'ONCE EMPOWERED, ALWAYS EMPOWERED' RINGS UNTRUE

This article first appeared in the Business Times section of The Sunday Times on 22 November 2015.

The results of the 10-year review of the Mining Charter and the subsequent squabble between the Chamber of Mines and the Department of Mineral Resources has brought up a key question about Broad-Based Economic Empowerment (BBBEE), and whether or not the policy can sustainably transform the ownership profile of the South African economy.   

The question of ‘once empowered, always empowered’ is central to the success of BBBEE and remains unresolved, perhaps for a good reason. 

Is it fair for a white-owned mining company to sell 26% of its equity to Black shareholders, often at a sizeable discount and great cost to its earnings, as well as practically finance the deal, only to end up with zero empowerment credentials when the Black shareholders settle their debt, sell and move on?  

On the other hand, can a South African mining company genuinely claim to have transformed an industry if it does not measure its transformation by taking a snapshot of its share register, at any given time, and see black shareholders owning more than 26%?  

And what about the right to sell? Surely the Black shareholders, assuming they are no longer encumbered and are past the lock-in period, have the right, like any other investor, to realise their investment and do as they wish with their wealth. 

The Chamber of Mines calls the charter ambiguos on this issue. I think what they meant is they find it unfair, not unclear. The charter states “In order to increase participation and ownership by Historicaly Disadvantaged South Africans (HDSA) in the mining industry, mining companies agree to achieve 26% HDSA ownership of the mining industry assets in 10 years by each mining company”.  

A lay man’s reading would therefore expect a measure that would value the total mining industry and compare that to the value of mining industry shares owned by black people. Apparently it is not that simple. 

Former Minister Ngoako Ramatlhodi tried arguing this. He was unsuccesful and eventually capitulated, leaving it up to the courts to decide.   

According to the Minister, he and the Chamber could not agree on the "principles applicable to assessing the ownership element" of the charter and therefore agreed to take the matter to the High Court for a declaratory order "to guide on the correct interpretation".   

It seems the Minister was happy to be bound by the interpretation of the courts, but not the Chamber of Mines.  They insisted on keeping the window open, and to appeal the decision, if it didn’t favour them.  

I don’t blame the Chamber for this stance. If the court found against them and their 72 members who represent more than 90% of mineral output in South Africa, its members would need to do brand new BBBEE deals or face losing their mining rights. 

However, the charter goes into great detail, outlining its principles and intentions, specifically in relation to ownership. With due respect, the Chamber’s issue is not and has never been about the principles. 

Ask any economically active South African what BBBEE is trying to achieve, and notwtshtanding their disappointment with its effectiveness, they will tell you its about trying to get Black people into the mainstream economy, and that’s the principle. 

When the government and the industry couldn’t take the public criticism of going to court to argue empowerment, they decided to attempt settling the matter out of court. Minister Ngoako Ramatlhodi was ‘reshuffled’ and enter new Minister Mosebenzi Joseph Zwane.  

The final outcome of these offline discussions was mining companies being temporarily exempt from the provisions in the Broad-Based Black Economic Empowerment Act ,which essentially means that mining companies, at least for the next 12 months, are governed by the DTI’s Codes of Good Practice and not the mining charter. 

This is meant to be a temporary measure while the Mineral and Petroleum Resources Development Act (MPRDA) and its underlying Mining Charter are being reviewed.  

Its taken the whole of 2015 for government and the industry to agree on what they signed 11 years ago, and there’s still no agreement. 

I suspect the industry has pulled one over the government here and created room for further extensions of this exemption. 

This will undoubtedly strengthen their leverage in having the provisions they want in the revised mining charter.  

Whilst all parties will keep fighting for their respective positions, the key issue of ‘once empowered, always empowered’ remains unresolved. 

I think this important question alone could mark the beginning of the end of BBBEE in its current form. Perhaps that too, is not a bad thing. 

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

Mauritius, Oh Mauritius!

The last time Mandisa and I were in Mauritius was in 2009 after celebrating our 5-year anniversary. Our son Andisa was 2 years old and our daughter Wandi was not born yet. We had such a great time on the island that we vowed to return, this time with the whole family. A few weeks ago we visited the Club Med La' Plantation D'Albion. What an experience! 

This was to be the first time we travel abroad as a family, since the Department of Home Affairs' law requiring children to travel with their unabridged certificates. So my very organized wife had started applying very early for all the travel documents. Thanks to Mandisa for doing this in time as it revealed all sorts of issues Wandi & I had at Home Affairs including the need for me to apply for a new ID and a new Passport after being a victim of identity theft. Thanks to the swift work of the Department, we were able to sort all this out in time for our travels. 

On travel day, I learned a few lessons: 

Number 1: When traveling with the kids never order Uber Black to the airport - Always call Uber Van - the poor Mercedes Benz C-Class had to squeeze in luggage to last 6 nights for 4 people, including 2 golf bags, because I had called the normal Uber Black to collect us for the trip to the airport. But we survived.

