South Africa’s troubled mining industry…lessons for Mozambique?

The future of mining in South Africa
by Peter Leon, October 05 2012 

As the Marikana commission of inquiry hearings have tellingly reminded us, the deaths were not a proud moment in South Africa’s embryonic democracy. It was, in some respects, not an unsurprising moment either for South Africa’s troubled mining industry. It could, however, prove to be the catalyst in crafting a new deal for the industry.

Mining was at the veritable crossroads well before 46 people tragically lost their lives during an illegal and unprotected six-week strike at Lonmin’s Marikana platinum mine from early August.

When a settlement was finally reached between mineworkers and Lonmin, it led to wage increases of between 11% and 22%. It later became apparent that most mineworkers would be less than 3% better off than they were before the strike, with the wage increases having included, among other things, a 10% increase that was negotiated before the strike and which would, in any event, have taken effect.

What makes the settlement negotiations extraordinary was the fact that they were mediated by the South African Council of Churches — bypassing the National Union of Mineworkers and thus the normal union-led wage negotiation process. Arguably, more perturbing than the cost to Lonmin is the serious loss of confidence this represents in the collective bargaining process itself.

Although events at Marikana were ostensibly driven by trade-union rivalry, wage dissatisfaction and a deficit in management as much as crowd-control techniques on the part of the South African Police Service, the root causes of the tragedy run much deeper. Plagued by an unhappy combination of regulatory ailments, infrastructure constraints and ever-escalating labour and energy costs, the South African mining industry shrank by 1% a year between 2001 and 2008. In the same period, the world’s other major mining jurisdictions expanded by 5% every year — a commodities boom on which South Africa clearly missed out. 

With the recent downgrade by Moody’s of South Africa’s government bond rating owing to, among other things, “a decline in the government’s institutional strength amidst increased socioeconomic stresses”, it is important to understand why things are so difficult for the mining industry and also to examine some solutions to the crisis the industry faces in Marikana’s wake. 

The mining sector’s historical association with colonialism and apartheid has created a legacy as much as a legitimacy issue for it politically, while, paradoxically, black economic empowerment (BEE) in the industry has failed to broaden its ownership base. According to BEE ratings and research agency Empowerdex, only 7% of BEE transactions between 2004 and 2008 involved employee share-ownership schemes, while a further 10% involved communities. Although more progressive mining companies have embraced both, a number simply have not. 

While the revised Mining Charter, released in September 2010, provides for employee share schemes and community trusts, it does not make broad-based black economic empowerment compulsory. Unlike the original Mining Charter 10 years ago, it imposes obligations only on the industry — not on the government or labour. 

In this respect, the revised Mining Charter is unbalanced and inequitable. 

Marikana itself has highlighted the dreadful living and working conditions of workers in and around some of the country’s mines and serves as a clear reminder of why a development partnership is urgently needed between the government, labour and business. In this regard, it is striking that the Rustenburg municipality has received five qualified audits from the auditor-general, while the settlements surrounding Marikana, where many of Lonmin’s mineworkers live in the most squalid conditions, show evidence of evanescent local or, for that matter, provincial government. 

Marikana also illustrates the underlying weaknesses of social and labour plans required for mining rights under the Mineral and Petroleum Resources Development Act. Under the act, a mining right may be issued only if the applicant submits a compliant social and labour plan. 

Social and labour plans are aimed at promoting employment and advancing the social and economic welfare of South Africans, while ensuring that the holders of mining rights contribute towards socioeconomic development. 

The required content and form of social and labour plans have, however, been unworkably vague. 

By presupposing a template model for communities — despite diverse needs and circumstances — these plans are simply not delivering the necessary benefits to mine communities. A study in 2009 by Stellenbosch University’s Unit for Corporate Governance in Africa has described the social and labour plan process as being “treated as a paper exercise to get approval for the mining licence”. 

South Africa could do well to learn from other resource jurisdictions. 

In Nigeria, for instance, the Minerals and Mining Act requires applicants for mining rights to conclude a community development agreement that should “ensure the transfer of social and economic benefits to the community”. Reviewed every five years, community development agreements have the ability to address emerging challenges while still providing reasonable stability. Similar approaches are now followed in Sierra Leone, Papua New Guinea and Mongolia. 

Community development agreements, as opposed to social and labour plans, provide more effective mechanisms for community participation in the planning, implementation, management and monitoring of development plans. 

Community development agreements also enable communities to become better acquainted with the financial and other constraints on mining companies, thus fostering a better understanding of expectations. 

Marikana has reinforced the urgent need for a new social compact for the industry that offers mineworkers and mine communities a real stake in mining operations. 

It must create a shared sense of responsibility between the government, the mining company concerned and the communities involved. And it must foster a mutual understanding of the expectations of all the parties concerned. 

Without strengthening mines’ social licence to operate, South Africa will simply not develop a proper foundation for a sustainable and growing mining sector. If a new deal is not struck, the fires of resource nationalism and its close relative, nationalisation, are likely to be stoked further. 

As Moody’s warns, increasingly interventionist economic strategies by the government will simply imperil South Africa’s growth potential further. 

With a record 6.4% current account deficit already attributable to lost mine production in the first quarter of this year, any further loss in investor confidence in the mining sector is something South Africa simply cannot afford. As the trade balance is principally financed by short-term investment flows, any rapid reversal of these would have a devastating effect on the current account, the currency and the overall economy. With endemic levels of unemployment, high levels of inequality and weak economic growth, the last thing SA needs is a domestic version of Argentina’s 2001 economic crisis. 

• Leon is partner and head of Africa mining and energy at Webber Wentzel.