Finance and legal

There are various options open to mining companies seeking protection against nonperformance by a contractor, and contractors seeking protection against nonpayment by a client.

In the mining and construction industries, the non-performance of a contractor or non-payment by a client to a contractor are potential risks that both parties need to consider in the early stages of their relationship, using performance bonds, insurance and various forms of payment security.

Performance bonds, which are issued by a contractor to its contracting client, are commonly used in capital projects. However, they can place a significant financial burden on the contractor, especially smaller emerging construction firms, and their call-up by the client can lead to costly and lengthy legal disputes.

This can be especially problematic for smaller businesses, without access to substantial litigation budgets, and it is impossible to know how many smaller operations have quietly collapsed as a result of frequently overly conservative drawdowns on performance bonds.

It is questionable whether performance bonds, which add to the costs of projects for the client (because the contractor will factor the costs into the tender), are the best way for clients to secure performance. The mining industry, which is required to assist emerging black entrepreneurs, may find that the costs of a performance bond render new entrants less competitive in tendering.

A performance bond or guarantee may require the contractor to set aside cash equivalent to 10% to 20% of the value of the contract, pay high premiums – in instances where cash security is not available – and expose their assets as further security.

As an aside, where the mine has secured traditional bank funding, the rights of the contractor are secured by way of a bank guarantee, as part of the funding package made available to the mine. In return for this “bank guarantee”, all rights to security would be ceded in favour of the bank.

One possible solution is contractor default insurance, which is relatively common in the United Kingdom, Europe and other mature markets – but not yet in South Africa.

Contractor default insurance covers the contracting company in the event that the contractor defaults, for any reason. It is a threeway contract between the insurance company, the client and the contractor. The cost is borne by the contracting party, rather than the contractor, but the advantage of this is that the cost of the protection is not a hidden cost in the project and becomes one that the client has more control over.

An alternative approach, which may be more appropriate for large mining companies with strong balance sheets, could be a form

of self-insurance. They could set aside a separate fund in the event of default, which could be called on in the worst-case scenario, but if not called upon could be rolled over and used for other projects.

Payment security is o en a risk for contract miners engaged by junior miners that do not have access to capital or a large balance sheet, particularly when they are in startup phase and before they have By Tyron Theessen and Megan Jarvis achieved steady state mining and Partners at Webber Wentzel payment via o take agreements. O en the contract miner will seek security for payments to be made to it by the client. Performance security in the way of a bond is o en not feasible as the required capital is simply not available. Various forms of security are available to a contractor wishing to minimise its exposure. A combination of various forms of security is o en necessary. Contractually, the contractor ought to include a right of suspension where payment is not made timeously. Although this is a good stick to have, a contractor is o en reluctant to suspend the contract as this may harm the relationship and put the project at risk. Also, the contractor must be mindful of the fact that its exposure can be for a three-month period (or longer, depending on the contractual payment terms) if it begins work in month one, then renders an invoice at the end of month one which is payable at the end of month two. If payment is not made, the contractor may need to give 30 days to remedy the breach. Usually, it is only then that the contractor would be able to suspend performance. The contractor should also include as security for the client’s performance the right to a lien over the site where it conducts operations. A right to use the client’s property onsite in the event of an exercise of the lien may be specified. This may allow the contractor to exercise its security and continue rendering its services, should it choose to do so. As lien holder, the contractor would need to remain in continuous possession of the site and exercise e ective control over it. The lien is a useful tool and, if it is exercised, has the e ect of making the contractor a secured creditor. Ultimately, if the client goes into business rescue or liquidation, being ranked as a secured creditor is preferable to being a contingent creditor. In South Africa, we have seen contractors taking out insurance to cover payment they are due by the client in terms of the contract. Care must be taken to ensure that the insurance is properly cra ed. O en this is cra ed as trade debt insurance, which is not the most appropriate instrument. Contractor default insurance is required. It is important to ensure that the insurers are wholly apprised of the nature of the contract and the risks associated with it. This is particularly relevant when this type of insurance is not commonplace in the market and the insurers may not be well-versed in the mining industry. In the end, a combination of one or more of these forms of security is suitable for helping to minimise the contractor’s exposure to nonpayment by the client. ■

