A mining make-over in progress?

Authors: Peter Leon, Partner and Chair of Africa Practice Group, Johannesburg; Ernst Muller, Associate, Johannesburg; Amanda Hattingh, Associate, Johannesburg

In his recent keynote address to the platinum group metals industry, Minister of Mineral Resources and Energy, Gwede Mantashe (the Minister) indicated that South Africa aims to increase the country’s share of global exploration expenditure to at least three per cent in the next five years. This is obviously laudable.

According to data published by Statistics South Africa (StatsSA), mining output rose by 0.8 per cent on a year-on-year basis in February 2021. StatsSA moreover reported that from January to February 2021, mining sector output rose by 3.8 per cent. This is a considerable improvement on the 8.4 per cent contraction observed in January 2021.¹

Despite these positive signs, South Africa’s ranking in the Fraser Institute’s 2020 Annual Survey of Mining and Exploration Companies’ Investment Attractiveness Index declined from 40th out of the 79 mining jurisdictions surveyed in 2019 to 60^th out of the 77 mining jurisdictions surveyed last year. In its findings, the Fraser Institute indicated that there are a number of factors which South Africa needs to address to enhance its attractiveness as a mining jurisdiction. These include:

1. creating a transparent and efficient mining cadastral system;
2. ending permitting delays;
3. enhancing regulatory certainty; and
4. providing properly structured tax incentives.

To improve South Africa’s investment attractiveness and potentially achieve the Minister’s goal, South Africa’s mineral law regime requires urgent reform. As part of this process, the Department of Mineral Resources and Energy (DMRE) needs to address the weaknesses of the South African Mineral Resources Administration (SAMRAD) system, the backlog in permitting applications, as well as maladministration within the DMRE’s regional offices.

Application backlogs

For years the DMRE’s credibility has suffered. Key factors include permitting backlogs caused by the ineffective SAMRAD system, management issues, as well as maladministration in some of the DMRE’s regional offices. In addition, delays relating to applications for the transfer of rights (also submitted through SAMRAD) have resulted in delays of up to six to eighteen months, further affecting investment into the sector.

As mining without the necessary rights or permits is an offence, these delays, according to the Minerals Council, have cost the industry up to ZAR 20 billion (US$ 1.3 billion).²

Given the economic downturn following the COVID-19 pandemic, it is now particularly important to address the permitting backlog. During 2020 the economic downturn in the wake of the Covid-19 pandemic, resulted in a seven per cent fall in gross domestic product³ and the highest unemployment rate on record (30.8 per cent) – which peaked in the third quarter of 2020.⁴

During the same period, South Africa’s share of global exploration fell by a worrying twenty per cent and, according to S&P Global Market Intelligence, is currently equal to just under one per cent of the global total.⁵

According to the Minister, the SAMRAD’s systemic shortcomings are the DMRE’s “biggest worry”. The system’s deficiencies have often affected officials’ ability to ensure that duplicate rights are not issued over the same properties. In some cases, this itself has enabled maladministration and corruption. In 2018, the Limpopo and Mpumalanga regional offices of the DMRE were temporarily closed to investigate significant permitting backlogs and alleged malfeasance.

The concerns regarding the SAMRAD system were reiterated during a Parliamentary portfolio committee on minerals and energy (portfolio committee) meeting on 24 February 2021 where a proposal was made to replace the current SAMRAD system in its entirety.⁶ The Minerals Council likewise confirmed that its members would support and contribute to an entirely new cadastral system.

In response, the DMRE committed to providing a solution by late August on addressing the inadequacies of SAMRAD as well as current licensing backlogs.

In our work in advising the Kingdom of Saudi Arabia on its new mineral law regime (see here for more information), Herbert Smith Freehills emphasised that online central cadastral systems are a key feature of successful mining jurisdictions.

Establishing and operating an open online electronic mining cadastral system is an important means of gaining (or regaining) investor confidence. As these systems reduce human inputs by incorporating automated processes, they significantly enhance the reliability as well as the transparency of the mineral regulatory system itself.

By creating a system that applies to the entire mining life cycle, mining cadastres provide a tool by which governments may regulate the industry effectively as well as monitor and regulate it through checks, balances and automated record keeping.

At an international level, the World Bank is one of the strongest proponents of open online mining cadastral systems. It has also been instrumental in funding projects aimed at reforming Africa’s mineral rights management by supporting projects which seek to consolidate mineral geological data coverage across Africa, through the use of such systems.

