ANALYSIS-Mining rights issue tarnishes S.Africa’s image

By Reuters Staff
August 24, 2010

By Agnieszka Flak and Julie Crust

JOHANNESBURG/LONDON, Aug 24 (Reuters) – South Africa’s handling of two disputed mine right awards has damaged the resource-rich country’s reputation and raised investor concerns over transparency and governance.

Kumba Iron Ore, a unit of Anglo American, and Lonmin have said the government deprived them of mining rights when it awarded prospecting licences, some to people linked to high-ranking officials, over areas where the two mining giants operated.

“The issuing of mineral and prospecting rights by the South African government is a process so fraught with danger that it is impossible to trust the authority not to steal, or be in league with those who wish to steal, your assets,” said Nic Borain, an independent political analyst.

The biggest worry for the industry is that mining rights they have exploited for years could come under government review and they could lose a part of their businesses to companies with deep political ties and little experience in mining.

South Africa is the world’s biggest producer of platinum and ferrochrome and the fourth-largest gold miner.

The mining sector’s influence on the economy may have declined, but it is still one of the country’s top employers, and accounted for 5.2 percent of the country’s gross domestic product in the first quarter.

Disputes over mineral rights have erupted as miners in the country struggle with power shortages, rising electricity and wage costs, a strong rand and stricter safety measures following a string of deaths.

Mining companies were required to convert their mining rights by a set date or lose them altogether after a new mining act took effect in 2004. The new legislation sought to avoid discrimination in the system and to better distribute assets among historically disadvantaged groups.

The mining ministry last week admitted there were “gaps and inconsistencies” in the mining act and promised a major overhaul of the legislation, but also said that rights already awarded were unlikely to be revoked. It imposed a six-month halt on new prospecting bids until the ambiguities are addressed.

“They certainly need to deal with the perception that there is a less-than-transparent process for being granted mineral rights … and create confidence in investors,” said Alison Turner, analyst at Panmure Gordon.

Mining Minister Susan Shabangu also dismissed allegations of corruption in her department, but said some officials had been suspended pending unspecified investigations.

“The events surrounding Kumba and Lonmin of late have evidenced a very worrying trend, but we certainly welcome the minister’s move to bring certainty back to the market,” said a spokesperson for a miner with operations in South Africa.

However, some in the mining sector are sceptical about the ministry’s ability to resolve the issue and are worried about the perceived lack of leadership from President Jacob Zuma.

The mining right deals have triggered a volley of criticism directed at Zuma’s government, alleging that it suffers from a leadership vacuum where cronyism thrives, just over a year into the new administration.

Investors in the mining sector are already concerned about repeated calls for nationalisation of mines by Julius Malema, the outspoken youth leader of the ruling ANC.

POLITICAL ALLIES

The two prospecting rights were awarded to parties linked to either Zuma or other high-ranking officials, leading to analysts, business and organised labour criticising the government for favouring a few over the interests of the state.

The Kumba decision, in particular, alarmed many of the world’s largest miners operating in South Africa, analysts said.

“The big boys have got to be concerned by that and I should imagine they have got their legal departments to crawl all over their current new order mining licences,” said Peter Davey, an analyst at Ambrian Capital.

The criticism also pointed at mining deals struck under the umbrella of black economic empowerment, meant to spread the wealth among previously disadvantaged groups, but benefiting a narrow group of business elites.

In a move to regain mining rights it failed to convert, ArcelorMittal’s South African unit said it would transfer 26 percent of its shares to employees and a group of black investors — including an investment group led by Zuma’s son.

“I call it ‘cadre-care’… regardless of the true intention, the perception and image is there of looking like the ANC is looking after its own,” said Peter Attard Montalto, emerging markets economist at Nomura in London.

South Africa’s business leaders have blamed the mining rights controversy for damaging the nation’s reputation, just weeks after the country hosted a successful soccer World Cup, and for causing harm beyond the mining sector.

“People are more wary,” said Panmure’s Turner, but she noted that the mining companies had few options.

South Africa accounted for around 77 percent of the world’s platinum production in 2009 with output elsewhere mainly coming as a by-product from base metal or palladium mining.

“The problem with mining all over the world is that the minerals sit where they sit. If you want to mine platinum then you have got to be in South Africa to do that,” said Turner.

(Additional reporting by Shapi Shacinda and Olivia Kumwenda, Editing by Sitaraman Shankar)

((agnieszka.flak@reuters.com; +27 11 775 3154; Reuters Messaging: agnieszka.flak.reuters.com@reuters.net)) (For more Africa cover visit: http://af.reuters.com — To comment on this story email: SouthAfrica.Newsroom@reuters.com)

Keywords: SAFRICA MINING/

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