South African Miners Say Free Carry Will Kill New Projects

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SOUTH AFRICA (Bloomberg) – The biggest threat posed by South Africa’s new Mining Charter may be to mines that haven’t been dug yet.

The draft rules, published Friday by Mineral Resources Minister Gwede Mantashe, lay out several requirements for new mining rights, including that nearby communities and employees each get a 5 percent free-carried interest in either the asset or the company that owns it. The charter is aimed at distributing the industry’s wealth more widely among South Africans to make up for racial discrimination during apartheid.

New mines are already scarce in the country, which has been mined commercially for more than a century and where producers have struggled with rising costs, regulatory uncertainty and a restive labor force. The industry argues that the free carry — which means the respective groups don’t have to buy their shares or pay their way — will make new developments even less likely.

“We consider much of the South African resource base to be in sunset,” analysts at Morgan Stanley including Brian Morgan wrote in a note received Monday. Many potential projects have marginal economics to begin with and “higher hurdle rates could equate to lower future mining investment,” they said.

The free-carried interests for new mining rights are included in a mandatory 8 percent each to be held by workers and communities, while a further 14 percent must be owned by black entrepreneurs, according to the draft Mining Charter, which was published for public comment.

Read more: South Africa’s New Mining Charter to Credit Past Black Deals

Another requirement for new rights is that the workers and communities be paid 1 percent of earnings before interest, taxes depreciation and amortization in years when a regular dividend isn’t declared.

While existing producers have an easier time, they will still have to increase their black-ownership percentage from the current minimum of 26 percent to 30 percent within five years.

The changes might not weigh on current equity valuations, but could be a potential negative for South Africa’s mining industry in the future, Morgan Stanley said.

South Africa is seeking to spread the mineral wealth more equally in an industry in which highly paid, mainly white male executives oversee hundreds of thousands of mostly black workers laboring in deep and dangerous operations. The Mining Charter, first introduced in 2004, laid out rules and targets for areas such as black ownership, and was later updated in 2010.

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