CGS, SDT & SADPMR 2021/22 Annual Performance Plans

Meeting report

CGS APP 2021/22
Mr Mosa Mabuza, the Chief Executive Officer (CEO) of the Council for Geoscience, took the Committee through the board composition (consisting of 54% female members) as well as the board skills sets. The board has equal proportions of geologists, engineers, town planners, environmentalists, finance experts and legal experts.

105 employees had tested positive for Covid-19 since March 2020 and there had been a 100% recovery. The CGS management interventions had created a safe environment for employees to perform to the best of their abilities.

The CGS strategic programmes and outcomes all align with the intentions of the National Development Plan (NDP) 2030 and the Medium Term Strategic Framework (MTSF) 2019-2024. Immediate CGS interventions include the implementation of an integrated and multidisciplinary geoscience mapping programme and prioritisation of assessment and drilling targets. An important target for the CGS is to capture 5% of the global share if mineral exploration expenditure ($10 billion) as part of their intermediate outcomes within the next 3-5 years.

The CGS has identified priority projects to ignite economic growth. The coverage of national geological mapping at the 1:50 000 scale increased from below 5% to 9% at the end of FY2020/21. The target for 2023/4 is 16% total coverage. The offshore marine mapping programme aims to understand marine geoscientific processes as they relate to energy, mineral and climate initiatives. 0.3% mapping coverage of the Economic Exclusion Zone (EEZ) is planned for 2021/22.

The high priority mineral assessments targeted for drilling include Renewable energy minerals, Base and precious metals, Fluorspar and Phosphates. There was also an assessment of the Molteno-Indwe coalfields in the Eastern Cape and the consideration of a customised modular power station with clean coal technology applications in the region. There is a possible direct value of R122 billion from the development of the coal deposits.

There is the possibility of the pegmatite belt in the Northern Cape Province which has a significant lithium deposit, a much-needed component for the battery industry.  The Karoo Deep Drilling (KDD) and environmental baseline project are in progress to develop a geo-environmental baseline model to inform regulations for shale gas exploration in the Southern Karoo. The borehole has emitted methane gas. This project is in collaboration with the Petroleum Agency of South Africa and assists the organisation with groundwater monitoring.  Gold projects in Mpumalanga were discussed, along with the long-term CGS projects on the sustainable management of mine water and legacy mines in South Africa. These are associated with the implementation of the National Mine Closure Strategy.

Artificial Intelligence techniques have been used to locate additional water in the Free State and the Eastern Cape.  The CGS is pursuing a National Geohazards Mapping programme, national dolomite report reviews and a probabilistic seismic hazard analysis to support infrastructure and land use projects. The CGS also embarked on “Geoscience Diplomacy” expanding their African footprint, through geoscience mapping of the continent including the supervision of World Bank projects.

Mr Mabuza outlined the CGS annual performance targets as well as their finances and budget. As in previous years, the CGS pointed out that there has been no real growth in the baseline grant and the aging research infrastructure of the CGS is of concern as investment is needed for its replacement.

Discussion
The Chairperson thanked the CGS and invited Members to pose questions.

Mr J Lorimer (DA) asked a series of questions:

The mapping programme seems unambitious considering modern technology. The CGS said that it would like to improve mapping of 1:50 000 up to 9.5% [of the total land area of SA], could there be a comment on why it cannot be faster? When comparing our mapping costs to other mining jurisdictions, it will be interesting to see if we are getting value for money compared to Western Australia.

On the question of high priority mineral assessments, how are decisions made on what is considered a high priority? Is this based on the mapping the CGS does or is it approached by mining companies? What informs this decision?

Could the CGS be more specific of what is being done specifically to achieve 5% of the global share of mineral exploration expenditure?

How much time and money are spent on investigating the Molteno-Indwe coal fields and why? Previous studies have found it to be a low potential coal. Why is there so much focus on this?

