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DE RUEHSA #1816/01 1381504
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R 181504Z MAY 07
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9898
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHBU/AMEMBASSY BUENOS AIRES 0261
RUEHTN/AMCONSUL CAPE TOWN 4368
RUEHSA/AMCONSUL JOHANNESBURG 6783
RUEATRS/DEPT OF TREASURY WASHINGTON DC C O N F I D E N T I A L SECTION 01 OF 02 PRETORIA 001816 
 
SIPDIS 
 
SIPDIS 
 
DEPT PLEASE PASS TO USTR FOR P.COLEMAN 
TREASURY FOR TRINA RAND 
BUENOS AIRES FOR DOUG CLIMAN 
 
E.O. 12958: DECL: 05/12/2017 
TAGS:      
SUBJECT: ITALIAN MINING COMPANIES BRING EXPROPRIATION CASE 
AGAINST SOUTH AFRICA IN ICSID 
 
 
Classified By: Econ Counselor Perry Ball for reasons 1.4(b) and (d). 
 
 1. (C) Summary:  Italian mining companies have filed a case 
in the World Bank's International Centre for the Settlement 
of Investment Disputes (ICSID) alleging that new South 
African mining legislation amounted to expropriation of their 
South African property.  The companies, unable to find 
Broad-based Black Economic Empowerment (BEE) partners due to 
goverment favoritism in the BEE process, were at risk of 
losing their mineral rights.  As a result of the case, the 
SAG has "unofficially" put on hold negotiations of 
trade/investment agreements and extended the deadline for 
other mining firms to file claims.  Although losing the case 
would be a black eye for the SAG, it is doubtful this case 
would affect BEE or be a signal for other firms to file 
cases.  End Summary. 
 
------------------------------- 
FIRST MINING EXPROPRIATION CASE 
------------------------------- 
 
 2. (U) Italian-owned mining companies Marlin Holdings, Marlin 
Corporation, and Red Graniti South Africa have filed a case 
in the World Bank's International Centre for the Settlement 
of Investment Disputes (ICSID) alleging that new South 
African mining legislation amounted to expropriation of their 
property and denial of national treatment under the South 
Africa/Italy and South Africa/Belgo-Luxembourg bilateral 
investment treaties.  The companies are claiming total 
damages of 266 million Euro (about $350 million). 
 
 3. (U) Enacted in 2004, South Africa's Mineral and Petroleum 
Resources Development Act (MPRDA) vested all mineral 
resources in the state and required companies to take 
specific steps to convert their former mineral rights into 
long-term licenses.  The law aimed to bring South Africa's 
previous minerals regime into line with "international" 
mineral rights norms, in which the state owns the mineral 
rights.  The conversion process is subject to time 
limitations and must take into account the requirements of 
the Broad-based Black Economic Empowerment (BEE) mining 
charter, which specifies that mining firms must sell 26 
percent of equity to black investors by 2014. 
 
 4. (C) According to Italian Embassy Economic Counselor 
Giovanni Brignone, the Italian companies were unable to find 
acceptable BEE investors and were consequently at risk of 
losing their mineral rights.  Both Brignone and the 
companies' attorney, Peter Leon, told econoffs that the 
companies tried for 18 months to amicably settle the dispute 
with the SAG, but never received responses to their numerous 
proposals.  Leon explained that the Department of Mining and 
Energy (DME), which had drafted the MPRDA, was quite 
intransigent and determined to defend its creation, even 
though it had failed to ensure that its draft legislation 
took into consideration expropriation language contained in 
the BITs.  Leon also noted that the Department of Trade and 
Industry (DTI), which is the custodian of BITs, is concerned 
with South Africa's international reputation and the effect a 
lawsuit might have on other BITs, but seems unable to 
influence the DME.  This split in government policy continues 
to plague the case, according to Leon, who said that both DTI 
and DME are providing the SAG's Paris-based law firm, 
Freshfields, with case strategies and input without any prior 
coordination. 
 
 5. (C) Although the companies' case is based on both 
expropriation and failure to provide national treatment, Leon 
conceded that the companies' national treatment claim was 
farfetched, since the MPRDA applies equally to foreign and 
South African companies.  However, he felt that the 
expropriation claim was quite strong. 
 
------------------------------------- 
FAVORITISM IN BEE EXACERBATES PROBLEM 
------------------------------------- 
 
 6. (C) According to Brignone, the companies were not opposed 
to BEE and had actually identified a potential BEE partner. 
However, the SAG had rejected their choice and tried to steer 
them toward a different partner, one more acceptable to the 
government.  (Note:  Econoffs have been told by several 
contacts in various industry sectors that the BEE process is 
less than transparent and that SAG officials sometimes press 
 
PRETORIA 00001816  002 OF 002 
 
 
firms to take on specific BEE partners.  In some cases, the 
SAG wants to ensure that BEE partners will be more than 
"fronts" and take an active role in management.  In other 
cases, the SAG may want to reward ANC loyalists.  End Note.) 
 
---------------------------------------- 
THE CASE GOES TO THE INTERNATIONAL STAGE 
---------------------------------------- 
 
 7. (C) Although the MPRDA allows claims for expropriation to 
be brought in local courts, the companies chose arbitration 
via ICSID because the BITS impose a higher standard, Brignone 
told us.  Whereas the MPRDA provides for "just and equitable 
compensation," the BITs require "immediate, full, and 
effective compensation."  The companies also felt more 
comfortable using an international panel, he said.  Leon 
predicted that the case could easily take two years to 
resolve in ICSID.  He told us that the SAG gives every sign 
of wanting to fight the case to the bitter end, though he 
acknowledged this could be a litigation pose. 
 
---------------------------------- 
SHORT AND LONG-TERM IMPACT OF CASE 
---------------------------------- 
 
 8. (C) This expropriation case has had both immediate and 
potentially long-term effects.  DTI's Manager for the 
Americas Cobs Pillay told Trade and Investment Officer that 
DTI has already begun to "unofficially" put on hold 
negotiations of trade/investment agreements until the case is 
resolved.  Brignone said that DTI is also being far more 
careful in drafting its international agreements to ensure 
they are in line with MPRDA and BEE legislation.  Concerned 
that the case could prompt other mining companies to bring 
similar actions, the SAG has extended its deadline for mining 
companies to file claims for the loss of mining rights by two 
years. 
 
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COMMENT 
------- 
 
 9. (C) While losing this case would be an enormous 
international black eye for South Africa, we do not expect 
many other companies to file cases.  Equity requirements 
under BEE are only compulsory in the mining sector, so a loss 
in ICSID would not extend to other sectors or to the BEE 
program as a whole.  Most local mining companies, while 
potentially able to file suits under local law, are more 
likely to avoid making political waves.  As Leon said, "You 
only file an expropriation case when you want to leave a 
country." 
Bost