On Restructuring South Africa’s Mining Industry YGHCC TEAM #16

Various Issues About Mining Industry

Human Rights Economy Environment

Business Health

Restructuring Plan

Environment Human Rights Economy

Business Health

Cost for Cleanup

Table Estimates of Abandoned Mine Cleanup Costs Note: The estimates are for 32 western states. The Mineral Policy Center estimates total cleanup costs at $33 to $72 billion; whereas, the now defunct Bureau of Mines estimated cleanup costs at $4 to $35.3 billion. Sources: James S . Lyon, T homa s J. Hilliard, and Thom as N. Beth ell, BURDEN OF GILT , Mineral Policy Center

Category No. of Sites % of Total Sites Characteristics Average Cleanup Cost Benign 194,500 34.88 No safety hazards or

water quality threats $0

Landscape Disturbance 231,900 41.59 Waste piles, poor vegetation, severe erosion

$4.4K

Safety Hazard 116,300 20.86 Shafts, adits, collapsed or unstable ground

$19.5K

Surface Water Contamination

14,400 2.58 Acid discharge, heavy metal contamination

$1M - $3M

Groundwater Contamination

500 0.09 Acid discharge, heavy metal contamination

$7.5M - $12.5M

Superfund 52 0.01 Extreme nastiness $250M - $350M

Excessive Waste-Removal Costs Total number of abandoned sites - 6000

Cost could range from anywhere between $51B to $93B

Some of the mines still have ore that is economical to extract, but the front cost far outweighs potential benefit

Furthermore, it is often difficult to establish who is to be held accountable for cleanup. ◦ The current owner may not have caused the damage

Large number of sites and large cost to cleanup

Still, we will plan to target a portion of these sites for clean-up, which will be discussed later.

Sulfuric Acid Arsenic

Mercury Acid Mine

Drainage

Preventing future damage Emissions trading: ◦ A cap is set on the amount of pollutant that may be

emitted ◦ Sold in the form of emission permits to discharge volume ◦ Total number of permits cannot exceed the cap therefore

limiting emissions to that level. ◦ Firms can buy permits from another firm that requires less

permits (produces less of the pollutant).

Execution Costs: ◦ Establish regulatory agency and hire 100 new workers to

make annual emission reports. $50,000 per worker annually amounts to $5M yearly.

◦ Administrative, equipment and legal costs may add up to another $10M.

◦ Offer a $4B cash infusion for life-time funding; additional cash flow can be generated from penalties

Distribution of $20B Funds

Trade Union

Capital Expansion

Regulatory Agency

Equity Distribution

Silica Respirators

Trainers and Educators

Case Manager

Environment Human Rights Economy

Business Health

Ineffective Trade Union Marikana’s 2012 Wildcat Strikes not only produced dozens of deaths, but also proved the trade union’s inefficiency

Left largely unregulated – Marikana Massacre began from NUM’s leadership

Internal conflicts threaten relationships

Workers are not receiving proper treatment

Symptoms of Current HR Situation

Lack of government enforcement and regulation

Misaligned incentives between business owners and employees

Disregard towards employees as “replace-able” units

Recommendations

Mandated Participation in NUM • All new and existing workers must take part

in new trade union

Enforcement Agency • Increase policing workforce to regulate

against trade union violations.

Cost-Benefit Analysis Ratio of 1:1000 enforcement individuals to workers ◦ Roughly 1,000 enforcers

Annual salary of $30,000 equates to $30M annually

Administrative/Legal costs add another $30M

Penalties may subtract $10M per year

Total 10-Year Cost: $500M

Distribution of $20B Funds

Trade Union

Capital Expansion

Regulatory Agency

Equity Distribution

Silica Respirators

Trainers and Educators

Case Manager

Environment Human Rights Economy

Business Health

Current SA Economic Situation South Africa is considered as an upper-middle income country, and is the wealthiest in sub-Africa

Current gross national income per capita is $10,000

Yet, roughly 25% unemployment exists, and one in four South Africans live on less than $1.25 per day

Largest rates of income inequality in the world economy dominated by mining sector 0

500

1000

1500

2000

2500

3000

3500

FY '12 FY '13 FY '14 FY '15 FY '16 FY '17 FY '18 FY '19 FY '20 FY '21

GDP per capita growth comparison

South Africa Mining-export countries

Re-brand Mining Industry Execution

With ~1500 mines and 500,000 workers, this equates to roughly 300 workers per mine.

