LET BLACK INDUSTRIALISTS FOLLOW WHATEVER PATH THEY CHOOSE

This article first appeared in the Business Times section of The Sunday Times on 7 February 2016 

THIS week I attended the government’s launch of the Black Industrialists Programme, hosted by the National Empowerment Fund and the Department of Trade and Industry.

I listened attentively as minister Rob Davies and deputy minister Mzwandile Masina provided details of the programme, how it would work, and what it would fund and not fund.

I am a big fan of what the government is trying to achieve with the Black Industrialists Programme. It is time we deliberately and unapologetically used state levers to create globally competitive black business champions in our economy.

The symbolism of being able to point to black entrepreneurs who control and operate major corporations in big industries is something we desperately need as a country still grappling with racial discrimination and inequality. This will have a profound impact on the psyche of future generations, who remain most affected by stubbornly high levels of unemployment.

The implementation of this programme must therefore be well thought through to ensure our efforts yield the best outcomes. In other words, we need to use our collective experience to give ourselves the best chance of success.

Unfortunately, at the end of the launch, I concluded that the government’s programme comes with two key flaws.

The first is that the government has single-handedly redefined the term “industrial ” to mean “manufacturing”. Not only is this simply incorrect, it is in stark contrast to local realities and global trends.

Just last month, world leaders at the World Economic Forum in Davos debated “the fourth industrial revolution”. That had nothing to do with manufacturing. It had everything to do with the knowledge economy, the fuel behind the growth of modern economies.

The second flaw is that the programme seems to have been crafted outside of the threats and opportunities before us today and in the foreseeable future.

In case you are not aware, the programme will focus on very specific sectors. These are the ocean economy; oil and gas; clean technology and energy; mineral beneficiation; aerospace; rail and automotive components; industrial infrastructure; information and communications technology; agro-processing; clothing; textiles, leather and footwear; pulp, paper and furniture; chemicals, pharmaceuticals and plastics; nuclear; and manufacturing-related logistics.

Why limit the programme to specific sectors? Black people hardly control any key sector of the economy.

The closest we have come is the taxi industry and football.

We ought to invite applications from any black entrepreneur in any sector, with a convincing plan, credible expertise and the will to succeed, with size, experience and expertise the only criteria. The programme shouldn’t be closed to sectors, only to small ideas with no major impact on inclusive economic growth and transformation.

The programme must be about catapulting or graduating existing black entrepreneurs in all industries to become leaders who control and operate the biggest companies in their sectors.

I have previously referred to a golden opportunity presented by depressed commodity prices. The list above does not include mining.

The policymakers have instead included “mineral beneficiation”. I am yet to be exposed to a big mineral beneficiation industry in South Africa. As far as I am aware, it doesn’t exist. Yes, I appreciate that we need to start beneficiating our minerals, but right now there is hardly any meaningful impact to be derived from having a black-controlled mineral beneficiation operator.

Even if the biggest mineral beneficiation company in South Africa was black-controlled, it would not move the needle in economic growth and transformation in the broader resources industry.

That ’s because the beneficiation industry is not yet adequately developed. It is a small part of the resources industry. So why are we wanting to create black industrialists in beneficiation when an even bigger opportunity beckons?

Imagine if a black steel operator acquired a Highveld Steel in business rescue or even an Arcelor-Mittal that recently announced that its loss is going to be 22 times higher than the previous year and more jobs cuts are on the way.

Imagine our pride if a black steel entrepreneur bought these businesses, drove down operating costs, the government stepped up to better protect the industry, and when global markets improved, we might have a steel industry actually controlled by black people.

I can say the same for platinum. Yes, Sibanye has acquired some of Anglo Platinum’s mines and Aquarius, but there is still Lonmin.

Imagine if Lonmin could be an asset we point to one day as a product of a clever move by a smart government, in a time of depressed platinum prices, that backed experienced black platinum group metals operators who persevered through the tough times and eventually controlled one of the largest platinum miners in the world?

Thanks to a question asked by the Black Business Council’s Gregory Mofokeng at the launch, I learnt that the construction industry has also been excluded from the so-called focus sectors. It has been replaced by “industrial infrastructure”. It’s not clear what this term means, but what is the logic of excluding the construction sector?

I am only aware of Dr Thandi Ndlovu ’s Motheo Group as a credible, sizeable, top-grade blackcontrolled construction group.

Not withstanding its impressive growth, Motheo is small fry compared to the big boys. Are we saying we don’t need a black-owned and operated Aveng, Group Five or Murray & Roberts? Surely not.

Let’s just be open to any big idea that will create a thriving economy that is controlled and operated by black people. Let us also move with the times. We live in a world where the best economies thrive because of innovation and knowledge, not by how much they manufacture.

