Much of the success or failure of a given negotiation rests with leaders, and the negotiation of mining rights is no different. Leadership can be wise, disorganized, corrupt, or anything in between, and in the case of the platinum-rich former homelands of South Africa, negotiations are often the purview of loosely-organized groups of traditional tribal leaders. 

Community leaders are, for the most part, negotiating with companies with focused interests and specific optimal outcomes. This does not bode well if there is any level of disorganization, infighting, corruption, or naivete on the part of the locals. 

So how can they get better deals? Let’s look at the question through the lens of a recent deal between the Bapo ba Mogale community of South Africa and Lonmin PLC. 

Know what you’re sitting on 

Minerals like platinum are scarce, expensive, and, luckily for South Africans, not readily available elsewhere.

Fully 77 percent of the world’s platinum is produced in South Africa owing to its severely limited availability worldwide. This makes it an incredibly precious resource, and while the price of platinum fell precipitously in late 2008, long term demand is expected to be strong. 

The Bapo recently negotiated a deal with Lonmin that halts any and all future platinum royalty payments in exchange for shares in the company (and what I would argue is a very modest cash payment).

Why the Bapo had to part with their royalties in order to become shareholders is very much unclear — Lonmin is under pressure to increase black ownership to 26 percent by the end of the year to meet South African Black Economic Empowerment rules, and there is no real reason why the one needed to be traded for the other. 

“The two are not related,” says Brendan Boyle, senior researcher at the Centre for Law and Society at the University of Cape Town. “Most empowerment deals go with some form of vendor funding, where the company that is selling loans [money] to the buyer, who pays it out of dividends or some such. In this case they would be using their royalty to buy the rights.” 

Is this a case of not knowing the value of one’s own negotiating position? I would argue that it is.

Know your counterparty 

Platinum, in addition to being expensive to buy, is also wildly expensive to produce — sometimes to the point where it’s difficult to turn a profit. And as reserves get harder to access and labor costs grow, production costs have increased.

These issues put extreme cost pressure on mining companies, which will do everything they can to ensure at least a modest profit margin on operations. 

In other words, any mining company is highly attuned to cost, and it can be hard not to get rattled by such a focused counterparty. Perhaps that’s what happened here. 

The Bapo were, says Boyle, “Concerned that they could lose out again because now the company is under pressure… For the community there’s a strong sense of now or never.” He’s referring to past deals between the parties that didn’t go through, and the worry that Lonmin could walk away and take its shareholding offer elsewhere. 

That kind of pressure is hard to resist, but it’s important to avoid: Again, if Lonmin wants to mine platinum in South Africa, it doesn’t have a whole lot of options. The Bapo would have done well to realize this and act accordingly. 

Always do the math 

Presumably someone does do the math in these agreements, and the Bapo reportedly commissioned outside analyses, but the results have thus far not been shared. That’s an important issue: Who benefits from a given deal is not always so easy to discern. 

In this case, the Bapo essentially got an ownership stake worth about $53 million and some cash towards Bapo administrators and community development. Their past royalties were set at a minimum of either about $47,000 per year or 10 percent of platinum revenue, with average payments, according to Boyle, of about $2.5 million per year.

The question of whether this was a good deal depends partly on how well you think the share price will do in the coming years. If future royalties stayed at their average but kept pace with inflation and the mine is active for 30 years, my back-of-the-envelope calculations imply that Lonmin’s share price would have to rise over 30 percent from current levels in order to provide commensurate value.

Of course, this assumes that the price of platinum won’t increase faster than inflation. Also, the Bapo would also have to agree that they prefer capital gains in 10 years over guaranteed annual income for the life of the mine (the shares are locked up for this period).

They would also have to prefer the vagaries of Lonmin’s common stock price over the ups and downs of the platinum market itself.  

Maybe someone did the math, but I’m still struggling to see how the Bapo — as a community — benefit from it. 

Institutions cannot be ignored 

Leadership comes and goes, but institutions — and the rules they set — remain.

A major problem for tribal communities in South Africa lies in holding leadership accountable. Laws can be adjusted depending on the whim of a particular ruler, and disclosure requirements are, if history is any guide, more or less optional. 

“Whenever you allow people to deal in secret,” Professor John Mbaku of Weber State University said in a conversation about corruption in Sudan, “There is a temptation for them to engage in corrupt behavior.”

These words ring true in such situations. Boyle notes that many people in the Bapo community seem convinced that this deal will bring “The end of poverty.” Capital appreciation, perhaps — but the idea that this transaction would end poverty seems very far-fetched. Where did this belief come from? 

Without some form of checks and balances, it is impossible to ensure visibility into a decision-making process and the viability of a particular venture. In this case, disclosure of commissioned reports would go a long way towards providing a clear picture of how exactly this transaction is going to benefit the community as a whole. 

Focus on reinvestment 

Finally, communities and governments need to focus on long-term reinvestment. Their immense negotiating power can and should be used to demand significant investment in activities that will provide lasting benefits. 

This comes in two flavors: infrastructure and the future. Roads, schools, hospitals, and training and skills transfer to build new industries could all feature prominently.

Leaders should be asking: How can we encourage companies to provide more employment? How can we develop additional services that will benefit the community? Where can we go from here? What skills, resources, and expertise can we create? 

In other words, leaders should not just be asking themselves what they can extract of the value that is already in the ground; they should be asking themselves what can be built on that ground. What will provide lasting value long after the final mine has been abandoned?