POSSIBLE STRATEGIC RESPONSES

TO THE THREAT OF NATIONALISATION OF ASSETS

IN THE SOUTH AFRICA MINING INDUSTRY

WITH SPECIFIC REFERENCE TO BHP BILLITON

by

Pieter Gerhardus Oberholzer (16357981)

Journal article presented in partial fulfilment of the

requirements for the degree of Master of Philosophy in Futures Studies

at the University of Stellenbosch

Lecturer: Professor TJ de Coning

Degree of Confidentiality: General

Date submitted: 29 September 2011

I, Pieter Oberholzer hereby declares that this is my own work and that all sources have been

acknowledged and clearly listed.

ii

Table of Contents

Table of Contents ....................................................................................................................... ii

1. ABSTRACT ...................................................................................................................... 1

1.1 Purpose ......................................................................................................................... 1

2. AN OVERVIEW OF BHP BILLITON, WITH SPECIFIC REFERENCE TO POLITICAL

RISK 2

3. AN OVERVIEW OF THE SOUTH AFRICAN NATIONALISATION DEBATE ..................... 4

3.1 The position of the ANCYL ............................................................................................ 4

3.2 The position of the ANC and other ANC leaders ............................................................ 4

3.3 The South African constitution ....................................................................................... 4

3.4 Conclusions regarding South African nationalisation debate .......................................... 5

4. A MODEL TO GAUGE THE LIKELIHOOD OF NATIONALISATION OF MINES IN SOUTH

AFRICA ...................................................................................................................................... 6

5. POSSIBLE STRATEGIC RESPONSES TO NATIONALISATION ..................................... 8

6. CONCLUSION ................................................................................................................ 11

7. BIBLIOGRAPHY ............................................................................................................. 12

1. ABSTRACT

1.1 Purpose

BHP Billiton (“BHP”) is the world’s largest diversified natural resources company, calculated by

market capitalisation (Financial Times 2011b). BHP’s global operations comprise over 100,000

employees and contractors located in over 25 countries, including South Africa. Its South African

operations include the development of aluminium, mineral sands, manganese and energy coal

resources.

The African National Congress Youth League (“ANCYL”) has in the recent past been an advocate

for the nationalisation of South African mining assets. The ANCYL is a member organisation of the

ruling party, adding weight to its calls for nationalisation. These calls by the ANCYL pose a credible

strategic management threat to BHP to consider when performing long term planning and strategic

positioning.

This journal article will propose strategic options to be considered by BHP in response to the threat

of nationalisation by discussion the following aspects:

o An overview of BHP with specific reference to political risk, including nationalisation.

o An overview of the South African nationalisation debate.

o Proposing a model to gauge the likelihood of nationalisation.

o Strategic responses to nationalisation.

2

2. AN OVERVIEW OF BHP BILLITON, WITH SPECIFIC REFERENCE TO

POLITICAL RISK

BHP is the world’s largest diversified natural resources company, calculated by market

capitalisation (Financial Times 2011b). The company’s stated purpose is to create long-term value

through the discovery, development and conversion of natural resources, and the provision of

innovative customer and market-focused solutions (BHP Billiton 2011).

It produces major commodities, including aluminium, energy coal, metallurgical coal, copper,

manganese, iron ore, uranium, nickel, silver and titanium minerals, and have interests in oil and

gas (Financial Times 2011a).

During the financial year ending June 2010 it recorded revenue of United States Dollar (“USD”)

52 798million and paid dividends to shareholders totalling USD4 800million. BHP’s global

operations comprise over 100,000 employees and contractors located in over 25 countries. Its

South African operations include the mining and production of aluminium, mineral sands,

manganese and energy coal resources.

Despite the size of BHP it is not immune to the risk of political interference. In its 2010 filing with

the United States of America Security and Exchange Commission it noted that: “Continued high

commodity prices have made the natural resources industry an attractive area for governments to

collect additional sources of revenue, economic rent and in certain instances to reconsider tenure

of land already awarded to resource companies. Countries where BHP has had to respond to

increased political risk include Australia, Chile, South Africa and the United States of America.”

(BHP Billiton 2010).

