A recipe for rescuing gold mines?
"An old lady whose Zimmer frame was breaking down." That's how Peter van den Steen described the state of Blyvooruitzicht gold mine when he took over as a business rescue practitioner in June 2011, in one of the first business rescue cases under the new Companies Act. It is also one of the most successful so far, having saved – at least temporarily – hundreds of millions of rands in value and thousands of jobs by averting liquidation.
Van den Steen ascribes the success to a combination of the actions his team took, which could not have been taken without the new business rescue law, and a fortuitous increase in the rand gold price in late 2011.
Blyvooruitzicht is like many South African gold mines – it's deep, runs on ageing infrastructure, is undercapitalised and probably destined for extinction if it does not have special ongoing management care and attention.
Established in 1937, Blyvooruitzicht was the first gold mine on the West Wits line. It became a subsidiary of Durban Roodepoort Deep in 1997 and in May this year it was taken over by Bernard Swanepoel's Village Main Reef, a specialist old-gold-mine company.
Blyvooruitzicht mine and its village was the setting for The Villagers, a soap opera filmed in the 1970s. The highest point in the village is a hill called Isidingo, from which the popular soap opera derives its name.
Blyvooruitzicht's business rescue in 2011-2012 could easily be part of any soap opera.
By the time its board appointed Van den Steen as its business rescue practitioner, the company was incurring monthly losses of about R10-million. The Durban Roodepoort Deep board could not continue to plug the dyke with money because it was putting the group at risk, said Van den Steen.
The new business rescue regime offered a possible solution that was better than liquidation, particularly because, if a mining company is liquidated, mining rights – a big part of its value – are lost.
"It needed a fresh set of eyes," said Van den Steen. It also needed the sometimes extraordinary powers that are given to the business rescue practitioner, who temporarily takes over custodianship of a company.
In the project Van den Steen, who has experience in the metallurgical side of mining, used a team including PwC's business recovery services division, Bowman Gilfillan's business rescue law specialists, media specialists and independent valuators. "You need independence and credibility because creditors are watching and challenging you all the time," he said.
His team started ferreting through the assets and the various operations of the mine. It was a large, complex and creaking organisation with a big turnover of about R1.7-billion a year. "We looked at the business fundamentals, but also at every detail and every piece of the operation. Nothing was taboo; we turned everything on its head and I asked the stupid questions," he said.
"We also spent a lot of time communicating with the unions and with the [then] 4700 workers to allay insecurity and demoralisation."
A major cash shortfall was developing. Van den Steen initially approached the Industrial Development Corporation (IDC) for financing, but to no avail.
Under section 136 of the Companies Act, the new business rescue regime offers practitioners extraordinary powers to suspend onerous contracts.
For the regime to succeed, the expertise and experience of the practitioner is vital, because he or she supplants the top management of the company. The practitioner's chances of success, compared with those of normal management, are enhanced because he or she comes in unencumbered by boardroom politics or the interests of shareholder groups and is able to make decisions outside of many of the strictures in the Companies Act.
But, most of all, the practitioner has much more bargaining power with creditors and leverage to renegotiate or even cancel unfavourable contracts. For instance, in certain circumstances the practitioner can force a supplier to continue supplying. And the new law offers a temporary respite from any civil law cases.
Van den Steen targeted "a critical supplier of a commodity that costs a lot more during winter" and in June, July and August Blyvooruitzicht paid the supplier's summer tariffs. The supplier was nonetheless required by law to continue supplying the commodity. In effect, Van den Steen used this supplier for interim financing when no one else could be found.
Van den Steen also negotiated with neighbouring mines, including AngloGold Ashanti, about fast-tracking a joint pumping project if Blyvooruitzicht stopped pumping to prevent the flooding of downstream AngloGold Ashanti mines.
Processes and metallurgy
With the unwilling help of the monopoly supplier, closure of some loss-making operations, more efficient processes and metallurgy, technical improvement projects and co-operation from the union, the monthly loss was systematically reduced, Van den Steen said.
Although the new business rescue law requires the practitioner to present a rescue plan within 25 days, with this complex operation an extension was secured. The plan was never presented or voted on by creditors because this was unnecessary.
When the company was no longer making losses, five-and-a-half months after the process began, it was taken out of business rescue. Van den Steen would have preferred to have completed the process to make the company more robust, but the Act prescribes that a company should be taken out of business rescue if there is no real reason to continue with it.
Nonetheless, he said, creditors had been paid and a settlement was reached with the monopoly supplier.
Affected underground operations
Van den Steen said the turnaround resulted in a total saving in value of several hundred million rands more than what would have been raised by liquidation, and avoided massive environmental liabilities and secondary job losses. The total cost of the business rescue was about R11-million, a little more than a month's loss in the bad period.
Village Main Reef has continued the restructuring of Blyvooruitzicht. The company was hit by a strike during the Marikana wave and about half its 4700 workers have been retrenched this year, but the mine continues to function. It announced this month that more jobs were under threat after a seismic event in October that affected underground operations as well as an illegal strike.
Given the large number of other old gold mines that are vulnerable to making losses, does Van den Steen believe that business rescue can make a big difference to the gold industry in general? "The problems with the Labour Relations Act, which requires a 60-day consultation process for retrenchment, much too long for the business rescue process, make it impractical ... The lack of fast and efficient funding mechanisms is also a big hurdle."
On the question of financing for companies in business rescue, he said banks were skittish. "It's going to take some time to change their minds," he said. Large financial funders such as the IDC are unlikely to be good sources (without special provisions for business rescue) because of their lengthy due diligence and other procedures. By its nature, business rescue requires quick action.
Van den Steen is involved in two other business rescues: Southgold Exploration Burnstone mine, owned by Canadian-based Great Basin Gold, and Top TV, which has run out of money two years after it started.