Investor confidence must be restored and the South African gold mining industry allowed to regain its rightful stature in the global industry.   To do this the ANC must relinquish the flawed and complex Australian-inspired Sims tax proposals.   Resource rentals must be collected by the state with an appropriate version of the gold-mining tax formula.   Such collections will benefit all and eliminate the root cause of today’s discontent.   This will also provide a more positive backdrop to future wage negotiations.

These are the worthwhile opinions of Steve Meintjes and must be endorsed with enthusiasm.   Steve Meintjes is head of research at Imara SP Reid and one of the most astute analysts this country has ever produced.   Steve’s article Apply gold-mine tax formula to the rest of mining industry first appeared in Business Day today and to spark your interest in reading the entire excellent article here are some extracts.

It seems a very long time ago (early 1960s) when a few of us youngsters (including Steve and myself) formed a small  investment syndicate in the hope of making mega bucks and retiring happily one day with a sound income.   Needless to say most of the members are still working.

WITH mining strikes spreading like wildfire after the out-of-line Lonmin settlement in September, we should note that, just as Winston Churchill said after the Second World War, “there never was a war more easy to stop”.   So, too, would it have been easy to prevent this fiasco.

Just take three of the most important factors.

  • First, lawlessness.   As Congress of South African Trade Unions general secretary Zwelinzima Vavi said the day after 34 Marikana miners were shot, police action was noticeably ineffective, despite increasing murder and intimidation in the area in 2010 and last year.   That was also the case when valuable underground plant and machinery were destroyed during illegal strikes at Eastplats last year.   So, by the time the Marikana miners went to the hilltop, the culture of violence in union strife was, thanks to ineffective policing, well established.
  • Second, socioeconomic issues such as housing were successfully dealt with elsewhere, for example on major coal mines in Mpumalanga, despite inter-union tension.
  • Third, the nationalisation debate was allowed to drag on and grow into a monster when it could easily have been nipped in the bud by rolling out the gold mines’ tax formula to the rest of the industry as a proxy for the collection of natural resource rentals.   There was no need to wait for the African National Congress’s (ANC’s) State Intervention in the Minerals Sector (Sims) report.

Despite decisive rejection of nationalisation in the Sims report, there remains enormous uncertainty and anger in the minds of investors and workers.   The Sims document rightly suggested that mining tax should move towards resource rentals collection and the mining industry needs to recognise this as the way to go.

The Sims proposals are, however, seriously flawed since its definition of resource rentals, as being the returns obtained over and above the rate of return on the capital required to enter the industry, ignores the important locational basis for resource rentals.   In plain English, this means the benefits to producers from exceptionally favourable locations including, say, high grades and shallow ore bodies, should be reflected in higher tax rates.

Equally important, however, is the corollary, and this is what the Sims document completely ignores — that is, that marginal mines with, say, lower grades and deep ore bodies, should pay little or no tax as their locations yield minimal benefit.

All of this has long been accomplished in the South African gold-mining industry by way of the formula tax, which incidentally, the Sims document proposed casually and in passing, be abolished.

In simple terms, the 2010 formula (it has been altered recently), has generally provided that mines with a mining profit of less than, say, 5%, pay no company tax, whereas mines with margins of more than 50% are taxed at more than 40%.

The current one-size-fits-all company tax rate applicable to the rest of the mining industry under collects from the richer mines and over collects from the less well endowed, thus hastening their demise.   The current mining royalty, despite entailing partial recognition of this principle, would become superfluous once the formula tax is recognised for what it is, namely an eminently practical proxy for the collection of natural resource rentals.

The by-now famous 6,000 payments of about R500,000 to Kumba employees last December were obviously made with the best intentions by management and a desire to be fair in the circumstances.

The reality, however, is that this generosity was made possible only by uncollected rent.

This is the “delicious fruit cake” that former ANC Youth League leader Julius Malema erroneously said would be obtained for the people through nationalisation.   It is that part of the return that was obtained over and above the inputs of capital and clearly efficient management, and which was due entirely to locational benefit.   Had the gold-mining formula tax been rolled out to the rest of the mining industry, these bonuses would not have been so generous as to create unrealistic expectations in the minds of miners elsewhere.

With regard to the ANC’s elective conference in Mangaung, we all need to focus on the best way to collect natural resource rentals in order to put our mining jurisdiction on a sound footing and one that is acceptable to investors and labour.

The mining industry must acknowledge that higher tax rates in boom times and on richer mines are just as well balanced by negligible tax rates on marginal mines and lower tax rates in recessions.   The ANC must relinquish its tendency to throw the baby out with the bath water and to try to fix what isn’t broken.   (One recent, and not entirely unrelated, example was its abolition of the highly successful site value rating system in many large South African cities.)    It should therefore relinquish the complex and flawed Australian-inspired Sims tax proposals and instead advocate the rolling out of an appropriate version of the gold-mining tax formula to the rest of the mining industry.

Labour, for its part, needs to weigh up the disastrous consequences of the nationalisation campaign and unrealistic wage demands against the many more mining jobs that will become available if Malema’s “delicious fruit cake” is collected for the people via these proposals.

This is not rocket science and does not require a lengthy commission of inquiry: it can be addressed in next year’s national budget.   Once resource rentals are seen to be collected for the benefit of all, the root cause of today’s discontent will have been addressed, thus providing a much more positive backdrop to wage negotiations.

Investor confidence will be restored and the South African mining industry will be enabled to regain its rightful stature in the global industry.