Every Friday morning, SAfm’s AMLive’s radio anchor Sakina Kamwendo speaks to Martin Creamer, publishing editor of Engineering News and Mining Weekly.  Reported here is this Friday’s At the Coalface transcript:

Kamwendo: Crippling new tax laws have been recommended for South Africa’s already maimed mining industry.

Creamer: There is concern growing around the Davis Tax Committee recommendations. The feeling is that there should be a call to action. That call to action came this week from Muhammed Saloojee from KPMG, who said the nation has really got to move fast, because the deadline to comment on the first round of recommendations is on October 31, which is next week. He is saying that three big pillars of the mining tax situation are about to be smashed down if these recommendations come through.

We just had a call from Business Leadership South Africa saying that we should really see it as a patriotic challenge, mining all that gold that is still underground. If this sort of tax comes through, it really emphasises revenue and de-emphasises growth and job creation. Job creation is not going to happen with these recommendations, because what has been an age-old gold formula – that hasn’t been formulated without a lot of thought, the original thought coming from Germany ages ago – just recognises that you can’t put mining into the same package as manufacturing, it has got to be treated differently, because there are all sorts of different risks and price taking and a lot of effort going into the creation of mines.

Now, they want to get rid of that formula. What industry is saying is that they should extend that formula to platinum, it is a very good formula, whereas the Davis Committee are saying in their recommendation is that the gold formula should be totally crashed, so that is one big pillar. Another is the indexation allowances that come from mining, which are not as easy to explain.

But, then you have got an early deduction possibility when you are actually developing new mining projects, a sort of an upfront write off, which is linked to the funding of these mines. They also want to smash that pillar down. A lot of concern around this, because we recently had chairmen of our top gold and diamond mining companies sitting at the Joburg Indaba saying that they are in a make-or-break phase. Do they want to break the industry or do they want to make the industry?

They were making the point that without convergence now, labour coming together with business, communities and government representatives, mining value is going to go from being billions of rands worth to hundreds of millions and keep falling. Everytime there is an intervention, we see less and less encouragement to invest. People get scared when you are trying to run a business and you have to cut costs and the government intervenes and says you must not cut those cost.

Then you start bleeding and losing money. That normally leads to further intervention as we saw in Zambia, total nationalisation, that nearly killed the copper industry. The Zambians then learned after the early nineties that they can’t do that. They have come back, but we don't want to have 20 years of lesson. The other countries have learnt, don't fall into that trap again. That was the warning from top chairmen of the gold mining and diamond sector.

Kamwendo: Disillusioned investors are demanding radical changes to the way mining CEOs are incentivised.

Creamer: These investors are totally disillusioned. The only people who haven’t made any money are the shareholders. Labour has come through with above inflation increases over a long period of time. CEOs have walked away with a disgusting amount of money. Fund managers have done fine. It is the shareholders that have got nothing. They are saying that they are turning their back on the industry, because the way they run it is unbelievably bad. The board of directors are useless and just rubber stamp everything.

The CEOs are incentivised through share-price mechanisms, which is crazy because then they misallocate capital as we have seen over and over again. They are soft targets for investment bankers who just want deal upon deal. They come in and the CEO says he is incentivised to grow the share price, so what do they do? The investment banker says to him buy this company. He hardly does proper due diligence. There were a lot of examples coming through, including from the Public Investment Corporation, which looks after the money of hundreds of civil servants.

We must realise that the money going in here is our money, it is provident and pension fund money. The fund managers have criticised this whole system and said we can’t keep incentivising CEOs in this way, it is skewed. They are actually just going out and buying other companies and when the problems come they rush out, but they have still cashed in on all their bonuses. You must realise that these people who are now having to allocate capital are not good at allocating capital, because they are either metallurgists or mining engineers or geologists.

They don’t really know anything about capital allocation. Why is the board putting this on them? They should rather say that they are operational, they must learn now to cut unit costs, that is your expertise. Don’t start running around trying to buy things. We have seen with Anglo American if they hadn’t bought Minas Rio in Brazil, which has been a really bad investment, they would have a balance sheet virtually debt free at the moment, which would have put them into a totally different situation. The way the mining industry and all industries are being run is coming under the spotlight.

Everybody is being looked at up and down, left right and centre. That should in time do well for the industry, but in the meantime you find investors saying they can do much better elsewhere and are not going to go into the mining industry.

Kamwendo: Transnet is setting out to penalise companies that have failed to meet their local-content obligations.

Creamer: We have got this great thing, local-content, because it means local jobs and training. People come in and want to sell you big things like maybe locomotives for your rail and you say to them that they must make part of it here and increase that percentage as we go along. It is part of the Industrial Policy Action plan and we have been seeing it happen.

When you question some of the actual achievements here, you find that in one case and the rumours are sweeping around here, the company building some very big products for Transnet has just ignored the local-content and said they would just pay the penalties. Now, if the penalties are so small that you can just pay them then they must be made bigger.

They need to push this local-content. It needs to be done properly or not at all. We see some companies do do it properly, namely General Electric from the United States.

Kamwendo: Thanks very much. Martin Creamer is publishing editor of Engineering News and Mining Weekly, he’ll be back with us at the same time next week.