Expand in South Africa’s abandoned mining deposits by increasing capital expenditures for large mining companies (De Beers, Exxaro, Harmony Gold, Lonmin, etc.) and covering cost with $3B cash infusion from Ministry. Hire 100,000 more workers with the new payment plan.

Consequence

This will result in reduced unemployment rates, increased mining productivity in South Africa, and higher GDP over the next 10 years.

Sample Financing Calculation for De Beers Financial Highlights: $7B in Net Sales, $1.7B EBITDA, $700M FCF, $1.2B Long-term Debt

Acquire $150M cash from Ministry to be amortized over 10 years towards increased expansion in equipment, land, and mines (PP&E)

Hire 5,000 workers at standard pay.

Increase future sales in South Africa by at least 20% (~10,000 current employees, with diminishing marginal product)

Distribution of $20B Funds

Trade Union

Capital Expansion

Regulatory Agency

Equity Distribution

Silica Respirators

Trainers and Educators

Case Manager

Environment Human Rights Economy

Business Health

Equity Sharing Overview Equity sharing plan in which miners become part owners of the companies they work for

Every mining company would have to give a 10% equity stake with voting rights adequate to secure at least one member on the Board of Directors

Permutations ◦ Funding; the cost can be borne by the government or shared with the companies ◦ Vesting; to maintain incentive alignment could mandate miners hold stock until retirement and/or must

sell at that time.

Total Cost and Cost Per Person Based on our equity calculations a 10% equity stake would cost $20-30K/person for a total cost of $12.5B ◦ (498,141 employees)*($25K/person) = $12.5B ◦ make the plan cost-neutral for the companies.

If we add 100,000 jobs, the cost of a 10% stake would be $20.8K/person ◦ $12.5B/600,000people = $20,833/person

Company Number of Employees

Type of Co. Market Cap, Current Price, Number of Shares

New Stock, New Price, Dilution Loss

AngloGold Ashanti

63,364 ($20,540)

Public, HQ SA $3.989B, $33.87, 384M

42.7M, $30.48, $1.3B

Lonmin 27,800 ($334,301)

Public, HQ London

$3.341B, $457, 203M

22.6 M, $411.22, $9.3 B

Anglo American Platinum

100,240 ($12,174)

Public, HQ SA, Anglo American is majority SR

$12.2B, $4,459, 2.75M

305,556, $3993.73, $1.3B

De Beers SA 10,573 ($42,977)

Non-public, but 15% held by Botswana and 85% held by Anglo American

SR Equity $4.089 B

11.11% New Equity, or $454 M

Potential Cost Sharing Legal Costs ◦ South Africa is a signatory to many bilateral expropriation treaties (many have regulation exemptions*) ◦ Constitution §25(1) Market Compensation

Deterred Investment Costs ◦ Counter intuitively, takings are positively correlated with Foreign Investment in the mining sector over

time, Hajzler, Review of World Econ (2012) p. 138

Sample Equity Calculation For Anglo American Platinum Total existing shares are 2.75M ◦ $12.2 Billion Market Cap/(JSE~$4,459/share)

A 10% stake requires issuing 305,556 new shares ◦ X/(2.75M+X), X=305,556

Current equity owners lose $1.3B ◦ $12.2B/(2.75M+306K)=$3993.73/share ◦ Loss of $466.27/share*2.75M shares = $1.3B

Miners gain $12,173.90/person ◦ 305,556 shares/100,240 is 3.05 shares/person times

