PDAC comments on draft minerals bill Tough sell for South Africa

Phumzile Mlambo-Ngcuka, South Africa’s minister for minerals and energy, has worked hard to sell international investors on the merits of her government’s proposed Minerals Development Bill. She has attended industry conferences at home and abroad to defend the document, which, despite all efforts, remains as unpopular as the 17 drafts previously circulated for public comment.

Although certain aspects are positive and will bring about much-needed changes, others can only be described as counter-productive to efforts aimed at encouraging investment and creating a much-needed junior mining sector. For example, plans to abolish private ownership of mineral resources are not being contested, and there is little objection to “use-it-or-lose-it” requirements, aimed at correcting the hoarding of inactive properties by entrenched interests. However, concerns have been raised over the lack of a legal framework to ensure security of tenure for prospectors and junior companies, as well as the extent of discretion afforded the minister, primarily to redress past racial discrimination in the sector.

During a March presentation in Toronto, the minister told delegates that industry views will be respected and taken into account in the final bill. She urged all interested parties — domestic and foreign — to make their concerns known during the comment period (ended March 31). And, once again, she gave assurances that the rights of investors would be respected and that ministerial discretion would be “hardly ever used.” However, in the next breath, she stated that “redress of past injustices is not negotiable.” Preference would be given to disadvantaged groups, she said, while still respecting “the first-come, first-served” principle.

Taking the minister’s invitation to heart, the Prospectors & Developers Association of Canada (PDAC) replied with a commentary urging the minister to formulate legislation that would allow the country to achieve its domestic goals and, at the same time, attract foreign investment.

The PDAC began by supporting the government’s three main objectives: making lands available for exploration and development; improving environmental responsibility; and promoting the entry of historically disadvantaged persons. “Although such legislative initiatives tend to impose costs on exploration and mining companies, such costs may yield countervailing reductions of risks and are, to that extent, consistent with the interests of the exploration industry.”

On the other hand, the PDAC expressed concern about the means by which such goals would be implemented. For starters, the bill fails to establish a framework of legal norms whereby prospectors and junior companies can acquire, hold, encumber and freely transfer prospecting and mining rights. As the PDAC pointed out, Canada, Australia and the United States all have strong mineral development sectors because they share a legal framework that gives citizens access to mineral opportunities and the opportunity to raise capital, based on the potential of their holdings and on fungible, freely transferable rights. “Mining history shows that mineral development has only flourished where legal reforms permitted junior companies to attract high-risk capital,” the PDAC stated.

As currently drafted, South Africa’s proposed legislation is fraught with legal risks that could deter junior companies from raising capital in the first instance. “The PDAC submits that the South African government should strive to create prospecting and mining rights that investors in local companies, pioneered by both historically advantaged and disadvantaged persons, can confidently know will not be forfeited and will be freely transferable.”

As for stimulating exploration, a section of the bill prohibits any mortgage or transfer of prospecting rights unless the minister approves, which makes raising capital difficult for early-stage exploration. “A prospecting right is more an access licence held at the pleasure of the minister than a property right,” the PDAC noted.

Furthermore, application costs are onerous, and there is no priority of application; prospecting rights are of uncertain duration; and confidential geological information given to government could be used against the exploration company that generates it.

Another concern is that the “legally unrestrained ministerial discretion” proposed in the bill allows the use of such discretion to achieve social objectives. The PDAC remarked that “nothing prevents the minister from prohibiting all transfers in order to force the prospecting right to lapse so the minister could subsequently grant the right to historically disadvantaged persons.” Indeed, a section of the bill requires the minister to favour such persons.

The PDAC pointed out that the sheer extent of ministerial discretion places the prospecting applicant and right-holder into the position of a joint-venture partner with the state. If enacted, the state would have more discretionary control and rights than would a joint-venture partner but without accompanying fiduciary duties, such as confidence and good faith.

Instead of trying to achieve corrective justice through mining legislation, the PDAC urges the South Africa government to adopt other ways to develop capacity among historically disadvantaged persons, such as training programs, including prospecting and mining schools, and incentives to promote local joint ventures.

The PDAC knows of what it speaks. Since the early 1920s, it has been a champion of a remarkable mineral tenure system that allows anyone — rich or poor, black or white, male or female — to stake claims at nominal cost, raise capital and develop mines for the betterment of the many, rather than the few. The model worked in North America, Australia and New Zealand, and it is now being adopted all over the world. It could work for South Africa too, if given the chance.