News24.com | 'Mafia' hit South Africa's R952 billion mining sector

BUSINESS

A threatening letter, a derailed train, blocked roads, burnt vehicles, workers locked up ... these are what some of the world’s biggest mining companies say they are battling in one of South Africa’s worst scourges: extortion.

Covid-19 plunged Africa’s most industrialised country – home to the biggest deposits of metals ranging from platinum and chrome to manganese – into the deepest economic contraction in more than a quarter of a century, and its aftermath has left it with soaring inflation, one of the world’s highest unemployment rates and a collapse of local government services.

READ: SA mining under siege from 'Range Rover brigade from Bryanston', warns head of Minerals Council

Mining firms, riding a boom in the global commodities market, have been a rare bright spot, making companies such as Anglo American, Glencore and Sibanye Stillwater targets for groups they say are demanding as much as 30% of their lucrative procurement contracts, often with little to offer by way of skills and services.

Noncompliance results in threats to executives and disruptions in operations.

“The procurement mafia mobilises the community for its own devices, which is really straightforward extortion,” says Paul Dunne, CEO of Northam Platinum Holdings, the operator of the world’s deepest mine for the metal.

OUT TO MAKE A QUICK BUCK

While some groups say they are fighting for social justice or BEE and demanding a bigger piece of the pie from the predominantly white-run mining companies, even government concedes that much of the relatively new, violent extortionist phenomenon is being driven by gangs out to make a quick buck.

Mining companies and even black-owned contractors say they are increasingly confronting syndicates that incite local communities to disrupt operations.

Bloomberg interviewed more than a dozen mining executives, contractors, government officials, politicians and protesting groups, and reviewed threats received by firms to show why extortion – coming on top of onerous local ownership rules, fractious labour unions and erratic power supplies – is turning South Africa into a less attractive destination for investment.

The country’s department of mineral resources and energy, which this year began efforts to revitalise the sector, listed “community unrest” as a reason for “decreased appetite by private investors”.

Already last year, Canada’s Fraser Institute’s Annual Survey of Mining Companies, a global industry benchmark, ranked South Africa 75th out of 84 jurisdictions, compared with 60th in 2020 and 40th in 2019.

READ: SA is a hotbed of organised crime

Few new mines are being dug and little exploration is taking place, hitting the sector on which the country’s economy was built – its R952 billion mining industry accounts for 8% of GDP, about half of exports and employs almost 500 000 people.

“The industry’s under attack,” says Hennie Flynn, head of the North West wing of the Hawks, the police services’ directorate that targets organised crime, economic misconduct, corruption and other serious illegal activities. The syndicates “are creating their own mafia-type groupings that exert pressure”, he adds.

Last month, a train derailed on the main export route for coal miners, with the state-owned logistics firm Transnet saying the incident had occurred “against a backdrop of threats and disruptions to the company’s operations by disgruntled groupings seeking business opportunities”.

Efforts to restore normal services were blocked by the Ulundi Business Forum, which demanded contracts from the company, said Transnet, adding that the group had resorted to “violent extortion efforts”.

Musa Ngqulunga, chairperson of the forum, denied that the incident had anything to do with the derailment. He said the group had been angered by contracts awarded to a business from outside the region, stating: “We can’t be spectators in our area. We told Transnet that if [it didn’t] give us a chance to work, we were going to close the site.

At Sibanye’s K3 platinum shaft, about 15 workers with a mining contractor were locked up for 12 hours in May by a local politician who gathered about 100 young people to demand jobs at the mine, said a spokesperson for the company.

A radial road network in and out of a web of mines in the metal-rich Bushveld Igneous Complex in northern South Africa, used by producers including Northam Platinum Holdings, Anglo American Platinum, Glencore and Samancor Chrome has been blocked more than 140 times this year by groups wanting everything from contracts to jobs, says Dunne.

Neal Froneman, CEO of platinum, palladium and gold producer Sibanye, adds: “What they’re demanding is to be awarded contracts from the mines at any price, irrespective of their effectiveness or ability.

