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Mining Charter – BBE Ownership Element

It’s important to note that the Mining Charter is not a typical Sector Code issued under Section 9 of the B-BBEE Act. It’s a separate instrument developed under the Mineral and Petroleum Resources Development Act (MPRDA), but it has significant implications for B-BBEE compliance in the mining industry.

1. Introduction and Applicability

1.1 Sector Code Overview: The Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry, 2018 (Mining Charter 2018, or MCIII) is the primary instrument governing transformation in the South African mining industry. It sets out targets and requirements for various elements of B-BBEE, including ownership. It is not a typical Sector Code under Section 9 of the B-BBEE Act, but rather a charter developed under the Mineral and Petroleum Resources Development Act (MPRDA).
1.2 Scope of Application: The Mining Charter applies to all holders of mining rights granted under the MPRDA. This includes companies involved in:
- Exploration and prospecting for minerals
- Mining and extraction of minerals
- Beneficiation of minerals (to a limited extent – the Charter focuses primarily on the upstream activities)
1.3 Legal Basis: Section 100 of the Mineral and Petroleum Resources Development Act (MPRDA), No. 28 of 2002, and the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended). The Mining Charter is not a Section 9 Sector Code, but it has significant legal force through the MPRDA. Mining Charter 2018 was published in Government Gazette No. 41934 on 27 September 2018.
1.4 Effective Date: 27 September 2018 (with specific transitional arrangements).
1.5 Precedence: The Mining Charter has a complex relationship with the Generic Codes and other Sector Codes. It effectively supersedes the Generic Codes for the core activities of mining rights holders (exploration, mining, and limited beneficiation). However, for activities outside the direct scope of the mining right (e.g., downstream processing, marketing, services), the Generic Codes or other relevant Sector Codes may apply. This can be a complex area of interpretation.

2. Ownership Scorecard and Thresholds

2.1 Ownership Scorecard: The Mining Charter 2018 does not use a points-based scorecard for ownership in the same way as the Generic Codes or other Sector Codes. Instead, it sets out minimum requirements for Black ownership in existing, pending, and new mining rights.
- Existing Mining Rights: Holders of existing mining rights (granted before MCIII) have a minimum of 26% Black ownership. They were given a “top-up” period to increase this if needed. There are complex rules regarding “continuing consequences” of past empowerment deals.
- Pending Mining Rights: Applications for mining rights that were pending when MCIII came into effect have a minimum of 26% Black ownership.
- New Mining Rights: Applications for new mining rights (after MCIII) have a minimum of 30% Black ownership, distributed as follows:
  - 5% non-transferable carried interest to qualifying employees.
  - 5% non-transferable carried interest to host communities (structured as a trust).
  - 20% effective ownership by Black persons (can be a combination of different entities).
  - A holder of a new mining right may not transfer the carried interest, in part or in whole, for the duration of the mining right.
2.2 Priority Element Status: While the Mining Charter doesn’t use the same “priority element” terminology, ownership is effectively a priority element because it’s a requirement for obtaining and maintaining a mining right.
2.3 Subminimum Requirements: Not applicable in the same way as the Generic Codes, as there’s no points-based scorecard. However, the minimum Black ownership percentages (26% or 30%) are mandatory.
2.4 Entity Size Thresholds: The Mining Charter does not use the standard EME/QSE/Generic classifications based on annual revenue. The ownership requirements apply based on the type of mining right (existing, pending, or new), not the size of the company.
2.5 Automatic Recognition for EMEs/QSEs: Not applicable in the same way as the Generic Codes. The Mining Charter does not provide automatic B-BBEE levels. Compliance is assessed based on meeting the specific requirements of the Charter.
- Crucially: Are there any conditions or restrictions on this automatic recognition? Not applicable, as there are no automatic levels.

