DIAMONDS — Revised law opens doors for South African miners — Marsfontein property dispute a catalyst for legal changes

A new mineral investment policy in South Africa is expected to open up exploration and mining in that country following decades of dominance by the large mining houses.

A new white paper, announced by South African government officials at a recent trade conference in Toronto, aims to encourage mineral development by making it easier to acquire mining rights. The policy was designed to lower barriers to both foreign companies and smaller South African enterprises.

Under the proposed system, the right to prospect and mine will be granted by the state, regardless of who owns the land. Formerly, mining rights on privately held land were granted by the landowner. Since two-thirds of the country’s land area is privately owned, new mining enterprises often had difficulty securing rights to prospective ground under the old system.

The urgency for reforms to the mining property laws was underscored by a dispute over mineral rights on the Marsfontein farm, near Potgietersrus in Northern Transvaal. That unedifying spectacle, which dragged on for half of 1998, pitted Toronto-based diamond prospector SouthernEra Resources (SUF-T) and South African joint-venture partner Randgold (RANGY-Q) against heirs to the original owners of the mineral rights, who sought to prevent the transfer of the mineral rights to Randgold.

The heirs, who had secured a court injunction to hold up the transfer, found an ally in De Beers Consolidated Mines (DBRS-Q) when the groups concluded a prospecting agreement. A subsequent court battle, in which the South African government had indicated it would appear in support of SouthernEra and Randgold, was averted when De Beers reached a deal with the joint venture to secure a 60% interest. Randgold bowed out of the project following a cash buyout from SouthernEra.

De Beers will now operate the new open pit at Marsfontein, while SouthernEra will process the ores at its Klipspringer plant and market the diamonds through De Beers’ Central Selling Organization.

“Part of the problem [at Marsfontein] was private ownership,” says J.H. Bredell of the Department of Minerals and Energy. “That was perhaps the final thing that convinced the government that we needed a new policy.”

The stumbling block that played a significant role in the Marsfontein case was the protection of land rights under the country’s new constitution. Legally, mineral rights cannot be expropriated without compensation.

“A mineral right is a real right in property,” says Bredell. “You can buy it, you can sell it, you can leave it to your children. We had to devise a plan to get around the negative side of private ownership.”

The policy shift will enable applicants to seek an exploration or development licence directly from the state, as is standard in most other common law countries. The law will protect rights-holders for the duration of the licence period, except in cases when the holder materially defaults on the terms of issue. Once the holder of a prospecting right has met the legal requirements, a mining right can be issued as an entitlement.

The holder of the mineral rights will be entitled to a royalty on any production, meaning that his rights have not been expropriated.

The holder cannot legally prevent exploration on his property, though the proposal stipulates that existing landowners can themselves seek prospecting and mining rights. The white paper provides for a transitional period — expected to be two years — during which landowners can pursue exploration or development rights on their own property. Once that period expires, new applicants can come in.

The new prospecting and mining rights will carry requirements for continued work on the property, which will be the essence of land tenure under the new system. “The key to that is the ‘use it and keep it’ principle,” says Bredell. “As long as you are utilizing your mineral right, nobody can take it away from you.”

The policy also offers the prospector a “retention licence,” which could be exercised at the end of a prospecting program. Under that program, a licence-holder with a mineral reserve seeks to defer development until market conditions improve. Applications for retention licences would be evaluated on a case-by-case basis.

While existing mining law permits mineral rights-holders confidentiality for the results of work on their properties, that will not be a feature of the new policy. Data that must be submitted to the government in order to prove that work requirements have been met will become public on the expiry of the licence.

Other provisions in the policy are meant to encourage small-scale mining, which the government sees as a way of providing jobs for miners that lose their jobs as the country’s large gold mining industry slims down.

The new prospecting and mining rights provisions are expected to open land for that sector as well, as is better access to information. Measures designed to ease project financing also are aimed at the small mining operator.

A sliding-scale royalty will reward operators that process metals and minerals downstream. At the same time, the South African Reserve Bank will abandon its role as central marketer for the country’s gold production.