On the internal issue of staff at the CGS, are there any plans to rationalize or cut staff, particularly scientific vs. support staff. Mr Lorimer said that the ratio of support staff to scientists seemed too high and asked the CGS to please comment on that.

On the accessibility of data, why is geophysical data gathered not on open file yet. It should be more accessible. Why is there payment required and signing non-disclosure agreements to access information?

On the Geoscience Act Regulations, what are the next steps and when are they expected to be implemented?

Ms V Malinga (ANC) noted that she was pleased with Mpumalanga when speaking about stakeholder engagements and welcomed the R4 million bursary allocation.

Prof C Msimang (IFP) asked about shale gas exploration, commenting that there was a lot of excitement when it was first discovered as if it was going to boost the economy. This was short-lived once its adverse effect was brought to light. But, within the presentation, it was presented as only positive and he requested clarity about this.

Secondly, he was interested in the ownership; it is not clear if it is entirely in the hands of private sector, or if the government has a stake in exploration.

Lastly, it seems as though Geoscience provides only positivity about mining, and it seems as though they do not know about the hazards.

Mr S Kula (ANC) raised the issue around the infrastructure in land-use projects, especially the housing. [On slide 33 the CGS reported it was implementing ground stability risk assessments across the Khutsong Area (near Carletonville, Gauteng), in support of resettling ~21 000 households on high risk dolomitic ground with the Housing Development Agency (HDA)]. How long was this assessment likely to take before progress was seen?

He had concerns around the staff compliment of CGS. The presentation showed 42% is core and 58% is support. How does this staff composition impact on the work of the Council? He was thinking that they need to cut down on their support staff and invest in their core. [The pie-chart on slide 53 gives figures opposite from those mentioned by Mr Kula.]

On human resources, can they elaborate on the degree of female employment in 2021 compared to the previous years?

The staff head count showed a substantial decrease in CGS employment. Are there any prospects for increasing the number of youths employed in the CGS?

There are persistent questions asked around the Molteno-Indwe project, and Mr Kula asked about what are the long-term benefits of this project? Because in his view, this project needs full support to unleash the full potential of Eskom.

Lastly, there is pressure for entities to be self-sustaining in the new future. When is the CGS likely to be self-sustaining?

Responses
Mr Mabuza said the mapping program was not unambitious. In the beginning, the intention was to have the country mapped in a period of 10 years. That requires the state to invest R20 billion in that period. The reality is that the budget is not big enough. He noted that there are results for countries that invest in geoscience. It is a fulcrum for human development, and allows informed decisions about development. The CGS was therefore moving at the pace and scale that is affordable to the country. The CGS is nothing but the function of the resources available.

In terms of mapping costs, the CGS is at the lowest quartile of the costs of mapping compared to other jurisdictions. They know this because they assist Namibia and Malawi with mapping. The costs are a lot more in other countries.

Minerals are prioritised in meetings where geoscience information is processed, and they can identify their targets. The CGS knows that energy security is important, and minerals that contribute to energy security are therefore flagged. There is an internal rating system that considers the nation’s needs.

The investment promotion agencies from the state are assisting to ensure South Africa has 5% of the global exploration expenditure. The Minerals Council of South Africa has also drafted the exploration plan.  

The CGS is on the side of making information available to the public. The bulk of the information is free on the CGS website.

He said the Molteno-Indwe coal is of superior quality when compared to coal in the northern hemisphere. It plays a vital role in the energy capacity of the country.

Is there a plan to rationalise staff? There are legislative steps and requirements in administration that make it difficult to not have support staff. To continue to comply with government’s prescripts, there is need for resources to fulfil the requirements within the entity. Compliance to governance is taken very seriously, therefore every position is there because it plays a critical role. To accelerate the goals of the CGS, it needs baseline stability and that employment ratio is there because of resources available.

On the processing of geophysics data and the availability of it; in certain aspects, it is information that belongs to projects outside of the CGS. And because the CGS complies with confidentiality, when right holders submit data to the CGS, they know that their competitive advantage will not be compromised. On the comment that this information is free in other parts of the world, it has been discovered that with their counterparts, what they say and what they do differ. It is important to establish those facts and not every aspect of information is available for the public; for example, there is some information that is needed for military application.

