Spotlight on the South African Market

Chapter 2 - Social, Political and Regulatory Landscape

Gold exports are the third largest contributor to South African exports.
Stage 6 load shedding imposes up to 20% curtailment of energy use for energy intensive industrial users in South Africa.
Domestic precious metals mining, refining and fabrication is governed by legislation, which is updated from time to time to assist and enable transformation and inclusion, and to promote downstream beneficiation.

Resource Economy

The ability of South Africa to extract, sell and export raw materials is a long-standing and key benefit towards the country’s economic prosperity. In 2022, South Africa’s non-energy mineral reserves were estimated at around $3 trillion, making it one of the wealthiest non-oil-producing countries in the world. By way of illustration, South Africa holds an estimated 49% of platinum and palladium, 43% of manganese, 35% of chromium and 5% of gold reserves. South Africa dominated global gold production in the 20th century, with over 75% of the world’s gold reserves in 1970. However, due to resource depletion and high operating costs, the country’s dominance in the global gold sector has declined, from first place in the 1970s to 13th in 2022. That said, the South African gold mining industry is the second biggest employer in the sector. According to the Minerals Council of South Africa, the gold industry accounted for 93,000 direct jobs in 2022 and enabled ten additional indirect jobs for every direct role. In addition, with 91% of gold exported in 2021 with a value of $7.4bn, it is the third largest contributor to South Africa’s export earnings after platinum group metals and iron ore.

While the gold industry is vital to the country’s wealth, it is vulnerable to two key deteriorating factors in South Africa today. Given its characteristically deep-level underground mining, electricity and water supply disruption can be costly. Not only does this come at the expense of production, but it also increases health and safety risks. The current energy crisis in the country is most visible through load shedding, a series of rolling blackouts imposed on Eskom’s residential customers to prevent a total collapse of the grid.

Load-shedding Stages

Source: EskomSePush, Eskom, Metals Focus

Gold mining producers are not subject to load-shedding as intensive energy users. However, a load curtailment regime is applied, requiring producers to reduce their energy demand. As a rough guide, stage 1 and 2 load-shedding at the residential level will not impact operations, while stages 3 and 4 would involve a 10% load curtailment, stage 5 a 15% lowering, and stage 6 a 20% drop in energy demand. However, as the situation has deteriorated, the ability to manage curtailment has also become more challenging to manage.

While highly problematic in the near-term, there is a silver lining in the form of renewables. In response to the challenges the industry is facing to secure reliable grid power, several gold mining and refining companies have accelerated their decarbonisation plans, opting for renewable solutions aided by the South African government’s landmark decision in 2021 to increase the licensing threshold for embedded generation projects from 1MW to 100MW. For example, Sibanye- Stillwater is developing a 50MW solar PV project to provide electricity for its Kloof ultra-deep level gold mine and Goldfields 40MW solar plant project at South Deep. Meanwhile, the Rand Refinery has invested in the installation of a 2.5 to 3.0MW solar farm and fuel cell to manage potential grid failures and also reduce carbon emissions. In addition, Metal Concentrators’ new refining facility in the Special Economic Zone at Johannesburg International Airport (Oliver Tambo) can sometimes run entirely independently from the utility provider following their 290kW solar installation.

A second factor which weighs heavily on the ability of the gold sector to contribute positively to the economy is the increase in crime and the deterioration in security. While Minerals Council South Africa has highlighted the disruption, loss and cost to the mining industry, the pervasiveness of crime and the growing lawlessness in South Africa can impact the entire value chain. The extent and level of crime are widespread – from gangs attacking mining shafts to community unrest in an effort to gain employment. Meanwhile, the exploitation of gold’s zero-rated export status precipitated various measures by the authorities, which, while curbing illegal activity, created challenging operating conditions for legitimate operators across the entire value chain. On a separate note, both companies and the public are engaging private security companies to protect people and assets, performing functions that used to be the preserve of the police. It is estimated that the private security sector employs around 500,000 people, surpassing the employment rate of the mining industry as a whole.

Protests recorded in South Africa (SA)

Source: Econometrix, ISSafrica

Importance of Policy Stability

South Africa is approaching its thirtieth year of democracy, which will be celebrated in 2024. This also coincides with the next national election. Since the birth of democracy in 1994, it has had four presidents, two of whom did not serve their full term. While this may be perceived as disruptive and speaks to political infighting, it is also testimony to a robust constitution. The African National Congress has been the ruling party since 1994. While the country faces several developmental and economic challenges, it has benefited from largely stable policies.

Within the mining sector, the government aims to transform the mining industry by implementing the Mineral and Petroleum Resources Development Act (MPRDA). While the process of developing this Act has not been without its challenges, the constitution and legal systems are robust. Companies can, whether it be through bilateral engagement, industry lobbying or the judicial system, challenge the institutions responsible for the policy and legal framework. In such a manner, businesses are able to help shape the outcome for their sector.

