20120209
Reuters
JOHANNESBURG/CAPE TOWN (Reuters) - A study submitted to South Africa's ruling ANC to reform its vital mining sector proposes a 50 percent tax on profits and rejects nationalisation as an "unmitigated disaster" for Africa's largest economy.

Although it delivers a hammer blow to calls for nationalisation by radical elements in the African National Congress (ANC), mining houses will be wary of the tax proposals as they grapple with steeply rising labour, power and safety costs in the world's largest platinum producer.

Since the end of white-minority rule in 1994, South Africa has struggled to ensure its vast mineral wealth benefits all of its 50 million people, and lavish spending on government job creation schemes has alarmed investors.

The mining sector - the fifth-biggest in the world by value - has long been in the government's sights.

"Under the current fiscal regime our nation is clearly not getting a fair share of the resource rents generated from its mineral assets," an official summary of the 600-page study obtained by Reuters said.

Key among its proposals is a "resource rent tax" - effectively a windfall levy - of 50 percent that will kick in after investors have made a "reasonable return". As such, it is meant to leave marginal or junior operations unaffected.

Industry leaders stressed mining companies must not be used as a cash cow to fund the government's economic agenda.

"I'm all for the industry playing a greater role in a developmental state but people forget the massive capital required by the industry," said David Brown, chief executive of Impala Platinum, the world's second-biggest producer.

NATIONALISATION OUT

As expected, the study, compiled after research trips to 13 countries ranging from Chile to Australia to Venezuela, flatly rejects nationalisation, mainly on cost grounds.

It put a 1 trillion rand price tag - almost as much as South Africa's annual budget - on acquiring all listed and non-listed mining companies in the country.

An asset grab without compensation would be even worse, the report concludes.

"Nationalisation without compensation ... would result in a near collapse of foreign investment and access to finance. This route would clearly be an unmitigated economic disaster for our country and our people," it says.

A two-year push for mine nationalisation by ANC radicals lost momentum last year when Youth League leader Julius Malema, the main champion of the cause, was suspended from the party for disciplinary reasons.

The document says new tax revenues raised, which it estimated at 40 billion rand at current prices, should be ploughed into a sovereign wealth fund that could be used to temper appreciation of the rand during commodity booms.

Once the resource rent tax is imposed, mineral royalty rates should be cut to one percent from the current sliding scale system, which caps royalties at 7 percent.

Lawyers said the proposals were too complicated and could create more uncertainty around minerals policy after a string of

administrative problems and scandals at the mining ministry.

"It's going to create another level of confusion, more lobbying, more delays in the awarding of rights," said Andrew Michell of commercial law firm Bell Dewar.

The study also proposes a clampdown on the use of tax havens by foreign mining investors - a practice that activists say bleeds capital from poor countries, especially those that rely heavily on mining.