Prior to taking or providing security, there are practical considerations that should be taken into account to mitigate risk. For more on this, see our previous alert here.

Once a decision has been made to take or provide security, the type of security that is most appropriate for the individual circumstances will need to be assessed. Some options when transacting with a mining right holder or contract miner include, but are not limited to a special notarial bond, a lien and a mortgage bond.

A special notarial bond

A special notarial bond is a notarial bond hypothecating corporeal movable property detailed and set out in the bond. The property must be recognisable, and the bond will be registered in terms of the Security by Means of Movable Property Act 57 of 1993 (Act).

Examples: 

• When transacting with a contract miner, one may consider using a special notarial bond where the contract miner owns moveable property equal to the value of the debt, for example mining equipment or machinery. 
• Further, a mining right holder may consider hypothecating certain moveable stockpiles of product owned by it as a form of security. The counter party would need to be comfortable with the risk associated with taking security over this form of moveable product, given that it may not be aware of the volume of the stockpile or value of the product when it enforces the security at a future date.

For more on the manner in which bonds are enforced see previous alert here. While one of the advantages of a bond is its enforceability against the debtor and other third parties, it may be a costly option to register. 

A lien

A lien is the right to retain possession of certain property belonging to another person as security for a debt owed by that person or claim against that person. 

Examples: 

• A mining right holder may consider the use of a lien where its contract miner’s equipment remains on site as security for a claim against non-performance by the contract miner under the relevant contract. The key to the exercise of a lien is possession of the property owned by the debtor. 
• Conversely, a contract miner providing mining services to a mining right holder may consider the use of a lien over the relevant product being mined by it, as security for payment of its service fees by the mining right holder, where it retains possession of the product.

One of the advantages of a lien is that the terms of the lien will generally form part of the underlying contract between the owner of the property and the holder of the lien and no registration or registration costs will be incurred, unlike a bond which does not require the holder to be in possession of the property to exercise or enforce the bond. However, the lien holder would need to maintain possession of the property at all times, which may become impractical.

Mortgage bond

A mortgage bond is an instrument used to hypothecate property. A mining right holder may hypothecate its mining right as a form of security with the consent of the Minister of Mineral and Petroleum Resources (as reconstituted from time to time) (Minister), as contemplated in terms of section 11 of the Mineral and Petroleum Resources Development Act 28 of 2002. This regulatory consent is not required where a bank, or any other financial institution approved by the Registrar of Banks, on request by the Minister, takes security by encumbering the mining right. 

Example:

• A mortgage bond can be used where a third party is providing funding to the mining right holder for purposes of mining operations or projects. The bond will be executed and registered in accordance with the Mining Titles Registration Act 16 of 1967.

While one of the advantages of a bond is its enforceability against the debtor and other third parties, like with the special notarial bond, it may be costly to register. 

Conclusion

All of the options above could be considered when preparing the relevant transaction agreements, having regard to the following:

• the value of the property in question, considering the relevant claim or debt;
• the essential requirements (regulatory or otherwise) that will need to be met for the special notarial bond, lien or mortgage bond to be enforceable;
• the advantages and disadvantages around enforcement of the security type;
• the risk appetite of the party who takes the security specifically having regard to the enforceability of the type of security; and