However, the widely reported corruption and the extreme inequality that persist in the country are leading to increased protests and civil unrest, destabilising the operating environment and impacting the appetite for foreign investment. While demonstrations are not necessarily linked entirely to Eskom, the deterioration of services in the country due to misappropriation and organised crime (as alluded to earlier) is further challenging the operational environment in South Africa. Notwithstanding this, business within the gold sector continues to navigate these challenges and engage actively with the government in trying to curb activities, such as money laundering and other related activities.

Regulation of Precious Metals

As in most countries, in South Africa the state can be regarded as the main custodian of unmined mineral and metals on behalf of its people. The South African government can confer custodianship onto a company following an application process. The Minister of Mineral Resources and Energy issues different types of licences and rights to applicants on a ‘first come, first served’ basis and upon satisfactory demonstration of the applicant’s ability to comply with the financial, technical, environmental, safety, health and socio-economic development requirements set out in the legislation.

One of the most important pieces of legislation in the context of this Spotlight report is the Mineral and Petroleum Resources Development Act 2002 (MPRDA), which came into force on 1st May 2004. Other important legislation includes the Mine Health and Safety Act 1996, the Mining Titles Registration Act 1967, the Mineral and Petroleum Resources Royalty Act 2008, the Precious Metals Act of 2005, the National Environmental Management Act 1998 and the National Water Act 1998. While the Acts referred to are concerned predominantly with the mining of all metals, the Precious Metals Act of 2005 provides a framework for all players across the precious metals value chain involved in the extraction, processing, beneficiation and sale (local and export) of all precious metals.

The South African Diamond and Precious Metals Regulator (SADPMR) was established as part of the Diamonds Act. The SADPMR overseas the movement and processing of diamonds, gold and platinum group metals in South Africa. The entity is classified as a schedule 3A public entity and is funded through state grants via the Department of Mineral Resources and Energy. The Precious Metals Act of 2005 repealed the Mining Rights Act of 1967 and is now the principal Act governing the precious metals industry in South Africa. The ambit of the Act and definition of precious metals according to the Act includes gold and the platinum group metals.

The objectives of the SADPMR are predominantly to ensure that South Africa’s precious metal resources are exploited and developed in the best interests of the people of South Africa, and to promote equitable access to, and local beneficiation of, South Africa’s precious metals.

The Precious Metals Act prohibits the possession, acquisition, use, and disposal of precious metals in unwrought and semi-fabricated forms as defined. It then proceeds to provide for licenses and permits relating to the possession, acquisition, use, and disposal of precious metals in unwrought and semi-fabricated forms as defined, and their administration in terms of application, issuance, renewal, endorsements and cancellation.

Potential Revisions to the Act

The SADPMR via its parent department, the Department of Mineral Resources and Energy (DMRE) has recently embarked on some revisions to the Act, which will be subject to a full consultation process. The key focus areas will be to bolster the transformation and beneficiation aspects of the Act. The Regulator plans to publish revisions for consultation this year, before having revisions enacted in 2024, depending on the extent of the feedback from relevant stakeholders.

According to the SADPMR, beneficiation promotion will be enhanced under section 12 of the Act, which deals with the commitment to satisfying local demand for domestic beneficiation before qualifying for export. This provision will be extended to gold in unwrought and semi-fabricated forms, from just PGMs at present. There are proposals to ensure that unbeneficiated materials that can be beneficiated in the country only leave South Africa after first being offered for sale in South Africa.

There are also plans to extend the validity of the Jeweller’s Permit from 5 to 10 years. There is also a proposal to provide for a New Entrant / Student permit with minimal application and compliance requirements to promote new entrants into jewellery manufacture and fabrication of precious metals in general. The BEE provisions are the area of the MPRDA which will have an impact on precious metals legislation if and when attended to by the DMRE.

Domestic Reverse Charge Regulations for VAT

In 2021, the South African Revenue Service (SARS) suspected VAT refund
fraud was being perpetrated involving illicit gold trading. The illicit gold was believed to have been brought into the supply chain with VAT then unlawfully being claimed using falsified documents.

In the normal order of business a VAT registered supplier will charge VAT to a buyer. The buyer will pay VAT and the seller will declare and pay the VAT to SARS. The buyer can then claim the VAT as an input tax deduction. However, if the gold was acquired and no VAT paid, then SARS would be out of pocket. The new regulation aims to leave SARS in a neutral cash flow position.

The VAT domestic reverse charge (DRC) on valuable metal was introduced in the Regulation published in Government Gazette 46512 on 8th June 2022 and became effective from 1st August 2022. The DRC places the accounting liability on the recipient. The buyer is required to self-account (reverse charge) the VAT on the procurement of gold before it is entitled to claim the corresponding input tax deduction. While the change has been welcomed by most participants in the gold value chain, concerns have been raised that the regulations allows for players with a far smaller balance sheet to enter the market.

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Chapter 2 - Social, Political and Regulatory Landscape

Resource Economy

Load-shedding Stages

Protests recorded in South Africa (SA)

Importance of Policy Stability

Regulation of Precious Metals

SA Gold Majors’ Contribution to Government

Potential Revisions to the Act

Export versus Local Gold Sales

Domestic Reverse Charge Regulations for VAT

Chapter 1 - Introduction

Chapter 3 - Mining