Mining industries protest South African tax proposal

The South African government softened its stand today on a new mining law that had drawn protest from the mining industry, the mainstay of the country’s economy, The New York Times reports.

The South African finance minister, Trevor Manuel, told reporters after a meeting with industry leaders that though the government intended to go ahead with a plan to assess royalties on all mineral extractions, the details would be open to negotiation, the Times reports.

The mining companies had bitterly objected to the royalty plan, saying that the added cost would make some mines uneconomic to operate, forcing them to cut production and jobs. They also argued that the proposed royalties, ranging from 3% of gross revenue for gold to 8% for diamonds, would impede the proposed law’s main goal, opening the country’s mineral wealth to smaller black-owned companies.

Manuel’s meeting with the Chamber of Mines, a group representing all the main companies in the South African mining industry, came on the last day for public comment on the proposed law. “It was a very cordial and constructive meeting,” Onkgopotje Tabane, a spokesman for the chamber, reportedly said. “It wasn’t meant to arrive at any conclusion as such, but is the foundation for further discussion.”

South Africa has been moving toward a new regulatory framework for the mining industry for some time. A law enacted last year formally transferred ownership of the country’s resources to the government. A royalty system was the widely expected next step, and the industry looked forward to the publication of the draft bill last month to end market speculation about how the system would work.

But the miners reportedly said they were shocked when they saw the draft, because the proposed royalties were high, and were based on revenue instead of profit, the Times reports.

The mining companies said the law also did not fulfill a promise that they would be given credit for royalties they already pay on some mines, the Times reports. For example, Impala Platinum pays a 22% royalty, based on profits, to the Bafokeng people for mines on tribal lands in the northwestern part of the country.

“It is our position that the introduction of a revenue-based royalty will add a fixed cost to every mining operation,” Peter Bunkell, acting chief executive of the Chamber of Mines, reportedly said. “The disturbing and logical outcome is that a significant amount of our mineral resources will never be mined because it will be uneconomical to do so.”

Martin Grote, chief director of tax policy at the South African treasury, reportedly said that the government’s royalty proposal was carefully researched and would bring South Africa into line with standard practices in other nations with major mining sectors. The proposed rates would yield about 4 billion rand ($565 million) in annual revenue for the state, he said.

But companies like Harmony Gold, which employs 48,000 people in South Africa, said that what works in Australia or Botswana may not be suitable for South Africa. The recent volatility of the rand makes doing business here particularly unpredictable, the companies say, and the costs of doing business in the country have risen because of the epidemic levels of H.I.V. infection in the country and the government’s efforts to open the industry to black entrepreneurs.

“Within the context that is South Africa, we do have particular challenges we have to deal with,” Cathie Markus, spokeswoman for Impala, reportedly said. “I think people need to be conscious of trying to walk that very narrow balancing act between addressing the particular problems of South Africa and making this an attractive place to invest.”

Basing the royalties on revenue rather than profits is a flaw in the eyes of the whole industry, but specific sectors also have narrower complaints. Diamond producers feel unfairly singled out by the 8% royalty proposed for them, while gold miners, suffering from a long period of low prices, say that even a 3% royalty would cripple some of their mines.

“Margins are definitely sinking,” Ferdi Dippenaar, marketing director of Harmony Gold, reportedly said. “Having this added cost of the royalty on top of that, which doesn’t take into account the idea that gold prices move in circles, will place an added burden on costs. That could impact on production in the short term, and ultimately, employment levels.”

The Chamber of Mines says that the proposed royalties would “sterilize,” or render uneconomic, some 600 tons of gold that would otherwise have been mined over the next four decades, with a present value of some 1.6 billion rand ($226 million) a year, but would yield only 1 billion rand a year in gold royalties.

Cutbacks at the mines would be worrisome for a government that is under pressure to create new jobs. But the industry’s claim that the proposed royalties would impede the government’s “black empowerment” agenda may carry more weight. The country has set a goal for 2012 of 26% ownership of existing mines by members of historically disadvantaged groups.

Teigo Moseneke, the chairman of the New Diamond Corp. and one of the country’s emerging black mining tycoons, said that there were two ways a company like his could break in to the industry: buying the marginal mines that the larger companies are willing to part with, or opening a mine from scratch, the Times reports. High royalties could make the first approach unprofitable and the second difficult to finance, Moseneke said. He said an 8% diamond royalty would force him to lay off half his workers.

“South Africa should be trying to reduce the operating costs of its mines, so that one can bring to account a larger number of deposits that have not been mined,” Moseneke reportedly said. “If you impose a royalty that is unduly high, you exclude a range of companies that could play an important role in developing junior mines.”

The government has said it will review public comment and submit a final draft of the mining bill to Parliament in the next few months.