Nationalising South Africa's mines

Julius Malema and the ANC Youth League have been calling for the nationalisation of South Africa's mines. What sort of impact is this having? This is how a Reuters correspondent reported on the issue on August 10, 2011. Consider what effect such a report might have on potential investors overseas. This is the report:

By Jon Herskovitz

JOHANNESBURG - South Africa’s ruling

African National Congress is at war with itself over calls to

nationalise a mining sector that has been the backbone of

Africa’s largest economy.

Nationalisation could bankrupt the country and destroy its

credibility among investors. But the idea resonates with the

country’s poor black majority who see it as a way to spread the

wealth from a sector that grew powerful along with

white-minority apartheid rule.

Here are a few questions and answers as to what may result

of the nationalisation debate.

WILL SOUTH AFRICA NATIONALISE ITS MINES?

Not unless the ANC wants to ruin the economy by trying to

take over a sector that accounts for about half a million jobs

and 6 percent of GDP.

The country cannot afford to buy out listed mining firms

which have a market capitalisation of about 270 billion, equal

to about two-thirds of GDP or twice the annual state budget.

Running the mining firms would cost tens of billions more a

year and given the loss-making track record of state-owned

enterprises, nationalised mines in South Africa would place a

huge drag on the economy.

Threats to tweak laws in order to expropriate shares for a

fraction of their value would run up against international

investment guarantees that would almost certainly a trigger

severe backlash from South Africa’s trading partners.

The debate is largely kept alive to settle political scores

in the ANC and will stay on the agenda at least through the end

of next year when it holds a conference to elect its leaders.

IF NOT NATIONALISATION, WHAT DOES THE GOVERNMENT WANT?

The government has been clear on what it expects from mining

companies: more black ownership, more jobs and social justice

for the black poor who have been marginalised for decades by

mining barons.

Nationalisation will not happen but keeping the debate alive

provides leverage.

The government has created a state mining company which will

focus on strategic minerals including coal and uranium, although

it has yet to be decided how the firm would operate. Analysts

said this may be the extent of state ownership in the industry.

WHAT MIGHT MINING FIRMS BE PRESSURED TO DO?

The government will likely apply more pressure on mining

firms to achieve a government mandate for them to have 26

percent black ownership and 40 percent black management by 2014.

Mining firms could be pressed into joint ventures with the

public sector in the downstream processing of minerals. The

government’s national growth strategy sees mineral processing as

a pillar of growth and job creation. It has laid out 10 mineral

commodities and five value chains it wants to develop, saying

mining firms will be called on to help.

WILL MINING FIRMS FACE INCREASING TAX AND ROYALTY BILLS?

Changes may come at the margins but there will probably be

nothing major. South Africa’s royalty system is considered one

of the more advanced among mining giants.

WILL MINING FIRMS AVOID EXTRA COSTS?

Probably not. Mining firms may face greater pressure to

increase shareholdings to local communities where mines are

located and pay a larger bill for infrastructure development.

The energy-intensive sector may see higher tariffs from state

utility Eskom, which is scrambling for funds to build much

needed power stations.

Mark Cutifani, chief executive of mining power AngloGold

Ashanti, said in an opinion article last month the mining sector

is willing to help end “inequality and the demons of its past".

Separate from nationalisation, mining firms could face a

huge bill from legal cases from miners seeking compensation for

deadly lung diseases, especially in the gold mining sector.

WHAT ARE THE DANGERS?

High-minded ideals of social justice could easily fall prey

to crass corruption.

Foreign investors, South Africans and the ANC's governing

partners have grown increasingly worried about the

implementation of a black economic empowerment policy introduced

by the ANC after apartheid ended 17 years ago.

BEE is aimed at righting the economic wrongs of apartheid

but critics say it has only enriched a few politically connected

businessmen in a country where millions live in poverty and over

a quarter of the work force is jobless.

An increased push for more black ownership could deepen the

pockets of a few while the impoverished majority see no gains.

Nationalisation could be used to bail out BEE firms that

made bad investments in the sector or to revisit mining rights,

which would deal a blow to regulators already being probed by

police over a sweetheart rights deal that benefited President

Jacob Zuma’s son and his backers.

Joint venture firms could end up as money pits that create

few jobs while piling costs on mining firms.

The biggest risk is that South Africa will place too high a

burden on mining companies, hurting the competitiveness and long term prospects for Africa’s largest economy.