To date, approximately sixty per cent of countries in Africa make use of land management software to automate mineral title workflows, improve compliance and expedite the overall mineral right application process. Key examples include Namibia, Ghana, Zambia, Uganda, Togo, Tanzania, South Sudan, Malawi, Mauritania, Liberia, Kenya, Guinea, Ethiopia, the Democratic Republic of Congo, Côte d’Ivoire, Cameroon and Mozambique.

The need for a transparent and effective cadastral system

The opaqueness of the current SAMRAD system has discouraged exploration by junior minors and hindered investors and interested and affected parties from obtaining critical information from the DMRE.

The recent decision in Baleni and Others v Regional Manager Eastern Cape Department of Mineral Resources and Others,⁸ may signal a shift towards improved transparency. In its judgment, the High Court confirmed that interested and affected parties⁹ (I&APs) are entitled to receive copies of mining right applications.¹⁰ The right is premised on the requirements imposed under sections 10(1) and 22(4) of the Mineral and Petroleum Resources Development Act¹¹ which include a duty to meaningfully consult with I&APs during the application process.

Before the decision, I&APs had limited access to mining right applications. In fact, they generally only secured copies of these applications after the consultation process had run its course. In these cases, I&APs were compelled to use the cumbersome mechanisms prescribed under the Promotion of Access to Information Act, 2000 (PAIA) to access to the information.

Notably, the DMRE also amended its PAIA manual in 2020 (after the judgment was handed down).¹² Prior to the amendment, automatic access to the prospecting or mining right applications was only available to landowners, lawful occupiers and other interested and affected parties.¹³ The 2020 PAIA Manual no longer contains this restriction. It still provides, however, that confidential portions of an application may be redacted.

Conclusion

In the wake of the 2020 recession, South Africa’s economy cannot afford any further impediments to economic growth, including unnecessary delays in addressing matters which impede investment in the country’s mining sector.

It is therefore critical that the DMRE prioritise the re-engineering or replacement of the SAMRAD system as soon as possible.

For more information, please contact Peter Leon, Ernst Muller or Amanda Hattingh or your usual Herbert Smith Freehills contact.

References

1. As reported by Daily Maverick, South African mining output rises in February after 12 consecutive months of contraction, 13 April 2021, accessible online at dailymaverick.co.za (last accessed on 14 April 2021).
2. As reported by MiningMx, South African mining projects worth R80bn ensnared by red-tape, says Minerals Council, 3 February 2021, accessible online at https://www.miningmx.com/news/markets/45079-south-african-mining-projects-worth-r20bn-snared-by-red-tape-says-minerals-council/ (last accessed on 15 April 2021).
3. See here: http://www.statssa.gov.za/?p=14074 (last accessed on 13 April 2020).
4. See here: http://www.statssa.gov.za/publications/P0211/P02113rdQuarter2020.pdf (last accessed on 13 April 2021).
5. As reported by Mining Mx, SA exploration policy in need of radical rethink after spend slumps to 20-year low, 8 February 2021, accessible online at https://www.miningmx.com/news/markets/45125-sa-exploration-policy-in-need-of-radical-rethink-after-spend-slumps-to-20-year-low/ (last accessed on 15 April 2021).
6. As reported by Creamer Media’s Mining Weekly, Minerals Council offers to part pay cost of replacing Samrad system, 4 March 2021 accessible online at https://www.miningweekly.com/article/minerals-council-recommends-replacement-of-samrad-to-encourage-greater-investment-in-exploration-mining-2021-03-04/rep_id:3650 (last accessed on 13 April 2021).
7. Minutes of the Parliamentary portfolio committee meeting are accessible via the Parliamentary Monitoring Group (PMG.org.za) (subscription needed) (last accessed on 14 April 2021).
8. [2020] 4 All SA 374 (GP)
9. As defined in the Mineral and Petroleum Resources Development Regulations published under the Mineral and Petroleum Resources Development Act, 2002 (“MPRDA”)
10. Duly redacted to protect sensitive financial information.
11. 28 of 2002
12. Accessible online at https://www.dmr.gov.za/portals/0/PAIA.pdf (last accessed on 13 April 2021).
13. The Department of Mineral Resources (DMR) 2014 PAIA Manual accessible online here (last accessed on 15 April 2021)