The Department is moving with speed on the regulations. Mr Mabuza said the CGS would process the comments in the following weeks to decide the next critical steps and engage with the broader community that does not have the benefit of accessing the websites.

The CEO thanked Ms Malinga for her comments. CGS has started with stakeholder engagement in Mpumalanga and will intensify it.

In response to Prof Msimang, he agreed that there was a lot of excitement following the discovery of shale gas in the Karoo until the hazards were illuminated. Government took the responsible decision to withhold further development until there is enough research done. The main delays were because the buy-in of stakeholders was needed. These stakeholders have been shown that there is value in the research done by CGS which could be used to affirm the legislation that protects water resources from pollution. There is hope that the outcomes of the research will unleash the potential of shale gas in South Africa.

On the issue of ownership of shale gas, the Department can answer this as the CGS is only focused on research.

In response to Mr Kula, the work being done with HDA was initiated a couple of months before. The initial collaboration would probably run until 2022 and would ask Dr Khoza to provide clarification on what they have done once he was done [responding to the issues raised by Members].

Based on what causes sinkholes, the CGS anticipates there is the possibility of wider research that needs to be done in areas which are dolomite infested, coupled with the triggers being assessed. There was a need to investigate the regional impact of these sinkholes, such as in Khutsong, however.

On the issue of youth, when looking into the senior managers who had been appointed in the past 3 years; when they arrived at CGS, they were all youth. It is not a problem to get rid of the youth, it is that age is not a permanent factor. All the youth is with CGS today, except they have gotten rid of the problem of being the youth. The CGS will continue to invest in the youth and invest in them optimally.

On the issue of when the CGS will be financially sustainable: There is an internal program on seeking to accelerate the goal of financial security. Part of this has to do with the partnerships that have been alluded to, such as with other nations, Mintek etc. Fundamentally, Mr Mabuza said the CGS must guard their primary mandate of being a science council. It should therefore not prioritize the incentive of making money, because the science mandate should be protected and not be corporatized.

He asked Dr David Khoza, Executive Manager: Applied Geoscience, to say a few words on the HDA.

Dr Khoza said that the work at Khutsong began year and they hoped to finish within the coming 6-8 months. The plan is to advise HDA appropriately.

Mr Nonkhosi Cele, Acting Board Administrator, CGS, said the current ratio of core staff to support staff was 60/40, which meant that there are 60 scientific staff members for every 40 support staff members. This ratio was monitored very closely to ensure that there was not too much support staff. To dwell a bit on the staff rationalization, he said, when positions become vacant, it is interrogated and decided whether it should be filled or absorbed by other responsibilities.

Regarding the gender parity at the organizational level; currently there was almost a 50/50 parity at an organizational level. The organization is seeking to ensure that there is gender parity in strategic positions and the CGS has come a long way. There are also more bursaries in the female cohort to resolve more structural gender parities beyond the CGS.

Dr Humphrey Mathe, Chairperson of the CGS Board, said that he thought it important to emphasise the integrated mapping program, where the CGS has defined the coal seams. The drive is to look at minerals which are going to be energy efficient, rare earth elements. The area CGS had mapped in the Northern Cape was proof that the CGS is looking at minerals which are going to drive the country and help with economic growth. On the side of thermal energy, there was a lot happening with the Carbon Capture Utilisation and Storage (CCUS) projects being looked at.

SDT APP 2021/22
Mr Stanley Mandla Mnguni, CEO, State Diamond Trader, and Ms Nelisile Mncwango, CFO, took the Committee through the presentation, which included their operations as the SDT, the new board appointed from 1 November 2020 as well as the key highlights of the 2020/21 financial year. Key highlights were the impact of Covid, where no trading occurred between March and July 2020 and the cashflow resulted in a reduction in personnel. Should this situation continue; the entity will not be in a position to carry out its mandate.