$3993.73/share = $12,173.90/person

Distribution of $20B Funds

Trade Union

Capital Expansion

Regulatory Agency

Equity Distribution

Silica Respirators

Trainers and Educators

Case Manager

Environment Human Rights Economy

Business Health

Work Environment

Silica Dust

TB Silicosis Lung Disease

Injuries

Death Disabilities

Migration

HIV

TB Spread to

home communities

Health

Because of the high concentrations of silica dust in gold mines, studies done in some mines in South Africa have shown that up to 36% if the miners have Silicosis

It is well documented that silicosis is a risk factor for TB

A cohort study showed that miners with silicosis were up to 2.8 times more likely to develop TB1

Silica dust exposure in the work place has been shown to increase the likelihood of TB regardless of whether or not employee has developed silicosis 2

Significance

Silica Dust

We recommend the mass distribution of half-mask air purifying respirators to all miners to protect against the effect of silica dust • While a cost effective analysis of different

methods to prevent silicosis showed that engineering methods (including wet sprays, and ventilation systems) are more cost effective in reducing silicosis 3 This does not take into account the environmental costs such as increase in water usage. As well as the increase in energy demand to keep ventilation systems running

Silica Dust Recommendation

Item Quantity Cost/item/year Total Cost

Half-mask respirator cost per year (includes training, and replacement)

500,000 $413.60 3 $206M

Silica Dust Cost

Miners have high rates of HIV (22-30%).

A study in the year 2000 showed that miners have high rates of HIV because they are migrant workers and this causes them to seek commercial sex. In addition, they spread the disease to their home communities5

HIV and silicosis have a multiplicative effect on the likelihood that someone will develop TB6

HIV Significance

We recommend an approach similar to AIDSCAP. An intervention among miners by the NGO AIDS Control and Prevention in South Africa, showed that sexual risk behaviors were diminished through5:

• Peer education to encourage mine workers to have fewer sexual partners. • Social marketing of condoms to increase access and usage • Training local nurses about syndromic management of STIs to encourage

prompt treatment This can be done through collaboration with NGOs doing HIV/AIDS work in South Africa

HIV Recommendation

Item Cost/item/year Quantity Total cost

Trainers: for nurses and peers educators

$2,100 500 $10.5M

Peer Educators $1,500 3300 $49.5M

Cost

HIV

The prevalence of TB among miners in South Africa in 2004 was 3821 per 100,000 miners7

Co-infection with HIV and TB has been shown to increase death rates among miners in South Africa seventeen times. This is greater than death rates due to mining accidents.8

Tuberculosis Significance

Annual Screening for TB using the Xpert MTB/RIF test in order to diagnose the disease in the earlier stages:

• This test catches MDR -TB as well as TB in patients with HIV

Allowing several weeks of TB treatment before miner is allowed to return to work. A study shows that at least 50% of TB cases occur because of ongoing transmission in the mining community.9

Assigning case managers to miners with TB to ensure medication adherence.

Tuberculosis Recommendation

Item Cost/item Quantity Total Cost

Xpert TB test $10 500,000 $5M

Trainers for Case Managers

2100 500 $10.5M

Case Managers 120/case 19,105 $22.3M

Tuberculosis Cost

Total Health-Related Costs Distribution of $20B Funds

Trade Union

Capital Expansion

Regulatory Agency

Equity Distribution

Silica Respirators

Trainers and Educators

Case Manager

Summary Distribution of $20B Funds

Trade Union

Capital Expansion

Regulatory Agency

Equity Distribution

Silica Respirators

Trainers and Educators

Case Manager

We plan to implement a multi-faceted solution aimed at not only targeting the symptoms of our issues, but also the root causes: • Trade union mandate and regulation for improved

human rights ($500M) • Aggressive subsidized capital expansion into

abandoned mines ($3B) • Regulatory agency to limit amount of pollutants ($4B) • Equity package for shareholders ($12B) • Health educators and equipment ($300M)

Thank you for your time

We welcome any and all questions you have!