It is insightful to note that BHP has in the recent past responded to political risk in different ways

depending on the jurisdiction. For example, in 2010 the Australian government proposed

introducing a significant new tax on mining entities. BHP’s responded very strongly and publicly to

the new tax proposals (Engineering & Mining Journal 2010). In other countries, such as South

Africa, BHP has preferred to follow a “behind the scenes approach” to responding to political risk.

Political risk is also not a new occurrence. Indeed, BHP has faced significant threats related to

nationalisation during its 126 years of existence, including during 1922, 1945 and 1972. (Gale

Group 2005)

Some conclusions can be drawn from the history of BHP regarding nationalisation:

o Calls for nationalisation are not new, and BHP has faced such threats on a regular basis during

its history. These calls are rooted in the principle that the minerals and resources of a country

belongs to all the inhabitants of that country, and that a government is responsible to ensure

that such resources are extracted to the benefit of all.

3

o Nationalisation and political risk is not limited to developing nations or third world countries.

Indeed, during 2010 BHP faced significant political risk in developed world jurisdictions such as

America and Australia.

o The calls for nationalisation is cyclical, and usually co-incide with either a significant rise in

prices for resources, political system instability or both. This will be further analysed in section 4.

o Nationalisation of mines is usually the result of a significant rise in prices for resources. This is

different from the nationalisation of financial institutions to protect the depositor base, as

observed during the 2008/2009 nationalisation of American and United Kingdom banks.

Financial institutions are often nationalised as a result of these institutions being bankrupt.

o A company can and should respond differently to the threat of political risk based on an

assessment of the environment in which it operates. These responses will be discussed further

in section 5.

4

3. AN OVERVIEW OF THE SOUTH AFRICAN NATIONALISATION

DEBATE

3.1 The position of the ANCYL

The ANCYL has in the recent past been an advocate for the nationalisation of South African mining

assets. The leader of the ANCYL recently called for nationalisation, saying: “The call of

nationalization is what is required by the Freedom Charter. Its interpretation is very clear. We need

to nationalise.” (Cohen 2011).The ANCYL is a member organisation of the ruling party, adding

weight to its calls for nationalisation.

The current debate around nationalization has been provoked by a sense that the continued

growth in the South African economy since democracy in 1994 has not resulted in an increase of

economic and job opportunities for those economically marginalised, primarily being young blacks.

Some of the benefits of nationalisation noted by the ANCYL include: (Malema 2010)

o Increased budget for the State and therefore more resources for education, housing,

healthcare, infrastructure development, safety and security and sustainable livelihoods for ...

people;

o More jobs for ...people...; and

o Better salaries and working conditions in Mines because State owned Mines will increase the

mining wage and improve compliance to occupational health and safety standards.

3.2 The position of the ANC and other ANC leaders

The calls for nationalisation are however not shared by all in the ANC, being the elected body. The

ANC has stated that official policy is that “nationalisation is not part of government policy” (Cohen

2011). A number of senior government officials have also expressed reservations about the

wisdom of nationalisation. Some comments include:

“We who run the country know the harm this reckless debate is doing to the good image and

investments of the country," said public works minister Malusi Gigaba. (SAPA 2011); and

"The correct question should not be whether or not we nationalise. The question, in my view,

should be: How do we make use of our vast mineral wealth to eliminate the evil triplets of poverty,

unemployment and inequality?" asked mines minister Susan Shabangu. (Cramer 2011)

3.3 The South African constitution

The South African constitution stipulates that expropriation can only take place if "just and

equitable" compensation are paid. (Anon 1996). To date courts have upheld this principle, both in

5

the lower and the constitutional court itself. The legal system is considered to be strong, and the

South African government has consistently complied with constitutional court orders. The

constitutional section that deals with expropriation can only be changed with a 2/3 majority and at

least six of the nine provinces voting in favour of the changes. (Anon 1996). The ANC currently

holds just below 2/3’s (65.8%) of the majority in parliament and controls 8 of the 9 provinces.

(Smith 2009)

3.4 Conclusions regarding South African nationalisation debate

o The calls for nationalisation by the ANCYL is rooted in a sense that the growth in the South

African economy since democracy in 1994 has not resulted in an increase of economic and job

opportunities for those economically marginalised, primarily being young blacks. This gives the

calls for nationalisation a “political breathing space”.

o The ANC is divided on the issue of nationalisation.

o Institutional structures, being the South African constitution, currently prevents nationalisation

without just and equitable compensation.

o The ANC could potentially gather enough support to change the constitution.

o It is not clear whether the ANCYL is calling for nationalisation without compensation.