3. Specific Ownership Requirements and Interpretations

3.1 Unique Ownership Targets: The Mining Charter sets specific, mandatory minimum Black ownership percentages (26% for existing/pending rights, 30% for new rights), with a prescribed distribution for new rights (employees, communities, other Black entities). This is very different from the Generic Codes’ approach.
3.2 Flow-Through and Modified Flow-Through: The Mining Charter has its own rules regarding the recognition of Black ownership through different entities, which may differ from the Generic Codes’ Flow-Through and Modified Flow-Through Principles. This is a complex area.
3.3 Exclusion Principle: The Mining Charter has its own provisions regarding the treatment of state ownership.
3.4 Treatment of Specific Entities: The Mining Charter has specific requirements for:
- Employee Share Ownership Schemes (ESOPs): Mandatory for new mining rights (5% carried interest).
- Community Trusts: Mandatory for new mining rights (5% carried interest).
- Trusts: Generally, trusts must meet specific criteria to be recognized.
- Broad-Based Ownership Schemes (BBOS): While not mandatory, BBOS can be part of the 20% Black ownership component for new rights.
3.5 Multinationals: The Mining Charter does not provide a specific alternative to ownership for multinational companies (like Equity Equivalents). The ownership requirements apply regardless of the company’s global structure. This has been a point of contention.
3.6 Ownership by Qualified Professionals/Specific Roles:
- Not a specific requirement within the ownership provisions, but the mandatory ESOP component for new rights means that employees will have a stake.
- Crucially: Are there any requirements for ownership to be held by individuals in specific roles (e.g., executive management, as in the Construction Sector Code for BEPs)? Are there penalties for not meeting these requirements? No, there is no direct equivalent to Clause 3.1.3.
3.7 Sale of Assets: The Mining Charter has specific requirements about disposal of assets.
3.8 Private Equity Funds: While private equity investment is possible, the Mining Charter’s specific ownership requirements (particularly for new rights) and the restrictions on transferring carried interests limit the flexibility of PE involvement.
3.9 Other Unique Provisions:
- “Once Empowered, Always Empowered” Principle: This has been a major area of contention and legal challenge. The Mining Charter 2018 does not fully recognize this principle. Previous empowerment transactions are taken into account, but there are complex rules and limitations.
- Carried Interest: The mandatory carried interest for employees and communities in new mining rights is a unique feature. Further details are included below.
- MPRDA Link: The direct link to the MPRDA and the granting of mining rights makes the Mining Charter’s ownership requirements particularly powerful.

4. Areas of Uncertainty and Interpretation

4.1 Ambiguities: The interpretation of “continuing consequences” of past empowerment deals, the interaction with the Generic Codes for activities outside the direct scope of the mining right, and the specific requirements for trusts and BBOS are all areas of complexity.
4.2 Industry Practice: Industry practice is constantly evolving, often shaped by legal challenges and negotiations with the Department of Mineral Resources and Energy (DMRE).
4.3 Potential Disputes: Legal challenges to the Mining Charter (and its various iterations) have been common, particularly regarding the “once empowered, always empowered” principle and the ownership requirements for new rights.

5. Deal Process, Parties, and Costs

5.1 Typical Deal Structures: Direct ownership, trusts, ESOPs, community trusts, and (to a limited extent) private equity.
5.2 Key Parties Involved: Mining companies, Black investors, communities, employees, legal advisors, financial advisors, the DMRE.
5.3 Deal Process Overview: Highly complex, involving due diligence, valuation, negotiation, legal documentation, regulatory approvals (from the DMRE), and implementation.
5.4 Cost Considerations: Significant legal fees, valuation fees, advisory fees, regulatory compliance costs, and the cost of the ownership transaction itself.

6. Gotchas and Best Practices

6.1 Common Mistakes: Failing to meet the minimum Black ownership requirements, inadequate documentation, fronting, not understanding the specific rules for existing, pending, and new mining rights, relying on outdated interpretations of the “once empowered, always empowered” principle. (Pay particular attention to any specific requirements like those for BEPs in the Construction Code). Not directly applicable, but the mandatory ESOP and community trust components are crucial.
6.2 Fronting Risks: Extremely high risk, with severe penalties under both the B-BBEE Act and the MPRDA.
6.3 Best Practices: Thorough planning, expert legal and financial advice, genuine commitment to transformation, careful structuring of ownership deals to comply with both the Mining Charter and the MPRDA, ongoing monitoring of compliance, and proactive engagement with the DMRE.

7. Carried Interest in the Mining Charter 2018: Explained

What is Carried Interest?

In general finance terms, “carried interest” (often just called “carry”) is a share of the profits from an investment that is paid to the investment managers (typically in private equity or venture capital). It’s a performance-based fee.

In the context of the Mining Charter, “carried interest” has a different, more specific meaning. It refers to a non-transferable share of ownership in a mining right that is granted to beneficiaries (employees and communities) without requiring them to pay for it upfront. It’s a form of free ownership, intended to ensure that these groups benefit directly from mining activities.

