Monday, October 24, 2016/ 2.37pm /BMI Research
BMI View: The ANC's proposal to establish a state-owned diversified mining company, through the State's Public Investment Corporation, to win back public support, would face both significant headwinds in terms of costs and union opposition.
The African National Congress (ANC), the country's ruling party, is considering having the State's Public Investment Corporation (PIC) establish a diversified state-owned mining company, in an effort to win back public support after the August 3 municipal elections revealed a sharp deterioration in popularity (see' ANC Election Losses Point To Sclerotic Policymaking Ahead', August 8).
The ANC's strategy would appeal to voters through increasing employment security and bolster support union's upcoming salary negotiations in the country's platinum sector.
However, the likelihood of this proposal to come into fruition is slim as the ANC will face significant headwinds due to the high costs involved and opposition from unions in other sectors.
Following the August election, the PIC expressed interest in having Anglo American either offload or spin off the firm's platinum assets in South Africa, as the fund holds a 2.7% equity stake in Anglo American Platinum.
In addition, the PIC considers floating the fund's 30.0% stake in Lonmin PLC, a South African platinum producer, and acquire a larger share of Kumba Iron Ore, the iron ore-producing subsidiary of Anglo American.
In December 2015, we highlighted that the ANC government would adopt a more populist policy, in order to retain its core support base (see 'Mining Industry End Game: Four Potential Scenarios', December 15 2015).
The expulsion of the National Union of Metalworkers of South Africa (NUMSA) from the Congress of South African Trade Unions (COSATU) resulted in NUMSA forming the United Front (UF), a trade union-based political party, whose formation would erode a share of the ANC support base in the August 3 municipal election.
PIC Strategy Would Face Major HurdlesThe ANC's PIC strategy to establish a state-owned diversified mining company would face significant domestic headwinds as both the costs involved and the backlash from other unions would result in severe economic and political constraints.
Firstly, the costs involved to both convincing the above mentioned companies to spin-off their assets and cost involved would prove prohibitive. For instance, acquiring both Anglo American and Lonmin's platinum assets alone would necessitate significant funding.
Anglo American already noted that it would consider offers from state-backed vehicles, such as the PIC, but would only accept a deal only if it was on better terms than what the firm would get from a normal competitive-sales process, effectively requiring the PIC to pay a premium.
Although acquiring these assets would maintain employment, this will not solve the mines' ongoing struggles from rising production costs, deteriorating ore reserves and low platinum prices.
As a result, the state could be saddled with loss-making assets. Furthermore, the required investment needed to improve the operational viability of these assets would mitigate the majority of the maintaining employment benefits.
Secondly, the ANC would face stiff opposition from other unions within the country, with the exception of the mining unions' AMCU and NUMSA, which would support the move to maintain employment for members.
However, this strategy would be highly unlikely to occur, as unions from other sectors would object to preferential treatment towards the mining sector. Over 2016, the government will be renegotiating with the Communication Workers Union (representing members of Telkom), the National Public Service Workers Union (civil service) and the National Union of Mineworkers (NUM) (representing members of Eskom).
All of these groups (with the exception of the NUM) hold a high degree of influence over the ANC, and would not support this strategy.
New Mining Charter Will Create Even More Uncertainty
When implemented, the 2016 draft Mining Charter will dent South Africa's mining investment outlook by increasing both legal and policy uncertainty for a sector already struggling with low mineral prices, labour unrest, power supply uncertainty and elevated production costs (see 'New Mining Charter To Cause Investment Uncertainty', July 1).
On April 15 2016, the South African Department of Mineral Resources published the draft review of the Charter, which aims to resolve the historic inequalities in ownership and revenue-sharing in the sector and increase performance targets for miners.
Furthermore, miners will need to comply with the new proposed requirements in order to be granted a mining permit, or retain their existing mining permit. However, the draft Charter has been met with significant opposition from mining companies, as stakeholders were not consulted in the preparation of the draft. As such, opposition to the draft has become increasingly vocal.
Under the draft Charter, miners will need to adhere to stricter compliances in a sector that's already struggling with a myriad of challenges. In addition to this, miners' legal and compliance costs will increase as the Charter requires strict restructuring of mining companies in a short time span (three years) in order to comply.
As such, both existing miners and potential new investors will face both heightened policy and investment uncertainty. Although the ruling ANC in June 2016 reversed its stance for the applicability of the draft Charter under the Mineral and Petroleum Resources Development Act (MPRDA) of 2002, which was a major point of contention between mining companies and the ANC, it will not resolve miningfirms' opposition towards the charter.
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