Being an empowered vendor of services and goods to the mining industry will offer significant leverage in supply negotiations, once the draft Mining Charter is promulgated, says law firm Strata Legal MD Brandon Irsigler.

The Mining Charter, which Mineral Resource Minister Gwede Mantashe said would be promulgated by November, will have a significant impact on vendors and will place many mining suppliers in the same position as mining companies when the Mineral and Petroleum Resources Development Act first came into effect in 2002.

Effectively, this means that suppliers, like mining companies, will have to ‘empower’ their shareholding to stay in business. Thus, Irsigler states suppliers that adapt early to the empowerment requirements of the charter will have a competitive advantage over their competitors.

“Suppliers to mining companies need to realise that empowerment is a competitive advantage, especially in the services space, where not every supplier will be able to meet the steep requirements set out in the charter,” he explains.

According to recent revisions to the charter, compliance with procurement provisions is weighted at 60% of a mining company’s overall charter compliance obligations, and, to comply, procurement players will need to be empowered.

The baseline definition of an empowered supplier, Irsigler points out, is a company where 26% of the shares are owned by empowered investors and the company has achieved a Level 4 contributor status in terms of the broad-based black-economic-empowerment (BBBEE) codes.

Empowerment obligations in the new charter comprise an 80% target for services spend.

A three-way split of this service spend means, in turn, that effectively 60% of this 80% empowered services spend should be allocated to BEE entrepreneurs, which are companies in which black South Africans hold 51% of the equity, with full company and economic rights attached to the equity holding.

Further, 10% of this must be allocated to BEE-compliant companies that have at least 26% black South African ownership and are Level 4 contributors in terms of the BBBEE generic codes.

The remaining 10% must be allocated to BEE women-owned enterprises, with 51% ownership, or 51% youth-owned and -controlled enterprises.

The same concept will apply to goods, for both consumable and capital spending. The 70% empowerment target must comprise 44% from BEE-compliant companies and 21% from BEE entrepreneurs, with the remaining 5% comprising 51% BEE women- or youth-owned and -controlled enterprises supplying goods.

Once the draft charter has been promulgated, Irsigler points out, suppliers to mining companies, and mining companies themselves, will have six months from the publication of the Mining Charter to submit a five-year plan indicating progressive implementation of inclusive procurement and empowerment targets.

To implement this five-year plan, he explains, suppliers and mining companies will need to understand what their current empowerment levels are, while building a credible reputation for empowerment.

With regard to spending on goods, mining companies must achieve 10:70 in Year 1, 20:70 in Year 2, 35:70 in Year 3, 50:70 in Year 4 and 70:70 in Year 5.

Compliance with empowered service spend is far steeper, Irsigler says, with 70:80 being targeted in Year 1 and 80:80 in Year 2. He notes that the service procurement’s five-year phase-in period is misleading.

Suppliers will need to consult with mining companies and have the necessary facts and information on hand, when developing and identifying a strategy, he adds.

Mining companies, meanwhile, will need to confirm empowerment trends and records, while unpacking targets and scorecard weighting.

Irsigler further suggests that mining companies must aware of all the elements contained in the mining charter and their specific subtargets, as well as what the scorecard weighting requirements are in terms of the company’s procurement, employment equity and human resource development obligations.

“Work out what your wins are going to be, and where your stresses are going to be. Unpack what your business is doing now against what it can do and what it should be doing,” he says.

A targeted approach is also beneficial, Irsigler adds, noting that mining companies could assist suppliers in becoming empowered through an understanding of the company spend, while implementing a strategy to reach a target in a certain timeframe.

“Ownership and the enjoyment of the rights of ownership are where the stress for the suppliers is right now.”

However, Irsigler warns that BEE transactions are coupled with similar concerns, ranging from the choice of partner to capital contributions and dilution, while also potentially locking in the obligation to remain empowered for a period.

“There must be an obligation to remain empowered, and that means that this will need to take place not only at the fundamental level at which you are doing the work, but also further up the mining value and supply chain.”

A fundamental issue is that an empowered shareholder should be treated exactly as every other shareholder, he says, explaining that “locking in” the shareholding obligation moves slightly away from this principle.

However, “locking in” the obligation to remain an empowered partner became a commercial practice, because the regulatory environment was so weak in the past, especially with previous “poorly drafted” charters, that it became the most acceptable way to secure a transaction that would continue.

Owing to this, and Mantashe openly acknowledges that mining is a decade-and-longer capital-intensive project, Irsigler notes, there is a push from government for black investors to remain invested for the long term.

“My sense is that the Department of Mineral Resources would much rather see locked-in entrepreneurs than no entrepreneurs at all.”

In this sense, legitimate controls need to be negotiated with potential BEE partners, while legitimate protections should be viewed as non-negotiable in any empowerment transaction, he adds.

Small Business Institute chairperson Bernard Swanepoel believes that the amendments to the charter introduced under Mantashe make the draft a considerable improvement on the earlier versions under former Minister Mosebenzi Zwane.