MIN NG

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Long renowned for its strong focus on operations that genuinely upli and empower local communities, Menar expects a similar impact from its maiden manganese mine. The commissioning of the East

Manganese mine in Hotazel, Northern Cape, marks a new chapter for the Menar group and the country. East Manganese is expected to produce approximately 30 000 tonnes per month of run-of-mine manganese ore, once at peak production. Sitatunga Resources, whose major shareholder is investment company Menar, originally acquired East Manganese in 2018, from prospecting and mining company

Sehunelo Group’s subsidiary Southern

Ambition. “This is yet another indication that we strongly believe in South Africa as a conducive investment destination, where regulators are responsive and e icient. We are committed to developing assets and creating jobs. As a matter of principle, we don’t sit on our assets, we develop them,” says Menar managing director Vuslat

Bayoglu. “We are also committed to making an impactful contribution to host mining communities, by investing in projects and initiatives that genuinely upli and empower local communities. We give priority to employing local people and purchasing local goods and services by integrating them into our supply chains, wherever possible.” As part of this skills development approach,

East Manganese also has a training centre that teaches workers skills, for example how to operate the various mining machines – from articulated dump trucks and excavators to dozers and the like. Other training includes blasting assistant training and training for health and safety representatives.

“This training is provided to new employees with the necessary certifications and as part of refresher courses for employees. It is critical that all employees are certified to carry out the tasks assigned to them and that they are correctly trained to do so, while upskill of local workers is also important to ensure that we improve their long-term employability prospects,” he says. of the decarbonisation of economies. From policymakers worried about economic slowdown, you will hear of the need for economic recovery,” he says.

“In its maiden manganese operation, Menar and its partner, Sehunelo Group, have combined all these concerns. On business licence approvals, East Manganese showcased what government could do to speed up investments. We invested in the project in 2018 and in September 2020, in the middle of the COVID-19 pandemic that wreaked havoc across all economies, we started mining the box cut.

“East Manganese could serve as a model of speedy regulatory approval by all the relevant licensing authorities, including the Department of Mineral Resources and Energy.”

Regarding environmental consciousness, notes Mkhabela, Menar is excited to be involved in the extraction of a mineral used in the manufacturing of steel, which is then used in renewable energy equipment such as solar panels and wind turbines. Manganese is also an input in batteries for electric vehicles.

“Finally, on the economic recovery front, there is no doubt that steel will be crucial to massive expenditure by governments as they try to revive their economies through infrastructure projects.

“This investment demonstrates that Menar remains committed to South Africa, and to its focus on ensuring that the country’s economy, the mining industry, local residents, and especially the unemployed youth in the Northern Cape, benefit from East Manganese and other mining projects in the province that are currently being evaluated,” he says. ■

Menar chairman Mpumelelo Mkhabela says anyone following business news headlines regularly will find some consistent and interrelated messages.

“From investors, you will hear of the need for speedy regulatory approvals for business licences. From the environmentally conscious, you will hear

BAKWENA PLATINUM CORRIDOR CONCESSIONAIRE CREATING WIN/WIN SOLUTIONS THROUGH PPPS

It is more vital than ever that heavily used road networks are maintained according to the highest standards. This can only be achieved today through public-private partnerships.

It is o en said that roads are arteries through which the economy pulses. They are part of the pivotal infrastructure that will determine the pace and direction of South Africa’s economic recovery and reconstruction. It is therefore of primary importance that an informed debate about the future funding model of road construction take place, especially on the contribution of public-private partnerships (PPPs) to the expansion and maintenance of the primary road network. Across the world there is broad recognition that road funding models are moving beyond the traditional solutions of direct budget allocations, fuel levies that will be impacted by green energy, and one-size-fitsall toll networks. Private sector companies such as the Bakwena

Platinum Corridor Concessionaire (Pty) Ltd with a strong track record in road expansion and management are able and available to contribute to the discourse on other models and to promote the value of partnership between the private and public sectors. We should, however, recognise that whatever funding model is decided on, the citizens will continue to pay, whether through taxes, or tolling, or rising prices for goods and services resulting from higher fuel levies, or additional transport costs associated with a poorly maintained road network. It’s therefore vital that existing road networks – especially primary roads such as the Bakwena Platinum N1N4 highway – be maintained according to the highest standards. Well-planned and well-maintained roads are catalysts for balanced and accelerated growth, and this contributes to the fundamental transformation of society. More than 85% of the national road network is funded directly from the national fiscus. A further 7% is managed by SANRAL as toll roads through toll levies and the borrowing of funds for construction on commercial markets. The remaining 6% is run as PPPs with concessionaires.

