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Re-arranging the deck chairs (SA mining industry)

December 2015

The devastating impact on the South African mining industry which has been hit by tumbling global commodity prices, shrinking demand, significant increases in production costs, work stoppages in various forms and labour unrest

This is reflected in aspects such as reliance on commercial force majeure clauses, material adverse governmental provision, clauses, cancellation of commercial contracts, the number of companies going into business rescue and the general downscaling or closure of operations, resulting in significant job losses.

In addition to the commercial disputes that naturally arise out of these processes, there has been a significant response from the Regulator, namely the Department of Mineral Resources (DMR), particularly in relation to downscaling and closure of operations.

The result has been urgent applications to the courts, internal appeals and administrative reviews in the courts, by the holders of the rights to prospect and mine that have been adversely affected by the actions of the DMR.

The current situation that the mining industry finds itself in has resulted in a substantial increase in both "commercial" and "regulatory" litigation. It has also resulted in more careful consideration of commercial agreements, particularly the force majeure, breach, termination and penalty provisions.

With the impact being so far-reaching, what could have been overlooked two to three years ago, or settled amicably at operational level, now often results in an immediate escalation, which includes dispute resolution, both through the courts and private arbitration.

Companies that are in financial distress as a result of, for example, cancellation of contracts, are being placed under pressure to be seen to be taking action to recover losses and other damages, with the dominant themes being early termination of contracts, penalties and standing time. Disputes involving communities and employees are, understandably, on the increase.

Where practically possible, these disputes should not be resolved through the courts or arbitration processes, as they are often long-term and emotions run deep.

They require an approach based on a proper understanding of the motivation behind the dispute, and an acknowledgement of diversity and divergent interests, particularly in the mining and resources sectors. Appropriate communication structures and relationships play a crucial role. Historically, there has been a strong focus on mediation and alternative dispute resolution methods as a primary means of resolving disputes. One of the key benefits of mediation was the preservation of the relationship between the parties. This may no longer be a primary consideration and the move, in commercial disputes, is to arbitration, while the clear emphasis in the regulatory disputes is on the courts because of the quicker turnaround times associated with urgent applications and interim relief. Where possible, parties are still resorting to arbitration with the primary advantages being a possible preservation of relationships (with the hope of medium to long-term recovery and resumption of services), agreement, in most cases, on the identity of the arbitrator and control over the processes. By their nature, arbitrations are private matters and the parties generally do not agree to disclosure.

Arbitrations generally also turn on their facts and each matter must be dealt with on its merits. Resolution of disputes, whether by way of arbitration or litigation, carry significant costs and it remains preferable for the mining industry to avoid resolving disputes in this manner.

Our experience is that the key to avoiding disputes arising, is multi-level communication among the parties. Good communication at operational level often results in a better understanding of the aspects that lead to disputes.

The reality is, unfortunately, that due to the current situation being faced by the mining industry, commercial and regulatory disputes will arise and, in our view, it is preferable for these disputes, where possible, to be resolved through processes such as mediation and, if this is unsuccessful, arbitration. It is also an unfortunate consequence of the current situation that parties do not have the resources (both financial and human resources) to see disputes through, and this may impact their outcome going forward. The primary basis of most of the commercial disputes is currently, and is likely to remain, cancellation of contracts, subsequent payments, penalties and damages.

As with most disputes, it is essential to engage competent advisors with an in-depth knowledge of the industry.

It is critical, in our view, for there to be a level of trust and honesty in the advice given, to ensure that disputes are not declared that are unsustainable, whether for economic or substantive reasons, and extremely careful consideration should be given to any apparent disputes before they are declared. The fact remains that what appears to be a principle position in the heat of the moment can turn out to be an extremely costly process.

The proposal by the Minister of Mineral Resources to buy "assets" discarded by mining companies and to have these assets run by woman, young South Africans and co-operatives, is aligned with the objects of the Mineral and Petroleum Resources Development Act, the Mining Charter and the ever-increasing demand by South Africans for greater participation in South Africa's mining industry. The proposal comes at a time when South Africa's mining industry is in a state of distress, with several mining operations being placed on care and maintenance or even abandoned, which creates opportunities to re-arrange ownership of the mining and processing operations.  However, it also presents the greatest challenge to successful acquisition and the sustainability of the operations, once acquired, namely poor commodity prices and a slow-down of demand.  Unless this reality is acknowledged, some of the acquisitions may be doomed to failure from the outset.  Perhaps, however, the intention is to implement the proposals at a time when commodity prices are expected to rise sustainably; when that would be is anybody's guess, at this stage. 

Critical to the successful implementation of the proposal are a number of challenges, which must be addressed holistically. 

These include:

  • an acknowledgement of the state of the mining industry, with the best examples of mining operations being preserved by companies with the "deepest pockets" 
  • the availability of government and, possibly, private funding, for the acquisition 
  • realistic expectations of government, the seller and the beneficiaries 
  • ensuring that the mining operation becomes attractive to investors who will be required to fund ongoing, sustainable operations and projects 
  • accessibility to competent technical, financial and operational advisers who are committed to supporting these "new" operations and ventures 
  • a stable work force, which will require a level of maturity and understanding of the importance of sustainable, continuous operations that are not disrupted by labour disputes, non-disruption of production through, for example, the "stop notices" issued by the Mine Health and Safety Inspectorate 
  • obtaining the so-called "social licence to mine" from the communities within which the mine is operating – community activism can stop an operation in its tracks. 

These "new" operations will also need to address the day-to-day challenges faced by mining operations, including the regulatory framework, compliance with stringent health, safety and environmental laws, access to power, water and infrastructure such as rails, road and ports, and co-operation from off-takers, such as Eskom.

The team

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