“In the worst case, they demand part payment from people who have honest contracts, otherwise they disrupt their ability to deliver goods and services. Anyone who steps up to intervene is intimidated.”

ATTACKS BY GANGS

The mounting attacks by gangs, which have also afflicted the construction industry, are quickly becoming an indictment of the ability of President Cyril Ramaphosa’s government to enforce the rule of law in the conduct of business.

“This is definitely the final nail in the coffin of investment,” says James Lorimer, the DA’s shadow minister for mineral resources.

“I have no faith that government’s going to act coherently over time to bring down these problems. There’s no political will – that’s quite obvious.”

READ: Transnet decline cost SA miners R50bn in potential income this year, says Minerals Council

Ramaphosa is fighting for his own political survival after an independent panel’s report stated that he may be guilty of violating the Constitution and questioned his handling of the theft of at least $580 000 (R10 million) from his game farm in 2020, disputing his assertions that he had done nothing wrong. The scandal may further weaken his hand in tackling the country’s law and order problems.

Groups such as the Ulundi Business Forum and the Bafokeng North-A Economic Forum (Banaef), an organisation that represents 72 black-owned companies, say they are legitimately seeking a fairer distribution of contracts. Companies at the receiving end of their demands do not see it that way.

Consider a letter Impala Platinum received late last year from a firm representing Banaef.

Executive Outcomes, headed by an apartheid-era defence force officer, said it had been hired by Banaef to conduct an audit of Impala’s procurement processes because the world’s third-biggest producer of platinum was “suffocating some black-owned companies”.

The letter was sent “to put pressure on them so that “they know that we can’t just be the affected host community and, 50 years down the line, [have] nothing we can show for it”, said Letlhogonolo Mogopodi, who was Banaef’s secretary-general until last month.

To top managers at Impala, the letter – a copy of which was obtained by Bloomberg – was an effort to make it redirect some contracts to Banaef members via a veiled threat from Executive Outcomes, which in the 1990s helped governments in Sierra Leone and Angola fight armed rebels.

“There’s definitely a tactic of syndicates organising communities to act on their behalf, always creating an impression that they’re disenfranchised,” says Nico Muller, CEO of Impala.

“We’ve had some of the communities appointing independent auditors who wanted to audit us. Then, when [we looked] into the audit firms, [we found that they weren’t] accredited.”

Mogopodi said Banaef had hired Executive Outcomes because it wanted to see “if management at Impala benefits from the contracts meant for locals. Impala claims it’s spending money on local businesses. We have no mechanism to test that.”

Executive Outcomes’ website carries an image of a man wearing combat gear in a tank and makes no mention of audit services. Its CEO, Eeben Barlow, declined to comment. Banaef officials said they were unaware of Executive Outcomes’ militia background.

“Are we using cartel-like behaviour in enlisting the services of mercenaries to get companies to implement transformative policies? I can equivocally say ‘no’,” says Ditebogo Diale, the group’s deputy secretary, adding that Banaef had also taken its case to a major Impala shareholder.

Did all the pressure work?

“Yes, you could say there’s been progress, but whether that progress is worth the paper it was written on can only be seen by the numbers Impala puts out,” she says.

Impala declined to comment on the Executive Outcomes letter. An Impala spokesperson, Johan Theron, says groups demanding business often want to provide products like diesel, explosives or uniforms, which the mining companies can get directly from the manufacturers at a much lower cost.

“Most of the business practices are fronting,” he says: 

The activity characterised as extortion by its targets often draws on the hopelessness of desperately poor people struggling to get by in circumstances exacerbated by the pandemic.

TAPPING INTO RESENTMENT

Many mines are located in some of the poorest parts of the country and the syndicates are tapping into the resentment of impoverished communities plagued by collapsed services and joblessness.