Supplemental Slides

De Beers Income Statement

De Beers Balance Sheet

De Beers Cash Flow

Data for number of mines was obtained from the department of mineral resources Republic of South Africa: http://www.dmr.gov.za/publications/viewcategory/121-directories.html

Cost of Silica Respirators

1Cowie R L. The epidemiology of tuberculosis in gold miners with silicosis. Am J Respir Crit Care Med 1994; 150: 1460–62. 2 teWaterNaude J M, Ehrlich R I, Churchyard G J, et al. Tuberculosis and silica exposure in South African gold miners. Occup Environ Med 2006; 63: 187–192 3 Lahiri S., Levenstein C., Nelson D.I., Rosenberg B.J. The Cost Effectiveness of Occupational Health Interventions: Prevention of Silicosis. American Journal of Industrial medicine.2005;48:503–14 4 Gottesfeld P, Nicas M, Kephart J, Balakrishnan K, Rinehart R. Reduction of respirable silica following the introduction of water spray applications in Indian stone crusher mills. Int J Occup Environ Health 2008; 14: 94–103 5 Meekers D.Going underground and going after women:trends in sexual risk behaviour among gold miners in South Africa. International Journal of STD & AIDS 2000; 11: 21-6 6 Corbett E.L. HIV infection and silicosis: The impact of two potent risk factors on the incidence of mycobacterial disease in South African miners. AIDS 2000; 14 (17):2759–68.

7 Murray J., Davies T., Rees D. Occupational lung disease in the South African mining industry: Research and policy implementation. Journal of Public Health Policy 2011; 32:S65–S79. 8 Murray, J., Sonnenberg, P., Nelson, G., Bester, A., Shearer, S. and Glynn, J.R. Cause of death and presence of respiratory disease at autopsy in an HIV-1 seroconversion cohort of southern African gold miners. AIDS 2007;6: S97–S104. 9 Godfrey-Faussett P., Sonnenberg P., Bruce M.C., Mee C., Morris L., Murray J. Tuberculosis control and molecular epidemiology in a South African gold-mining community. The Lancet 2000;356 (9235):1066-71.

Health-Related Sources

Legal Sources Luke Eric Peterson, South Africa’s Bilateral Investment Treaties: Implications for Development and Human Rights. Geneva Dialogue on Globalization N° 26 /November 2006.

Constitution of South Africa, §25(1) “Property may be expropriated only in terms of law of general application - for a public purpose or in the public interest; and subject to compensation, the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court.” Retrieved from http://www.info.gov.za/documents/constitution/1996/96cons2.htm#25

Sources – Equity Analysis We used self-reported numbers from the companies’ annual financial reports

Available online at: ◦ http://www.aga-reports.com/11/financial-statements, ◦ https://www.lonmin.com/Lonmin_Annual_Report_2011/Root/financial_statements/consolidated_state

ment_of_changes_in_equity.html, ◦ http://www.angloplatinum.com/, ◦ http://www.angloamerican.co.za/, ◦ www.debeersgroup.com/ImageVaultFiles/id_1703/cf_5/_De_Beers_Operating_and_Financial_Review_

2011.PDF

Company Number of Employees Equity Dilution

AngloGold Ashanti

63,364 (at 42.7M shares, this is 673.8 shares/person, at $30.48/share is $20,540/person)

$3.989 Billion (NYSE $33.87, 384M) 42.7 M new shares, ($33.87*384M)/(42.7M+384M) = $30.48/share, lose $3.39/share, which is $1.3 B total

Lonmin 27,800 (at 22.6M shares, this is 812.95 shares/person, at $411.22/share is $334,301/person)

$3.341 Billion ($457, 203M) 22.6 M new shares, ($457*203M)/(203M+22.5M)=$411.22/share, lose $45.8/share, which is $9.3 B total

Anglo American Platinum

100,240 (at 305,556 this is 3.05 shares/person, at $3993.73/share is $12,173.90/person)

$12.2 Billion (JSE~$4,459, ??, 2.75M*computed)

305,556 new shares, ($12.2B/(2.75M+306K)=$3993.73/share, lose $466.27/share, which is $1.3B total

De Beers SA 86.9% in Africa of 12167 = 10,573 ($42,977.4/person)

SR Equity $4.089 B “Each shareholder group is entitled to nominate two persons for appointment to the board.” Debswana started as joint venture

11.11% New Equity, or $454 M