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Black empowerment. THE SCORECARD SO FAR
September 27, 2002 9:01pm
Brendan Ryan
09/27/2002
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Black empowerment THE SCORECARD SO FAR Platinum sector offers good opportunities In late 1997, the pioneering black economic empowerment (BEE) venture in the mining industry involving mining house JCI blew up in the face of promoter Anglo American. Five years on, the issue of empowerment in the mining industry is more critical than ever, but at least now there are examples of what works.
The stakes are huge. The mining industry is one of the biggest employers in the private sector and is SA's foremost earner of hard currency through sales of gold, platinum, coal and diamonds. The scope of the deals to be done matches the stakes. Metorex chairman Simon Malone describes the empowerment potential in the platinum sector as “ the biggest mineral rights play since the development of the West Wits line after World War 2”. The West Wits line gave birth to world-class gold operations like Western Deep Levels and the Driefontein mines.
Get BEE wrong and, as one worried mining house executive says: “SA will end up like Zambia; in 30 years, we will be a third-rate mining country.” Get BEE right and all manner of desirable benefits fall into place, ranging from the creation of wealthy, black middle and upper classes to job creation and the upliftment of poor communities in the regions where the mines operate.
This last benefit assumes the new black business elite passes some of the benefits of the dispensation on to the broader community, as government intends.
Says Kuyasa Mining chairman Ayanda Bam: “A lot of companies are bending over backwards to provide breaks for black businessmen because of government's BEE policies. It would not be right for someone receiving those kinds of benefits under the cloak of BEE to subsequently decide he will cash them in for his own account and leave the small change behind.” That is precisely the allegation levelled by many against Mzi Khumalo — who, with Brett Kebble, presided over the demise of JCI — for his actions in the furore that erupted over the BEE stake in Harmony held by Simane (Companies July 19). Since the JCI debacle, a number of BEE mining deals have been concluded, resulting in the emergence of a handful of successful black mining companies. What they all have in common is that they are far smaller than JCI and all, bar Tokyo Sexwale's Mvelaphanda Resources (Mvela), concentrate on single commodities. Other important aspects of these deals are that they involve assets acquired at handsome discounts and, in many cases, with technical back-up from the vendors through service agreements.
Lady Luck has played a big role for some in the gold sector through the favourable timing of the acquisition of assets ahead of the surge in the gold price from the end of 2001.
In terms of management strategy, the one that has worked best is to focus on logical, achievable growth and not bite off more than can be chewed in one go.
The best example of this is the latest BEE deal involving the purchase of Delmas Colliery from Ingwe Coal (the SA coal mining subsidiary of BHP Billiton) by Kuyasa Mining (Business September 13). Kuyasa was formed in 1995 by four ex-Ingwe middle managers. In 1996, they set about establishing the Ikhwezi Colliery from scratch on mineral rights acquired from and with technical assistance of Ingwe. Funding came from the Commonwealth Development Corporation (now called CDC Capital Partners) because no commercial institution would back them; the debt was repaid within a year.
Ikhwezi was opened in March 1997 and now produces up to 1,8Mt of coal annually and employs 100 people. Delmas will add 1,2Mt and Kuyasa is in the running to establish a new 8Mt/year colliery down the track through a joint venture (JV) with Ingwe.
Says Bam: “Management focus is crucial. We have invested a lot of time and effort in coal and we need to get the rewards from that work through achieving certain targets. Maybe in 10 years or so we might think about diversifying.” Anglo's second attempt at BEE in the mining game was also in coal through a partnership with Ingwe, resulting in the establishment of Eyesizwe Mining, now SA's fourth-largest coal group.
Eyesizwe bought assets valued at R700m in November 2000 for R360m from Anglo and Ingwe. The deal was funded in part by Anglo/Ingwe, which also took a 20% stake in Eyesizwe and signed technical service agreements.
Anglo Coal executive Roger Wicks said at the time: “The price paid for the assets has not met the initial aspirations of Anglo Coal and Billiton Coal and our willingness to pursue the transaction to conclusion, with its attendant compromises in many areas — not least on the question of value — is further evidence of our commitment to realistic and practical empowerment.” Eyesizwe's supply deal with Eskom gives the group a solid income stream from which CEO Sipho Nkosi is paying off the debt while positioning himself to expand the group's coal business, both with Eskom and through the export market through possible deals with Kumba Resources (Business September 13).
Entrepreneur Patrice Motsepe has worked hard to get where he is in the mining industry — a rand billionaire and majority shareholder in the world's 12th-largest gold group in terms of production — but he got a large helping hand from AngloGold along the way. In 1998, African Rainbow Minerals (ARM, now listed as ARMgold) bought various shafts and assets from the former Vaal Reefs gold mine for R38,2m on soft terms. Later in 1998, ARMgold bought various Free State shafts from AngloGold for R28m, of which it paid only R7m because AngloGold waived the balance.
However, AngloGold demanded cash on the nail in its latest deal — the sale of Freegold to the Harmony/ARMgold JV for R2,2bn — but gold industry observers reckon it was a bargain. Whether that was by design or error on AngloGold management's part is not clear.
The reason the price was considered cheap is that with the soaring gold price Harmony/ARMgold have made cash operating profits of R972,6m out of Freegold in the six months to June. They took control at the beginning of January. If this kind of performance is maintained, the JV will recover the purchase price in less than 15 months, making it a phenomenal deal. Everything after that is clear profit on an asset that looks increasingly long-life. No wonder Harmony CEO Bernard Swanepoel at the time described the decision to buy Freegold as “a no-brainer”.
Linking up with Harmony has also been an extremely valuable experience for two other BEE groups — the Khumo Bathong consortium led by Paseka Ncholo and the Simane consortium — because of the explosion in Harmony's share price over the past year from a low of R39 to a high of R187. Khumo Bathong was part of a consortium that two years ago bought a 10% stake in Harmony's operating Elandskraal mine for R100m, using funds borrowed from Harmony. The consortium has since cashed out its stake for R210m and used the profits to grow gold assets under Khumo Bathong's direct management control. These include the purchase of 60% of Crown Gold Recoveries — the dump retreatment operation formerly owned by Durban Roodepoort Deep (DRD) — and a 3% stake in DRD itself, which gives Ncholo a seat on the DRD board. Since this deal, Crown Gold bought out the 70% stake held in East Rand Proprietary Mines (ERPM) by German entrepreneur Claus Daun, at a price that Ncholo terms an acceptable black empowerment discount. Khumo Bathong already owned the other 30%, having joined forces with Daun in 2000 to buy the mine which was on the brink of liquidation. Mvela has gone a different route, taking substantial but minority stakes in Northam Platinum and Trans Hex, while striking JV deals in diamonds with De Beers and in platinum with SouthernEra. Mvela CEO Mark Willcox says the intention is to reduce risk through diversity in precious metals and minerals. He points out Mvela is not a passive shareholder but is involved closely in management decisions at both Northam and Trans Hex. “The senior management changes made recently at Trans Hex had a lot to do with our involvement,” he says. |