Excluding service industries and making the Black Industrialists Programme exclusively about manufacturing is ill-advised. 

For example, ICT is on the list, yet the biggest ICT companies to come out of South Africa are mostly in the services space. Think of Dimension Data and EOH.

We need to learn from the past and craft policy that will give us the results we want. I’m afraid even the 100 industrialists in three years that Masina speaks of so passionately may very well be a pipe dream if the department guidelines are anything to go by.

D-DAY LOOMS THIS WEEK FOR STRUGGLING LONMIN

This article first appeared in the Business Times section of The Sunday Times on 15 November 2015.

The company founded in 1909 as the London and Rhodesian Mining and Land Company and renamed ‘Lonmin’ 90 years later after unbundling its diversified portfolio, to focus only on mining activities in Southern Africa, released it annual results and final details of its $407 million (about R5,8 billion) rights issue this week.

It was a reminder of just how damaging the recent drop in commodity prices has been for mining companies, especially this platinum group metals high cost producer.

For some context consider that in 2008 global miner and shareholder Xstrata valued Lonmin at $10-billion when it made an offer to buy out all other shareholders. Today Lonmin’s worth just under $90 million. The company is worth less than 1% of its value 7 years ago.

Further consider that the $407 million rights issue is the third equity raise in six years for the beleaguered PGM producer.

There was a $457 million issue in 2009, at a 44% discount, which was followed by a refinancing package of $575m that would push the maturity of the debt facilities by another 3 years to 2012.

Then came 2012. The Marikana tragedy happened in August. Three months later another rights issue is announced. This time it was for $817 million at a 45% discount, for the same purpose of trying to stave off a breach of covenants and maturing debt.

Speaking about the 2012 rights issue, then Chairman of Lonmin, Roger Phillimore said "This rights issue was designed with one thing in mind: to help our shareholders maximise returns from the Company's excellent assets and position in the market, when it improves." Unfortunately the market has not improved since 2012. The market has become much, much worse.

This year’s third installment is worth $407 million and comes at 94% discount. Can 94% even be called a discount? Its no different to someone needing R100 and asking you to help them out with R94!

The company says the funds will be used to ‘withstand a continuation of the weak PGM pricing environment, and as additional working capital, allowing the company to meet its obligations and commitments as they fall due’ – which is a courteous way of saying ‘Dear shareholders. Our selling price has halved, we’ve cut out all the fat from the costs, and the wolves are at the door. Please help.’

Over and above the rights issue the company has also managed to dodge the bullet of maturing debt facilities of some $307 billion. However, that refinancing package depended on a successful rights issue. The rights issue itself is now fully underwritten albeit at a heavy cost of some $38 million dollars in fees, according to reports.

So the suggestion that, Lonmin could’ve shut down had it failed to raise the capital it needed, is not far from the truth. Without the capital, it would have failed to refinance the debt, hence failed to honour its commitments when they become due. That also explains the heavy discount.

I have speak to expert equity analysts and asset managemers every day. For the past two weeks I have been posing the question: “Are you following your rights on Lonmin?”. Not one of them have said yes. One of them even lamented that “I am not in the business of keeping Lonmin’s mines openned, in the outside hope that it doesn’t run out of money before the platinum price recovers’.

However, the truth is the company has managed to get major banks to underwrite the offer. The likes of The Public Investment Corporation (PIC), which holds about 7% of the stock, have also followed their rights and even offered to sub-underwrite a “material portion” beyond its entitlement.

Why? Fees and Discount.

By anybody’s measure a $38 million (R536 million) payday is a good payday - notwithstanding the inherent risk taken by an underwriter of a share issue, which in Lonmin’s case is present and real.

The other reality of course, is that by its very nature rights offers, especially at such huge discounts, are dilutionary.

So every shareholder is faced with a tough choice.

Follow your rights, inject cash into Lonmin, take advantage of the discount, keep your relative shareholding at the levels you desire and place yourself in a good position when (and if) the market recovers.

Or don’t follow your rights, don’t part with your cash, you will end up owning much less than you currently do in relative terms, and you will surely miss the opportunity to cash in when the good times come back (if they come back).

It is therefore over to you Mr & Ms Shareholder. Next week Thursday, 19 November is decision day. All shareholders of Lonmin vote on the rights issue and essentially on the future of the platinum producer. Good luck.

Andile Khumalo is the CIO of MSG Afrika and MD of POWER 98.7. He also presents POWER Business on POWER 98.7 at 5pm, Monday to Thursday. This article first appeared in the Business Times section of The Sunday Times on 15 November 2015.

Click here to listen to Lonmin CEO, Ben Magara's interview on POWER Business with Andile Khumalo