"We cannot solve our problems with the same thinking we used when we created them."
Einstein

By Henk de Hoop, Business Development Director Resources at Rand Merchant Bank

The global macro background for the mining industry is looking very positive, probably the best in a number of years. The emerging picture of increasingly synchronised and accelerating world growth is hugely positive for commodity volumes and pricing. At the same time, interest in emerging markets is returning, with emerging market investors even seeing South Africa in a more positive light, after the December ANC conference outcome.

But does that returning interest also apply to the South African mining industry? The answer is it's unlikely, just yet. Global mining is at a point where many stars are aligning, but In South Africa, the industry is at war with its regulators. Court cases are about to begin relating to some crucial disagreements about how to achieve transformation in the industry, and could possibly last for many years into the future.

The sad part is that both sides actually agree on the basic tenant that transformation of the industry is necessary for the long-term health of the sector, and the country. The surprising fact is, however, that the definition of what a sustainably transformed industry looks like, and how to achieve this, has not been agreed between the parties.

The 15 year history of trying to transform the industry has seen some spectacular successes, and some dismal failures. It is time for industry participants and regulators to both acknowledge the successes AND the failures. It is also time to acknowledge that transformation goes far beyond the narrow ownership debate, and should not put the industry at risk of losing the interest of the lifeblood of the industry, capital. For example, a community will be much more sustainably transformed through re-investment in and growth of existing assets. It will protect and grow jobs, while the community benefits from successfully implemented local procurement policies, targeted socio- economic spending, and upskilling of the workforce. Similarly, entrepreneurs are not created by forcibly introducing tiny geared minority interests at asset level of each and every prospecting and mining right, with their success or failure only dependant on a lucky share price run at the time when the debt needs to be repaid.

The original intention of the industry leaders and the regulators of the day, was to work towards an outcome that would see 26% of the industry in previously disadvantaged hands after a defined period of time. Unfortunately, this has morphed over time into a system, where each and every prospecting and mining right is required to show a minimum of 26% BEE ownership. This has resulted in a rather ludicrous system, a regulatory nightmare, open to abuse from both sides, with widely different 'transformation' outcomes, depending on what time in the cycle the company entered into a well-intended transaction. Although hugely beneficial to the legal, banking and advisory industry as deals succeed and fail before being regurgitated, the result of the 'negotiated settlement' at the time has left both sides with a system that doesn't serve its purpose.

A quote from Einstein is applicable to the industry at this point: "We cannot solve our problems with the same thinking we used when we created them". To continue to believe that fiddling at the margins with percentages and timelines will eventually get us to nirvana, is a mistake. The laws of finance are like physics - you cannot create gold out of lead. For example, to expect permanent ownership transfer based on geared minority interests AND dividend flows to minority shareholders AND a guaranteed exit value - over and over again and across the industry, is simply impossible. To try to regulate a failed concept in the hope of bending the laws of finance to achieve it all, will eventually lead to the demise of South Africa's economic motor - a profitable mining industry.

Therefore, it is time to re-look at the original intention of permanently transforming the industry, but going about it in a completely different way. The successes of industry champions that indeed have been created should be celebrated, and future transformation should aim to help create more of these previously disadvantaged industry champions into real entrepreneurs who can stand on their own and compete on an equal footing; who can apply for prospecting and mining rights on their own accord; who can raise and commit capital and take risk like any other mining venture. Only then will the industry be properly transformed.

But how does one start all over again? Firstly, the regulators will have to accept and acknowledge that there have been many transformation successes. Similarly, the industry will have to acknowledge where transformation has indeed failed, and no or limited value was transferred. Secondly, for those companies that have as yet not achieved the agreed targets, previously disadvantaged ownership at the operational level should be an option, not a requirement. Instead, companies should be allowed to contribute assets, either their own or through acquisition, to form the core of the next black empowerment mining champion. Alternatively, for those who are unable to contribute or acquire assets, a financial contribution to bolster the new entrants balance sheet could be agreed to, either through a once-off or an upfront annuity for a period of time. The latter will hugely assist the new champions in raising capital and accelerating industry investment growth.

Thirdly, to provide the certainty that investors, and the new mining entrepreneurs, so desperately require, a clear methodology on how to measure success or failure needs to be agreed upfront, with defined timelines and targets attached. Continuously changing the goalposts is deadly for investor confidence and South Africa's long-term attractiveness as a mining nation.

Fourthly, more public education is required by regulators and industry on the much broader benefits that a profitable, growing mining industry can bring to communities, employees and South Africa as a whole. The focus should perhaps turn more towards the equitable distribution of the benefits from resources, rather than who owns them.

There are many more angles to be considered in re-designing legislation that, as it currently stands, will simply reflect Einstein's famous definition of insanity: "Doing the same thing over and over again and expecting different results".

Nobody expects that the process will be easy. It will involve hard work, open minds, trust, and acknowledgement from both sides that the current processes simply do not and will not achieve the ultimate dream of both sides: a sustainably transformed industry.