Number 2: Always arrive at the airport at least 3 hours before departure. As we were checking in at the Air Mauritius counter, Mandisa's eyes suddenly widened as the check-in agent was perusing our travel documents - she sensed we had forgotten something important - at that point we realized that we had left behind the very same unabridged birth certificates we had worked so hard to get. For some reason after we received them we put them in the safe, but not in the same bag as the passports.

  

"I can't find the unabridged certificates!"

We immediately switched from 'holiday mode' to 'problem-solving' mode. I called an Uber. Jumped in. Gave him instructions to do whatever was necessary to ensure I was back in time for check in. It was time to abuse another Uber driver. 

He did great. We were back in time to check in, and board. We landed in Mauritius at around 19:30. At the brand new airport, Club Med has its own counter where you are directed to your transfer to the resort. I was worried about whether we would catch dinner in time, and was assured that the resort is expecting us and have made arrangements for us to have dinner before bedtime. 

The drive to D'Albion was very interesting. Our driver was very knowledgeable about history of the island, the resort, things we should try out during our stay. 

We were warmly received by our Club Med D'Albion hostess who took us through all the activities and facilities of the resort. All the resort activities were included in the resort rate and wouldn't cost anything extra. These included snorkeling, boat cruise, sailing, catamaran tour, trapeze, golf, soccer, beach volleyball, and many others. All food and drinks were included in the resort package also. Yes, even the drinks. 

When the hostess mentioned Mini Club, our eyes brightened. We had heard about Mini Club Med. I think we were more excited about it than the kids. The Mini Club is a kids’ section of the resort that has activities all day everyday specifically designed for children to enjoy the resort their way. There are child minders on duty all day, who often take children from all over the world around the resort to the beach, pool, games area, etc.   

"See you later, parents!"

"Here I come!"

I was really excited to find out that the resort had a second restaurant that was specifically set up for people like us: people who are always late for breakfast cut-off time. Let me explain: At the main restaurant breakfast kicks off at 07:00 and ends at 10:00. At the second restaurant, breakfast starts at 10:30. This was heaven sent. We tend to sleep in a lot when on holiday and breakfast cut off times are the enemy. Apparently not at the Club Med D'Albion.

"I believe I can Fly"

The resort also has an ‘adults only’ pool that caters for those who want to take a dip in silence and without the noise or children playing. But if you really want to soak up a week of chilling at the pool and taking the odd walk on the beach, with the bar in full sight, the main pool is for you. Mandisa and I spent most of our time here reading, swimming, and enjoying cocktails. Even the noise of children playing in the background can be very relaxing. 

Dinners are themed every night and the restaurant offers 5 serving stations including Italian, Mauritian, and Japanese. The variety of food is a little overwhelming as you can find yourself walking round with a plate in hand, very confused what to have, as everything looks soooo good. I visited the Italian and Mauritian stands often and was never disappointed. My staple drinks diet was the leading Mauritian beer, Phoenix – which was on tap every night at dinner. The wine list is also extensive though you have to pay for most of the selection. Mandisa often had her favourite of vodka, lime & lemonade and that seem to go down well also.

"Peace to the Creative Director!"

Another highlight of our stay at the Club Med D'Albion are the theatre shows every night - all with different themes from the Cabaret show to Infinity Circus Show. 

The best was the musical that featured pop music from Lady Gaga, Madonna to Rihanna. Mandisa loved these shows so much it was a welcomed suprise when she got an opportunity to meet one of the leading actor on our last night there. 

The sports activities were brilliant also. Andisa and I played some golf at the resort after turning down an offer to pay R4,200 for a 9-hole game at a nearby golf course. Err... how about "NO"! We had a great time in the sun, and it gave Andisa a great opportunity to make a case for a new set of golf clubs. I’m happy to report that I have made good on my promise and in fact today he tried out his new set with me over a 9-hole game. He seems very satisfied with his choice.

 

"Second shot. Birdie!"

"That's how we roll!"

The kids also tried the trapeze – something they’ve never done before but were quite intrigued by it. I suspect next time they do it, they would be better prepared. 

The final day of our stay was a day of snorkeling and sailing for Mandisa and I. Swimming in the middle of the ocean is such a surreal and peaceful experience. Watching sea life go through its version of normality is fascinating. I could watch it all day. I did however hope to see more fish than I did. Our sailor did warn that the time of the year isn’t great for seeing a wide variety of fish and sea life. It was a great experience nonetheless.

"Fun in the Sun"

The date of departure was a tough one. We had to leave the resort at 06h00 and the flight was delayed by 2 hours after the pilot found a fault in one of the engines. The airline, understandably didn’t let anyone out of the plane during this time, and that resulted in a number of passengers being uneasy. The Khumalos slept most of that time, as we had had an early morning. I got some work done, as the brain was now switching back into work mode.

We eventually landed safely in Johannesburg. 

We were happy to be back home. But we were sad the holiday had come to an end. This one will stay with us for a long time to come.