The SDT intervention strategy had short-, mid-, and long-term components. In summary, the 2021/22 approach means the SDT intends to increase the current purchases from 2% to 4,5% of total run-of-mine diamond production. It intends to obtain a favourable grant/credit facility for SDT and collaborate with partners in promotion, research and development.

Key challenges include funding and the type of rough diamonds it can supply - as it can only purchase run-of-mine which means all qualities have to be purchased [irrespective of whether stones are suitable for beneficiation by clients or not]. Their clients have been hard hit by the decline in the economy. The SDT strategy to deal with the challenges includes investing in the latest technologies, collaboration on research and training, investment in local and international market activities and lobbying for start-up funding for diamond manufacturers. The key risks and mitigations were also covered as well as the budget allocations.

Budget assumptions presented were that operating costs are expected to increase by 5% per year over the next 5 years. The revenue is expected to increase marginally, and the gross profit margin will remain stable at 3%.

SADPMR APP 2021/22
The presentation was led by Mr Abiel Mngomezulu, the Chairperson of the Board of the Regulator, and Mr Cecil Khosa, CEO. They took the Committee through the mandate of the SADPMR and the diamond and precious metals value chain, starting with exploration and ending in jewellery trading.

They presented the SADPMR performance over the past 5 years. The presenters commented that there was local beneficiation and that overall, the Regulator had 4 unqualified audits and 1 clean audit.

Regarding the Impact of Covid-19, the SADPMR is impacted because of uncertainty on future revenue. Challenges include obtaining a VAT exemption from the SA Revenue Services (SARS) on imports of diamonds to be beneficiated, to free up much needed cash; and a change in the legislation to increase the present 5% export levy on diamonds, to increase local beneficiation.

Discussion
Mr Lorimer, in addressing the SDT presentation, commented that the State Diamond Trader used to have the virtue of being financially self-sustaining but that this no longer seemed to be the case. He said that he found slide 15 “disturbing” because it said that should the current financial situation continue, the entity will no longer be able to carry on its mandate. Can the Committee have information about the implications of getting revolving credit, how much debt is there and what is the plan to get out of it? And what in the SDT opinion, needs to be done to the legislation. “Is the current model unable to enable you to be financially stable?”

He said he was pleased to hear that the SDT are at least able to survive this financial year. When the SDT said it wanted to increase its purchases from local diamond producers, did it mean SDT wants the rules changed, to get a bigger percentage? How much of an increase did SDT need? “This will make mining unprofitable. And have you done studies on the likely bad effects on local mining?”

As to the client base, how many local diamond beneficiators was the SDT dealing with now? What was the prospect of that number increasing in the short term? And did the largest local purchasers from SDT make up more, or less, of SDT local sales?

In addressing the Regulator, Mr Lorimer asked how far along the process was on the engagement with SARS on the VAT exemption? He commented on the proposed increase in the export levies on diamonds, saying it was effectively a subsidy for manufacturing industry for inefficient processing, and would disincentivize mining. Had the Regulator done any studies on the extent of this disincentive?

Mr M Mahlaule (ANC), addressing the Regulator, commented that it seems as though many industries were affected negatively by Covid. When he went to the Regulator physically, he saw people coming to either deposit or purchase diamonds. The pandemic would have affected them in that regard as the Regulator could not take walk-ins. Had there been thoughts of a possible option of managing sales online?

Responses
Mr Mnguni, of the SDT, responded to the question of Mr Lorimer on slide 15, which talked about Covid 19. In terms of trading, the SDT was mainly trading with international communities. During lockdown, there was no international trading, so there was no trading at all during lockdown and this affected the financial position. The SDT had to therefore operate on its reserves. The issue was should this situation continue, it will mean that the SDT will not be in a position to trade and carry on with its mandate. Mr Mnguni said that, for the present, the situation seemed to have improved. There was a strategy to review to the business plan and a financial mobilization strategy.

