AIRLINE'S HOPES FLEW WAY ABOVE REALITY FOR START-UPS

This article first appeared in the Business Times section of The Sunday Times on 6 December 2015.

This week, domestic low cost airline Skywise’s operations were suspended by the Airports Company South Africa (ACSA) due to unpaid airport charges for landing, take off and parking of aircrafts.

Skywise was founded by Tabassum Qadir and J. Malik with the first daily scheduled flight taking off on 5 March this year.

Until Wednesday’s suspension, the airline serviced Johannesburg and Cape Town, with a daily schedule of six flights a day with its one leased Boeing 737 aircraft.

The suspension caused tremendous inconvenience for Skywise customers, especially the passengers stuck at airports in mid-week with no flight home.

So what is the real problem?

According to the Co-Chairperson of the airline, Tabassum Qadir they had estimated that it would take a few months for the new airline to break even.

“Any business takes six to eight months to break even. Then you come to a point where you start making money and profits in the peak season. This [December] was our peak season time. Even if we didn’t get the capital injection, we were good enough to go with the peak season.”

So Skywise founders believe that it takes a few months for any business to break even, and that the business model of domestic low cost carriers is to lose money all year and bank on a bumper December to make it all back and take some profits with. And in their case, ACSA is standing in the way of their payday.

If there is a business out there that breaks even within six to eight months, I want in. Furthermore, aviation is a thin margin industry that is extremely capital heavy and cash hungry.  

Taking into account that the business of aviation requires a long-term commitment as well as deep pockets, how could Skywise's founders believe their business would break even in its first year of trade?

Did they ignore the tough economic climate and lethargic GDP growth curve that South Africa finds itself in?

What about the tight competition in the domestic low cost carrier market?

I do not want to believe that the entrepreneurs who invested R70 million of their own cash, could possibly be this naive. I am left with only speculation: The founders did not raise enough capital to carry the business.

The company was put on a “pay as you fly” plan after ACSA refused to extend and further credit to it, and the parties agreed on a six-month payment plan. Skywise made good on two payments and then struggled to keep up. The cash they hoped to generate was inadequate to fund the business, and the founders had already exhausted their capital.

This is not a new phenomenon and most successful entrepreneurs have been here before, at great cost to the reputation of their businesses.

Qadir concedes “Its not easy to start an airline. It was four years of hard work. And we are in operation for only nine months. We put in personal funding of R60 million – R70 million in the business. According to our business plan we were supposed to only make a profit in December and then continue to, going forward”

So a part of me sympathizes with the Skywise founders. I admire their bravery in entering aviation sector and am saddened by the strain they are having to manage.

However, I am also disappointed. I am disappointed by the business plan, which sounds more like “a hope” than “a plan”.

Blaming ACSA for suspending its services to Skywise due to non-payment, is not credible. Writing an open letter to President Jacob Zuma asking him to intervene is incomprehensible. If the airline has indeed secured equity investors to inject further capital, I sincerely hope they don’t expect a return in six to eight months. They would be lucky to see one in six to eight years.

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 6 December 2015.

Click here to listen to Skywise Co-Chairperson, Tabassum Qadir's interview on POWER Business with Andile Khumalo

POLISH YOUR SKOROKORO: THE RIDE WILL BE TOUGH

This article first appeared in the Business Times section of The Sunday Times on 29 November 2015.

In the mid-80s, ‘Skororo’ hitmaker Condry Ziqubu released another catchy tune, which I was convinced, was about ‘Mello Yellow’, the popular soft drink launched in the same era.

This week, a friend reminded me that ‘Yellow Mealie Meal’ was written to highlight the plight of Black South Africans in the aftermath of the hard-hitting droughts of 1982.

The punchy lyrics open with: “Hey look. Up there. Sun is very hot. Hey look. Up there. No thunder, no lightening. God of rain. Your children are crying, There’s no rain. Everybody’s singing this song. Yellow, yellow, yellow mealie meal”.

Last week the reserve bank governor, Lesetja Kganyago stood in front of the nation and announced the central bank’s decision on interest rates and updated its forecasts on GDP growth. A number of South Africans, whether working class professionals or entrepreneurs may not fully appreciate the impact of the current state of affairs, and how they ought to react to it.

The governor summarised matters well when he said “The key risks are a marked depreciation of the rand; worsening drought conditions and their likely impact on food prices and the possibility of additional electricity tariff adjustments. At the same time the economy remains weak.”

The comfort that rising interest rates are going to tame inflation, which is expected to breach the top end of the 3% - 6% range, have all but disappeared as the causes of real inflation have little to do with interest rates.

As the worst drought since Condry Ziqubu’s hit ravages us, we are likely to face serious headwinds on food prices in months to come. Climatologists say we should not take much comfort in the recent rains, as significant showers are only expected next March.

According to Grain SA, South Africa is expected to spend at least R2.2 billion on yellow maize imports of almost 1 million metric tons of from countries such as Argentina and Ukraine in the year through to the end of March 2016.

This week, Eskom reported interim results that showed a 13% increase in power prices, which helped its net profit climb to R11.3 billion. These were bitter-sweet news. We all want a successful Eskom who has enough to spend on maintenance to avoid further blackouts, and a constructive hamstring to the economy. But this doesn’t come for free. South Africans have no choice but to brace themselves for additional electricity tariff hikes.

Add to this mix a weakening rand, the volatility around a potential US interest rates hike, the uncertainty of wage negotiations in early 2016, and an economy that is forecasted to grow by 1,5% in 2016, you soon appreciate the tricky terrain we have to navigate in the next 12 months.

As an individual the choices are relatively easier to understand, avoid debt, especially unproductive debt. You are likely to start earning less in real terms as your employer sees lower profits in an economy that grew by only 0,7% in Q3 of 2015. Those big salary increases and fat bonuses are likely to be a fond memory. Reality check: A 6% salary increase is essentially a 0% salary increase in 2016.

Dr. Adrian Saville, Chief Strategist at Citadel Wealth Management has one piece of advice for businesses in these times. “Our estimates now is that economic growth going into 2016 could actually be sub-1%, and therefore businesses will have pressure on the top line, which means that your competitors will be trying to get at you, by eating into their own middle line. In other words, not only are your revenues going to struggle but so are your margins, leaving less to trickle into the bottom line. So what can you do? The first rule in these times is to survive. It’s the same as South Pole expeditioning. It’s not about who gets to the South Pole or top of the mountain first. It’s who gets home.” says Saville

Now is the time for resilience. The only way you can enjoy an economic recovery is to be there. It is also time for prayer. Prayer for more rain. Otherwise, we will all be singing yellow mealie meal in our skorokos for longer than we wish.

'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