There is little economic activity other than mining in North West, where much of the country’s platinum and chrome lies. Roads are dusty and potholed and settlements are ramshackle, often boasting little more than a church, a liquor store and a pawn shop. Government – which faces a party election this month and a general election in 2024 – is pushing mining companies to buy more goods and services from firms owned by black South Africans.

Mining companies have profited for decades from exploiting rich veins of metals such as gold, platinum and manganese. Some have included community trusts in BEE deals whereby a stake in assets is sold to members of South African ethnicities disadvantaged during apartheid.

The biggest beneficiaries of that effort have been a small group of black businesspeople, some of whom are politically connected. They include Ramaphosa, who took stakes in assets owned by Glencore and Lonmin during a stint outside government, and his brother-in-law Patrice Motsepe, South Africa’s only black dollar billionaire.

However, little progress has been made in promoting black South Africans to the upper echelons of management. Of the eight South Africa-based mining companies included in an index of the top 40 stocks traded in Johannesburg, only one – Exxaro Resources – has a black CEO.

While black-owned companies’ participation in the sector has increased, many smaller firms are still excluded because they simply cannot afford the machinery and equipment required, says Jonathan Leso, executive director of African Sun Mining, a black-owned contractor. That said, black businesses are also often targets of the gangs, he adds.

“The environment’s a bit levelled-up, the reason being that people are no longer looking at who you are – they just want to know whether you have the machines,” he says.

READ: Transnet decline cost SA miners R50bn in potential income this year, says Minerals Council

“The biggest thing now is that if you’re not from that local area, it’s difficult to get any type of job because the local communities are fighting that. If you’re not from the community, they block the roads and burn tyres because they’re forcing you to go into a joint venture with them.”

About 90% of people or entities demanding business from mining companies are not registered, says Tseliso Maqubela, a deputy director-general at the department of mineral resources and energy, acknowledging that the increase in such activities is a problem.

“Some of them think they can just go to a mining house and demand to be given a contract,” he says.

Communities with high levels of unemployment and lacking basic services such as clean water now look for solutions from mining companies, says Natascha Viljoen, CEO of Anglo American Platinum, the world’s biggest platinum producer by market value.

“We’re picking up additional costs to do business,” she says. “These are needed to ensure stable operations and to run our businesses uninterrupted.”

SECURITY COSTS SKYROCKET

Security costs have surged. Impala alone has about seven ban orders against various groups interfering with its business, and one group is currently threatening to burn buses used to ferry employees to the mine unless it is awarded contracts, says a source familiar with the situation.

Security guards have been hospitalised after being beaten up, vehicles and guard cabins have been set on fire, and procurement staff have resigned after being threatened, say mining companies.

“This is as bad as it’s ever been,” says Roger Baxter, outgoing CEO of the Minerals Council SA, which represents most mining companies operating in the country.

Gold Fields had to cordon off its assets after groups who had asked for 30% of the value of some projects were turned away, says Sven Lunsche, its spokesperson.

“We had to erect fencing around our tenement to keep people away. We provided security to our procurement teams. We had to make sure they had bodyguards when they went home. Some of our senior managers were also threatened. [Those included] personal threats and you don’t take those lightly.”

Rio Tinto found out just how real such threats can be when Nico Swart, general manager of operational services at its Richards Bay Minerals unit, was shot dead on the way to work last year.

The motive for the killing is not known and those responsible have not been found. The company says its mine is still subject to intermittent harassment, with sporadic shootings at buses carrying workers and the stoning of vehicles.

“All our leadership still have to travel and live under very heavy protection, including myself,” says Werner Duvenhage, managing director of the unit.

“You can’t really move around. Normal little things like going to shops or just going out for dinner [aren’t] normal things any more.”

For now, producers have higher metal prices to help them shoulder the additional costs, but that may not last, warns Sibanye’s Froneman.

“When the commodities cycle changes, it obviously affects our margins,” he says. “We put jobs at risk because we’ve now taken on burdens that we’ve already paid for in terms of taxes and royalties.” – Bloomberg