign labour is regulated in terms of immigration laws, and, given South Africa's high unemployment rate, the general principle is that foreign labour should only be used for scarce skills.
ii Sale, import and export of extracted or processed minerals
Other than the special permits required for processing, possessing, transporting or exporting precious metals, diamonds and nuclear materials, there are no general restrictions on the sale, import and export of extracted or processed minerals. Imports may be subject to customs duty imposed under the Customs and Excise Act 1964.
Under the terms of draft amendments to the MPRDA currently subject to public comment, the government proposes imposing certain restrictions on the export of unprocessed minerals, in an effort to promote local beneficiation of minerals.
iii Foreign investment
South Africa implements a system of exchange control, in terms of which Reserve Bank approval is required to transfer sums of money to and from South Africa. Reserve Bank approval may be obtained in advance in respect of a large number of proposed or potential transactions, for example in respect of all dividends payable in respect of a foreign investor's shareholding in a company. Generally speaking, the Reserve Bank finalises applications for exchange control approvals relatively quickly (i.e., in a matter of weeks rather than months).
Foreign investors in South Africa enjoy various levels of protection of their investments, depending on whether South Africa has a bilateral investment treaty with the investor's country; where no bilateral investment treaty exists, the Protection of Investment Act 2015 will apply. According to commentators, this legislation significantly waters down the level of protection previously afforded under bilateral investment treaties. For example, investors are given legal protection of their investments to the same extent as any South African citizens, with reference to the property rights under Section 25 of the Constitution of the Republic of South Africa. This Section of the Constitution is constantly being interpreted by the courts, and there is case law to the effect that South African law does not recognise any forms of constructive or indirect expropriation. Moreover, the Protection of Investment Act stipulates that investment disputes will be decided by the domestic courts, unless the government consents to international arbitration.
Under the terms of the Mineral and Petroleum Resources Royalty Act 2008 (the Royalty Act), a person who wins or recovers a mineral resource in South Africa must pay a royalty for the benefit of the National Revenue Fund in respect of the transfer of that mineral resource to another party.
Under the terms of Section 4 of the Royalty Act, a formula is prescribed for calculating the extent of the royalty, based on the earnings before interest and taxes from the sale of refined or unrefined mineral resources. The maximum royalty in respect of refined mineral resources is 5 per cent, and the maximum royalty in respect of unrefined mineral resources is 7 per cent.
In addition to the royalties mentioned above, South African mining companies are subject to normal taxes, such as standard income tax on companies, withholding taxes on dividends to shareholders, value added tax (in certain circumstances) and transfer duties in respect of transfers of land or prospecting and mining rights. However, mining companies may deduct large portions of capital expenditure against their taxes, and may ring-fence capital expenditure and taxable income in respect of distinct mining operations. Moreover, gold mining companies enjoy a special tax dispensation whereby income tax rates increase as the company's profits increase, while allowing shareholders to receive dividends even when no income tax is payable because of low profits. A detailed discussion of the tax regime applicable to mining companies in South Africa is beyond the scope of this chapter.
Duties payable by mining companies include transfer duties and custom duties for the importing of goods.
iv Other fees
In addition to the above-mentioned taxes, duties and royalties, mining companies pay prospecting fees based on the area of the land where exploration takes place, and small fees for various applications and administrative processes under the MPRDA.
VII OUTLOOK AND TRENDS
The High Court in Pretoria recently ruled in favour of the Minerals Council South Africa (previously known as the Chamber of Mines) in a dispute with the Minister of Mineral Resources regarding the continuing consequences of historical black economic empowerment transactions. In essence, the High Court ruled that mining right-holders cannot be compelled to restore their empowerment shareholding to 26 per cent when black shareholders have disposed of their shareholding. The Minister has appealed against this finding, and that appeal is likely to be heard by the Supreme Court of Appeal towards the end of 2018.
Another important development concerns the publication (in June 2018) of a new Revised Draft Mining Charter for public comment. This follows the promulgation of a Revised Mining Charter in June 2017, which caught the mining industry by surprise and culminated in litigation between the Minerals Council South Africa and the Minister of Mineral Resources regarding the validity of the Revised Mining Charter 2017. The operation of the Revised Mining Charter 2017 was suspended (and the litigation stayed) pending negotiations regarding the new Revised Draft Mining Charter.
The new Revised Draft Mining Charter introduces a number of new empowerment requirements for mines, including:
- a 10 per cent free-carried shareholding to be allocated to employees (5 per cent) and mine communities (5 per cent);
- an increase in the minimum empowerment shareholding requirement from 26 per cent to 30 per cent;
- the requirement that the 30 per cent shareholding must be allocated in a specific ratio among employees, mine communities and black entrepreneurs;
- a requirement that mines must pay a mandatory 1 per cent 'trickle' dividend to black shareholders under certain circumstances;
- more stringent requirements for the purchase of capital goods and services from South African and HDSA suppliers; and
- increased requirements for the employment of HDSAs in junior, middle and senior management roles within mining companies.
While the government's efforts to obtain public comments and to consult extensively with the mining industry and organised labour in relation to the new Revised Draft Mining Charter should be appreciated, the current proposals contained therein appear to be very onerous from the mining industry's perspective and may affect investment in this sector. Moreover, some of the proposals appear unrealistic given South Africa's current capacity to produce goods, services and skills locally, especially in the context of the employment equity and local procurement requirements currently envisaged in the Revised Draft Mining Charter.
The outcome of engagements during the coming year between the government and the mining industry regarding the contents of the Mining Charter may prove critical to the future of the mining industry in South Africa.