The issue of revolving credit arose because of the financial position and because sometimes the purchases budgeted for were large. The diamonds are on the market at a particular time. The value is unknown as well as the amount of production. Should one producer make a big discovery, the SDT may lack enough funds to purchase. The revolving credit is there as an agreement with the Industrial Development Corporation (IDC). The SDT is not able to deal with it because of the current financial situation.

Mr Mnguni said there was an internal study on the issue of legislation. The 10% run-of-mine production that is available for the entity itself to purchase [in terms of legislation] does not assist the entity. Since its inception, there was never funding [to purchase as much as 10%]. The SDT is essentially operating as a commercial and social entity, hence there is a requirement to review if the 10% is practical or not. Also, talking about the 80/20% principle that is there, was this competitive enough? The Regulator had also looked at whether it was assisting the SDT [adequately] and if the legislation needs to be reviewed so that it can assist the SDT going forward. The internal study was being discussed with the Regulator and everything consolidated to submit to the Department of Mineral Resources and Energy (DMRE). Currently, there are about 14 producers the Trader is buying from. The aim is to ensure that all producers in the country, as per the legislation, should offer [their production] to the SDT, [from which it can purchase up to 10%] as per the legislation. Should that situation happen, the finances should improve, and the entity was pushing for that.

For local beneficiaries, currently, there are about 78 clients with the SDT that have been cemented [as purchasers of diamonds from the SDT]. The top five clients contribute about 50% of sales. To reiterate, there is a need to ensure that those producers who are not compliant, become compliant - in showing the SDT their production - which means there will be more access to goods.

The Regulator responded to the questions of Mr Lorimer on the issues surrounding engagements with SARS and clarifying the challenges. The first issue was the diamond export levy itself, and the other was VAT refunds.  There have been a lot of submissions from industry in the past to say the VAT charged by SARS on the import [of diamonds suitable for local beneficiation] is hampering development. Submissions were made to SARS and engagements were held but there had not been much progress. In 2018, the Regulator began to engage in SARS about this issue.  Lately there had been meetings with SARS.

On VAT refunds, there were instances were clients waited for a few months to get money back from SARS. That impacts gravely on their cash flows. But there were ongoing engagements with SARS, who seemed to be coming on board,

On the question of export levies and if there had been studies done: the Regulator embarked on a process on benchmarking against South Africa’s counterparts globally. Particularly Russia and Angola are examples of countries where benchmark studies were done. From their side, the Regulator tries to encourage local beneficiation of diamonds and to encourage imports [of suitable stones] into their jurisdiction for local processing. Mr Lorimer would recall that before the amendment of the Diamonds Act, the export levy was 15%. When the amendment was done, that amount was reduced to 5% and then the Regulator saw an outflow of diamonds in rough form because of that legislation. Because clients feel they can fetch a better price at a lower levy.

On the issue from Mr Mahluele around industry impacted by Covid 19, and what were the possible actions to have an online presence in the future, the Regulator said there was a web administrative system which had different modules for licensing, and for the Diamond Exchange and Export Centre (DEEC). The electronic system is an integrated system that looks at integrating the activities taking place. Provision is made for expanding the module under the DEEC to include online bidding. There is the development of apps for online applications. However, the Regulator is being careful by doing this gradually, so as not to overwhelm the system. There is an upgrade of the infrastructure as the entity adapts, so that clients can have information when interacting with the Regulator. Another advantage was that South Africa has data centres for cloud technology that would assist in improving systems.

Concluding Remarks
The Chairperson thanked the entities for their presentations, but commented that he would leave some of the issues for now. The APP’s and the budgets would require a thorough discussion outside of the normal procedures, outside of Parliament. He could see that it was going to be very tough for the Department and that it was going to take time for most to understand the purpose of this exercise, especially in understanding key priorities. But hopefully with time, there would be improvement, it was now left to the Committee to deal with all presentations and make recommendations.

The Chairperson thanked all the Members and presenters.

The meeting was adjourned.