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Billions in mining capital at stake?

Analysts find that new codes for mining black economic empowerment (BEE) effectively seek to extinguish debt, after two years, even if a cent has not been paid off.

Author: Barry Sergeant
Posted: Thursday , 21 May 2009

JOHANNESBURG -

Having examined the recently published "Codes of Good Practice for the SA Minerals Industry," analysts at Royal Bank of Canada Capital Markets find "the current description around ownership to be a possible reason for renewed concern".

The codes, published in the South African Government Gazette on 29 April, attempt to set out administrative principles for "effective implementation" of the minerals and mining legislation and to "enhance" implementation of the "Broad-Based Socio-Economic Charter" applicable to the industry, under the general umbrella of black economic empowerment (BEE).

"If we understand this correctly" the RBCCM analysts say in a report, "the document effectively says that any sale to a BEE body will not accrue full credit if this BEE body still has debt associated with this purchase two years after the deal was done.

"Also, ‘ownership' effectively only occurs once the BEE party has no more debt.

Given the requirement by law that the companies must be able to prove that 26% ownership [of South African mining assets] has changed hands by 2014, it would imply that all debt will have to have been paid off by then. We do not believe this to be possible".

A good number of mining BEE deals are deep under water; just last week, Anglo Platinum, the world's No 1 digger of platinum group metals (PGMs), effectively announced a material bail out package for Anooraq Resources. In September 2007, Anglo Platinum announced two black economic empowerment (BEE) deals, including the sale of certain domestic PGM assets to Anooraq for ZAR 3.6bn.

The relevant announcement now states that the value of the deal would be reduced by ZAR 1bn in favour of Anooraq. Within the bail out package, Plateau, a wholly owned subsidiary of Anooraq, will raise ZAR 1.2bn through the issue of cumulative redeemable "A" preference shares, to Rustenburg Platinum Mines, none other than a wholly owned subsidiary of Anglo Platinum.

Beyond that, Anglo Platinum, in its own name, has agreed to reinvest ZAR 1.1bn of the new transaction consideration proceeds into Anooraq through a special purpose financing vehicle ("Pelawan Finance SPV") established between Anglo Platinum and Pelawan. Pelewan, a BEE entity, is Anooraq's controlling shareholder.

Beyond that, "in order to ensure the sustainability of Anooraq" and Lebowa Holdco, a new vehicle held 51% by Anooraq and 49% by Anglo Platinum, "Anglo Platinum will make two further facilities available to Plateau", including an operating cash flow shortfall facility of up to a maximum of ZAR 750m, "which Plateau may utilise to fund its share of any operating cash flow shortfall".

In effect, however, Anooraq will end up with debt of about ZAR 2.6bn, which it would have to repay with its 51% share of Lebowa mine's cash flows - an operation struggling to generate positive cash flows at current PGM prices. The BEE partners, as such, will not be putting a cent in towards debt reduction.

Analysts at RBCCM say that according to the Code, compliance in terms of ownership will depend on points scored on voting rights, economic interest and net value in BEE hands. The first two effectively relate to percentage share holding, but the net value calculation excludes any outstanding debt used to acquire the asset.

In the view, of the analysts, the new Code "raises new questions and will serve to destabilize the now ‘accepted' BEE activity when investing in South African companies again. We can only hope that the uncertainty and questions around these codes get resolved as soon as possible, particularly in the face of the South African mining industry having seen virtually no foreign investment into the sector over the past few years while the rest of the world saw significant investment in the bullish metal price environment that existed.

"We will try to keep up with changes and possible impacts, but for now, we believe it prudent to at least highlight the real potential for some uncertainty and potential volatility in the near-term".

Elements of the code include:

• Ownership

• Management Control

• Employment Equity

• Human Resource envelopment

• Preferential Procurement

• Mine Community and Rural Development

• Beneficiation and

• Housing and Living Conditions Standards.