Government has to make hard choices on its spending priorities.

Immediate socio-economic needs in the fields of education, healthcare, social welfare and security make legitimate demands on annual budgets. Road projects must compete with other strategic infrastructure projects such as water, power and sanitation. However, a sustained lack of investment in roads has clear negative impacts on long-term development and sustainability. Public infrastructure spending has been on a steady decline in recent years, and it currently amounts to only 13% of total expenditure.

It will have to accelerate rapidly in the remainder of the decade if it wants to achieve the 30% by 2030 envisaged in the National

Development Plan. PPPs present a proven model that has been implemented with great success across the world – and in South Africa. A concession contract to finance, construct, manage, upgrade and maintain a reliable road infrastructure along the N1 and N4 arteries was signed between SANRAL and Bakwena in 2000. For more than two decades Bakwena has managed a world-class road network on the N1 between Pretoria and Bela-Bela (95km) and 290km of the N4 connecting Gauteng through Rustenburg and Zeerust to the Botswana border – 385km in total. In addition to the obvious benefits the road brings to communities

in Limpopo, Gauteng and the North West provinces, it is also a primary link for the transportation of goods, services and people into the Southern African Development Community. The tra ic growth on this network and the rising value of goods transported underscores the importance of this road for the regional economy. The country is faced with the vexed question of how this vital infrastructure, which sustains economic growth and greatly benefits communities, should be funded.

By Solomon Kganyago The Infrastructure Investment Plan released by government was seen as a major step in the COO of the Bakwena Platinum right direction. It o ers a framework for future

Corridor Concessionaire investments and provides details of credible and bankable projects that are in the pipeline. Importantly, it recognises the central role played by PPPs – especially in the transport and construction sectors – and commits government “to remove policy bottlenecks in engaging with the private sector”. Investment in road infrastructure has to be at the core of the economic transformation strategy. On the list of infrastructure projects announced by government are several shovel-ready construction and maintenance projects, which will be implemented in all nine provinces and improve the quality of life of all citizens. We welcome President Cyril Ramaphosa’s commitment to a more coordinated engagement among government, the private sector and other players in the infrastructure financing space. This will no doubt lead to greater private sector participation in both the planning and implementation of critical road projects. Moreover, the National Treasury is preparing legislative changes to enable retirement funds to invest more readily in infrastructure projects – a move that will further release critical funding. The use of tolling to fund road projects is a workable and coste ective approach. It ensures that the money received from toll fees is ploughed back into road assets for construction and maintenance purposes. Compared to traditional tax-based funding, PPPs also accelerate the availability of initial resources for delivering road infrastructure earlier while providing opportunities for the private sector to invest in a new class of assets. In its most recent report, the National Planning Commission notes the concern that the state does not have the institutional or financial capability to finance infrastructure to the required scale. It concludes: “Given the government’s limited finances, private sector funding will need to be sourced for some of these investments.” Legislative amendments mooted by National Treasury that will enable pension funds to invest easily in infrastructure are a timeous and welcome move. PPPs such as Bakwena transfer the risk from the public sector to the private sector. The concessionaire assumes full responsibilities and risks for the condition of the road pavement, the management of tra ic volumes, the collection of toll revenue and the costs associated with maintenance, rehabilitation and expansions for the duration of the concession. The toll revenues collected are used to recover costs for debt servicing, capital expenditure, maintenance, and a return on equity to the investors with a defined cap. This o ers a win-win option for the companies, the government and citizens and ensures that vital infrastructure, managed in such a manner, continues to flourish. ■