Key Features of Carried Interest under the Mining Charter 2018:

Mandatory for New Mining Rights: The carried interest provision applies only to new mining rights granted after the implementation of the Mining Charter 2018 (27 September 2018).
Beneficiaries:
- Qualifying Employees: A 5% non-transferable carried interest must be granted to qualifying employees of the mining company.
- Host Communities: A 5% non-transferable carried interest must be granted to host communities, typically structured through a community trust.
Non-Transferable: The carried interest is non-transferable. This means the employees and communities cannot sell or otherwise dispose of their interest. This is intended to ensure long-term benefit and prevent short-term speculation. The shares cannot be encumbered.
“Free” Ownership: The beneficiaries do not have to pay upfront for the carried interest. It’s granted to them “free” of charge. However, the precise mechanism of how this works in practice (e.g., how dividends are paid, how losses are handled) can be complex and is often a subject of negotiation.
No Dilution of Other Black Ownership: The 5% carried interests for employees and communities are separate from and do not dilute the 20% effective ownership requirement for other Black persons/entities. The total Black ownership in a new mining right must be at least 30%, made up of: 5% (employees) + 5% (communities) + 20% (other Black persons/entities).
Dividends: The Mining Charter stipulates that the holders of the carried interest must receive a certain percentage of dividends declared by the company, even during periods when the company might not be profitable (e.g., during the development phase). This is often referred to as a “trickle dividend” or “guaranteed dividend.” The exact percentage and the timing of these dividends are subject to negotiation and should be clearly defined in the relevant agreements (e.g., the trust deed for the community trust, the ESOP rules for employees).
Voting Rights: The Mining Charter doesn’t explicitly mandate that the carried interest holders have full voting rights proportionate to their ownership. The voting rights arrangements are typically defined in the relevant agreements (trust deed, ESOP rules, shareholder agreement). However, the spirit of the Charter is to ensure meaningful participation, so some form of representation and consultation is expected.
Duration: The carried interest lasts for the duration of the mining right.

How it Works (in Theory):

New Mining Right Granted: A company is granted a new mining right.
Ownership Structure: The company’s ownership structure is established, including:
- 5% non-transferable carried interest for qualifying employees (typically through an ESOP).
- 5% non-transferable carried interest for the host community (typically through a community trust).
- At least 20% ownership by other Black persons/entities.
- The remaining ownership (up to 70%) can be held by the original company applicants (which may or may not be Black-owned).
Operations: The mining company operates the mine.
Dividends: When dividends are declared, the employee ESOP and the community trust receive their share of the dividends, even if the company is not yet fully profitable.
Long-Term Benefit: The employees and community continue to benefit from the carried interest for the duration of the mining right.

Controversies and Challenges:

Financial Viability: The carried interest requirement, particularly the “trickle dividend” provision, can create a significant financial burden on mining companies, especially during the early, capital-intensive stages of a project. This has been a major point of contention.
“Free Carry” vs. “Funded Carry”: There’s ongoing debate about whether the carried interest should be truly “free” or whether some form of funding mechanism (e.g., a loan from the company or a development finance institution) should be involved.
Community Representation: Ensuring genuine and effective community representation in the management of community trusts can be challenging.
Employee Participation: Designing ESOPs that are truly beneficial and empowering for employees requires careful planning.
Legal Challenges: The Mining Charter (and its previous iterations) has faced numerous legal challenges, and the carried interest provision has been one of the points of contention.

The carried interest provision in the Mining Charter 2018 is a significant and unique requirement aimed at ensuring that employees and host communities directly benefit from mining activities. It’s a form of “free” ownership that is mandatory for new mining rights. However, the practical implementation of carried interest can be complex, and it has been a source of debate and controversy within the mining industry. It’s crucial for mining companies to carefully structure their ownership arrangements to comply with these requirements while also ensuring the financial viability of their projects.

8. Alternatives to Ownership

The Mining Charter, unlike other sector codes, includes other elements, including:

Human Resource Development
Employment Equity
Mine Community Development
Housing and Living Conditions
Procurement and Enterprise Development (with specific sub-elements)

9. Conclusion

The Mining Charter 2018 sets out mandatory minimum Black ownership requirements for mining rights holders, with different rules for existing, pending, and new rights. The Charter’s provisions are distinct from the Generic Codes and other Sector Codes, reflecting the unique history and strategic importance of the mining industry. The link to the MPRDA and the granting of mining rights gives the Charter significant legal force. The “once empowered, always empowered” principle and the specific requirements for new rights (including carried interests for employees and communities) are key areas to understand. Crucially, the Mining Charter does not have a direct equivalent to the Construction Sector Code’s Clause 3.1.3, but it does impose specific ownership structures for new mining rights.

Please contact us for a confidential discussion around your unique BEE ownership needs.