6

4. A MODEL TO GAUGE THE LIKELIHOOD OF NATIONALISATION OF

MINES IN SOUTH AFRICA

It is proposed that the likelihood of nationalisation is a factor of two broad categories, being:

o Political and social cohesion, with a decrease in cohesion indicating in a greater likelihood of

nationalisation; and

o An increase in the prices of commodity prices, with an increase in prices resulting in greater

likelihood of nationalisation.

The model below sets out the interaction between these two driving forces of nationalisation, and

the likelihood that nationalisation will occur.

Low

Political and social

cohesion

High Low High

Commodity prices

Table 1 – Gauging the likelihood of nationalisation

Determining whether commodity prices are high is a relative easy exercise, as market prices are

readily available.

Determining political and social uncertainty is more difficult, but certain proxies can be suggested.

The National Planning Commission in the Presidency produces a comprehensive report on

Development Indicators that provide a useful guide in determining the levels of social cohesion in

South Africa. (National Planning Commission 2010)

These factors include:

High

Medium

Medium

Low

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o Real per capital GDP growth

o Black and female managers

o Unemployment

o Living standards measure

o Inequality measures

o Poverty headcount index

o Poverty gap analysis

o Education enrolment rates

o Adult literacy

o Strength of civil society

o Voter participation

o Confidence in a happy future for all races

o Public opinion on race relations

o Country going in the right direction

o Public opinion on delivery of basic services

Additional factors to be considered are:

o The level of public discourse regarding nationalisation

o The strength of the Constitutional Court

o The likelihood of the Constitution being amended

o The strength of the ruling party.

These factors include quantitative and qualitative measures, indicating that such an assessment of

political and social cohesion will not result in an answer that can be calculated in an automated

manner. Rather, such an assessment should be made after consideration of all the factors and a

conclusion reached based on professional insight.

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5. POSSIBLE STRATEGIC RESPONSES TO NATIONALISATION

In the previous section a model was proposed that gauges the likelihood of nationalisation. Four

possible scenarios were proposed, as indicated below. The proposed strategic options are

discussed in Table 3 below.

Low

Political and social

cohesion

High Low High

Commodity prices

Table 2 – Gauging the likelihood of nationalisation

Table 3: Strategic actions per “Likelihood of Nationalisation” category

1. Low

commodity

prices

/ High

cohesion =

Low risk

2. Low

commodity

prices

/ Low

cohesion =

Medium risk

3. High

commodity

prices

/ High

cohesion

= Medium risk

4. High

commodity

prices

/ Low

cohesion

= High risk

Accurate and timely payment of taxes

X X X X

Protecting the environment in terms of

legislation

X X X X

Highlighting contribution to society by

business

X X X X

Reframing conversations (Note 1)

X X X X

4. High

2. Medium

3. Medium

1. Low

9

Table 3: Strategic actions per “Likelihood of Nationalisation” category

1. Low

commodity

prices

/ High

cohesion =

Low risk

2. Low

commodity

prices

/ Low

cohesion =

Medium risk

3. High

commodity

prices

/ High

cohesion

= Medium risk

4. High

commodity

prices

/ Low

cohesion

= High risk

Enter into empowerment ventures

X X

Efforts to strengthen civil society

X X

Creating jobs

X X X

Training of interns

X X

Procurement in communities

X X X

Creating physical infrastructure (schools,

housing etc not directly associated with

business)

X X

Join industry groups (Note 2)

X X X

Break ranks with industry groups (Note 2)

X

Aggressively protecting legal rights

X X X

Appeal to international bodies for

compliance with international treaties

X

Play the man, not the ball approach

X

Decrease investments and jobs (Note 3) X

Note 1 – Reframing discussions

It is interesting to note how the course of a discussion can be changed by reframing a discussion.

The ANCYL has focused exclusively on nationalisation as the solution to the problem of poverty

and unemployment. The minister of mines has reframed the discussion by posing a simple but

10

profound challenge: "The correct question should not be whether or not we nationalise. The

question, in my view, should be: How do we make use of our vast mineral wealth to eliminate the

evil triplets of poverty, unemployment and inequality?"(Cramer 2011). By using this approach the

focus shifts to the key under laying concerns of parties suggesting nationalisation as an option.

