Even if you're not invested in mining shares - you need to read this…
The mining sector is in talks with mining minister Mosebenzi Zwane on 25 and 26 April 2016.
This comes after the release of the new “Draft mining charter”.
In the draft mining charter the minister of mining set new requirements for mining companies in South Africa.
You might think this doesn't affect you as an investor. But it does.
Even if you're not invested in mining shares the effect of this new mining legislation could have a devastating effect on your portfolio - or it could make you a lot of money…
Whether it’s ‘economic suicide’ or not – you have to face it
The new mining charter has already been dubbed by the media as ‘economic suicide’.
In short this new piece of legislation stipulates that mining companies need to perpetually re-empower black economic partners even if the previous partners sold off their shares.
This makes it tough to do business in the mining sector.
Imagine a mine is put up by a black investor. After some years they want to sell out. A wealthy white investor wants to buy it from the previous owner.
They could, but they would have to get a black partner in on the deal to stay accredited.
Or an international company builds a new mine and takes on a black partner with 30% ownership in the project. After five or ten years the black partner wants to realise the growth they’ve made and they sell their investment. If it’s not to another black investor this mine would no longer have BEE accreditation and could risk losing its mining licence.
The problem here is many companies go to great lengths to get BEE investors on board. Set up vendor financed loans and help them with financing. But logically these BEE investors want to realise the growth in their investments as well – which means they will sell somewhere down the line.
So this will always leave mining companies with the issue of finding the next BEE investor.
What the industry is asking for is that once they have done an empowerment deal they remain empowered.
Government says now- you need black investors for as long as you want to remain empowered.
It’s unfair to all. You simply cannot propose to lock black investors in, unable to sell just so a company can remain empowered. But you also can’t expect a company to continually give away chunks of itself to black investors time and again – just to remain empowered.
These are the facts – I suggest you keep them in mind when investing in your next mining venture. Whether you are black or white you need to recognise that the mining company you are invested in could see huge financial losses if its black investors decide to sell their shares – a natural thing to do…
But the new charter has more far reaching consequences than this.
How the mining charter affects the industrial sector
Part of the new mining charter requirements is that 60% of all purchases by a mine need to be from black suppliers.
Again – this means companies with proper accreditation will receive preference. But what’s worse is – if an accredited company has black shareholders who sell their shares it could be in trouble. It could risk losing contracts with mines just because of this.
Think of a company like Bell Equipment. In March 2014 the company bought back 30% of its shares from Kagiso and its employees share trust as they decided to cash out their investment.
By December 2014 Bell still didn’t have a new BEE investor. Simply put no one was willing to invest in an equipment manufacturer that supplies to the struggling mining sector at the time.
In March 2016 the company said “A key strategic element in achieving compliance
will be the introduction of a BBBEE equity partner at Bell Equipment Sales South Africa Limited and the process to achieve this has commenced.”
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In short it’s still looking for a BEE partner.
Under this new mining charter a company like Bell will be in serious trouble. But even more importantly – it leaves mining companies exposed. They could be unable to buy unique products from suppliers because they’re at risk of breaking the charter’s rules.
Here’s how to protect yourself from economic suicide and profit
I’m no political commentator. I’m an investor. And while I need to know about these kinds of laws I don’t fight them.
I profit from them.
And right now there are a couple of companies positioned perfectly in light of this.
Merafe, Wescoal and Torre Industries are all companies with strong black shareholding.
Wescoal for instance is targeting a 51% black shareholding by end of 2016 – and it’ll help the company get the long awaited Eskom contracts it needs to continue making big bucks from its coal mines.
All three of these shares have the potential to double on their own accords – and they won’t be phased by the introduction of the new mining charter.
Here’s to unleashing real value
Editor, Red Hot Penny Shares
P.S. If you haven't read it yet, I've recently released an urgent report: If you invest in these three companies you are at risk of losing ALL your money…
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