Political scientist, Francis Fukuyama, in a general formulation, writes about how countries should aspire to the level of institutional and social achievement of Denmark. 'Getting to Denmark' is how he summarises the development challenge.
In mining, the parallel challenge should be called ‘getting to Canada’, a reference to the world’s best mining jurisdiction in 2017. As in development generally, this does not involve a single heroic leap but rather a series of incremental steps drawing on established best practice.
In mining, the first such step requires establishing just what minerals lie within a country’s jurisdiction. Exploration, in other words, is where the journey starts. In 2017, Canada spent in excess of $2bn on exploration, according to the Prospectors and Developers Association of Canada. By contrast, South Africa, effectively spent nothing. So insignificant is mining exploration in South Africa that there are not even official figures for the activity.
In August, at the company’s results conference, the CEO of South 32, which owns the rump of BHP Billiton’s South African assets, said: "Quite honestly, until we see how the Mining Charter … lands, it’s hard to invest in exploration in South Africa."
Diamond giant, De Beers, spent more than two years waiting to receive 16 permits to explore in the Northern Cape (out of the 52 it applied for) and then refused to exercise them, saying the company was also waiting for finalisation of the Mining Charter. Of the $239m spent worldwide on diamond exploration in 2017, according to S&P Global Market Intelligence, none went into South Africa.
Follow-through share regime
The reason Canada is such a red-hot jurisdiction for exploration is a mechanism called the follow-through share regime. This is a tax concession which allows an investor to deduct 100 percent of the purchase cost of their investment in the explorer from their tax liabilities. Mineral exploration is extremely high risk and requires this sort of innovation to make the investment worthwhile.
In Canada, flow-through shares were the funding mechanism for 60.1 percent of exploration finance raised on the Toronto Stock Exchange in 2017 (and 69.8% of transactions smaller than $20m).
What is odd is that South Africa has an almost identical mechanism – Section 12J of the Income Tax Act, introduced in 2009. Seen by National Treasury as a part of the regulatory framework for venture capital companies, it was set up specifically to finance mining exploration. But it hasn’t done this. Activity in the 12J space has been dominated by hotel and shopping centre construction.
Very few of the 116 venture capital companies listed by the South African Revenue Service are interested in mining and those that are avoid exploration like the plague. Venture capitalist, CCP 12J, for instance, may have employed the former heads of Aquarius Platinum and Keaton Energy, but it has emphatically stated that it will not invest in primary exploration, pre-production mining projects or early-stage feasibility studies.
Instead, CCP 12J will look to invest in lower-risk mining projects such as tails retreatment facilities, dump reprocessing operations and brownfield processing plant expansions. Its CEO says the idea is to "partner with existing industry players (to) mitigate as many inherent risks as commercially possible".
The pattern is clear. Even venture capitalists regard mining exploration in South Africa as too risky, despite the existence of the 12J flow-through mechanism.
Nor is this aversion to exploration only wariness about the as yet unknown conditions to be laid down by the Mining Charter. Even before the charter became the issue it is today, exploration was floundering on the bureaucratic sclerosis of the official licencing regime. In Canada, the flow-through tax benefits fall away if not exercised within two years. In South Africa, that’s about how long it takes to get the exploration permit, if you’re lucky.
Hen's teeth permits
And because it takes so long to get an exploration permit, where companies don’t use them, they hang onto them. So rather than an active market in exploration rights, in South Africa, these hard-to-get permits clutter up the bottom drawers of those lucky enough to have chiselled them out of the Department of Mineral Resources in the first place.
Getting to Canada will be a long and arduous journey for the South African mining jurisdiction. Minister Gwede Mantashe may have no political alternative but to remain committed to the Mining Charter. But surely he can whip his own department into action and get those mining permits into circulation? Maybe there’s some risk junky out there willing to use them.