Note 2 – Joining industry groups / Break ranks with industry groups

If a company is not the dominant player in a country it might be in its interest to join industry groups

so that any lobbying is done in conjunction with other groups.

There is always the temptation to break rank with other industry players, especially if a company

views itself as being better positioned to respond to nationalisation claims. This is however a risky

strategy, as it could end up dividing the industry position to the detriment of all.

Note 3 – Decrease investments and jobs

A company can threaten to decrease jobs and investment, if the risk of nationalisation continues to

remain high. This is however a high risk strategy.

11

6. CONCLUSION

Nationalisation will always form part of the political risk universe that mining companies need to

deal with. Calls for nationalisation increases when the prices of natural resources increase,

because communities have a valid claim to part of the benefits derived from the natural resources

of a country.

The lack of political and social cohesion creates an opportunity for political and social leaders to

call for nationalisation. Political and social cohesion can be measured using a number of indicators,

but remains difficult to calculate accurately. This however does not detract from the ability of an

organisation to access the overall likelihood of nationalisation.

As the likelihood of nationalisation increases/decreases and organisation can respond strategically

by undertaking different actives.

12

7. BIBLIOGRAPHY

Anon, 1996. Constitution of the Republic of South Africa, Available at:

http://www.constitutionalcourt.org.za/site/constitution/english-web/index.html.

BHP Billiton, 2011. About us, Charter. Available at:

http://www.bhpbilliton.com/bb/aboutUs/charter.jsp [Accessed April 15, 2011].

BHP Billiton, 2010. United States Securities and Exchange Commission, Form 20-F BHP Billiton

Limited and BHP Billiton PLC June 2010, Available at:

http://www.bhpbilliton.com/bbContentRepository/docs/2010Form20f.pdf.

Cohen, M., 2011. Malema Says South Africa’s ANC Seeks Nationalization Model. Bloomberg.

Available at: http://www.bloomberg.com/news/2011-06-22/malema-says-south-africa-s-anc-

looking-for-best-model-for-nationalization.html.

Cramer, M., 2011. Mine nationalisation wrong, dangerous question to ask - Shabangu.

Miningweekly. Available at: http://www.miningweekly.com/article/mine-nationalisation-

wrong-dangerous-question-to-ask-shabangu-2011-08-02 [Accessed September 29, 2011].

Engineering & Mining Journal, 2010. Proposed Australian Mining Tax Draws Heavy Fire.

Available at: http://www.e-mj.com/index.php/news/australia-a-oceania/402-proposed-

australian-mining-tax-draws-heavy-fire.html [Accessed September 29, 2011].

Financial Times, 2011a. BHP Billiton Ltd Markets Data. Financial Times. Available at:

http://markets.ft.com/tearsheets/performance.asp?s=au:BHP [Accessed April 12, 2011].

Financial Times, 2011b. Rising Star: IPO shapes new goliath. Financial Times. Available at:

http://www.ft.com/cms/baa9ad1a-6537-11e0-b150-00144feab49a.jpg [Accessed April 12,

2011].

Gale Group, 2005. BHP Billiton. International Directory of Company Histories. Available at:

www.enotes.com/company-histories/bhp-billiton/introduction [Accessed September 29, 2011].

Malema, J., 2010. ANCYL Presidentʼs address to the students of the University of Limpopo.

African National Congress Youth League,. Available at:

http://www.ancyl.org.za/show.php?id=6512 [Accessed September 29, 2011].

National Planning Commission, 2010. Development Indicators South Africa 2010, Available at:

http://www.thepresidency.gov.za/MediaLib/Downloads/Home/Publications/NationalPlanning

Commission4/Development Indicators2010.pdf.

SAPA, 2011. Minister acknowledges mines debate harm. Miningmx. Available at:

http://www.miningmx.com/news/markets/Minister-acknowledges-mines-debate-harm.htm

[Accessed September 29, 2011].

Smith, D., 2009. South Africaʼs ANC wins big election victory, final results show. theguardian.

Available at: http://www.guardian.co.uk/world/2009/apr/25/south-africa-election-anc-result

[Accessed September 29, 2011].