ANC heavyweight Cyril Ramaphosa's investment in Incwala is sinking, writes Lisa Steyn.
Lonmin’s empowerment vehicle, Incwala Resources, was the largest deal of its kind when it launched in 2004 and investors and financiers alike scrambled to get a piece of the R3.9-billion pie.
But just eight years later its majority shareholder, Cyril Ramaphosa, has lost money on his investment and could walk away from it.
In May 2010, a deal was struck with Ramaphosa’s Shanduka Group - or rather its wholly owned subsidiary, Shanduka Resources - for a majority share of 50% in Incwala.
Lonmin extended a $304-million loan to Shanduka to buy out its then-distressed empowerment partners. Lonmin needed to have a black economic empowerment (BEE) partner if it was to retain its mining licence.
A deal with Shanduka appeared a logical quick-fix to satisfy the narrow-based empowerment requirements of the mining charter, which requires mining companies to work towards and achieve 26% ownership by historically disadvantaged South Africans by the end of 2014 to keep operations running.
But following the poor performance of the industry since the financial meltdown of 2008, weeks of violent strikes and more than 50 deaths at Lonmin’s Marikana mine earlier this year, the platinum miner faces an uncertain future. Also uncertain is what Ramaphosa will do with his investment in Incwala.
Heading for trouble
Launched in 2004, Incwala was upheld as a flagship for transformation in the mining sector. In 2007, Miningmx.com reported that bankers were falling over each other to refinance Incwala, which had gained 328% in value since its inception. But two years later Incwala was in deep trouble.
Not only had Lonmin’s mechanised mines performed poorly, but plunging platinum prices meant Incwala’s original majority BEE shareholders, the Thelo Group, Vantage Capital and Dema Capital, which had a 52.8% combined interest in Incwala, had gone bust.
With no dividends paid out, the distressed shareholders were unable to service their debt, which they had raised from major banks and Lonmin. A repayment of R1.5-billion was due by the end of September 2009.
Lonmin warned its shareholders that it could be called on to pay out R930-million in loan guarantees that Lonmim had given to third-party funders at the time of Incwala’s formation.
Lonmin was in a tough spot; it had no choice but to bail out the distressed parties and did so by extending the sizeable loan to Shanduka Resources for it to buy out the previous BEE shareholders.
Lonmin says the $304-million Shanduka paid was fair value at the time, but despite being unable to service their debt, Lonmin and Shanduka say the original BEE partners walked away with a profit, although neither Lonmin nor Shanduka will disclose the amount.
“The acquisition consideration was mostly used to settle bank and third-party funding obligations of the existing Incwala shareholders, with these exiting shareholders retaining the balance of the consideration,” Lonmin said.
One beneficiary, the Lonplats Employee Masakhane Trust, which had a 25% holding each in Dema, Thelo and Vantage, paid about R200-million to more than 26 000 Lonplats employees in July 2011.
A sweet deal
Cobus Loots, Shanduka Resources’s managing director, said it was not unusual business practice for the distressed partners to make some sort of profit, but “they certainly made way less than they could have made if they sold out at the top”. It seemed a sweet deal for Shanduka at the time.
The transaction resulted in it holding a 50% interest in Incwala, which has a direct shareholding of 18% in Lonplats, Lonmin’s primary subsidiary that holds Eastern Platinum Limited and Western Platinum Limited. Incwala also holds 26% of Akanani, a Lonmin project in the northern bushveld, which cost Inwala R800-million.
Shanduka put up R300-million - “a sizable sum for a BEE company”, said Loots - whereas Lonmin extended the $304-million loan for five years at 5% interest. Besides that, R175-million in preference shares were issued to Shanduka a few months later.
But Loots said the interest would be higher because it was calculated on a ratcheted mechanism. According to Lonmin, as of September 2012 the Shanduka debt was $381-million, which will accrue interest until its repayment in 2015.
The loan is secured on Shanduka Resource’s stake in Incwala, meaning that if Ramaphosa’s company is unable to meet its debt commitments to Lonmin, it could simply walk away from the deal with a loss of R300-million.
This would once again leave Lonmin without a BEE partner, putting its licence in jeopardy. In its 2010 annual report the platinum mining company said its board had decided robust funding would be required for the new BEE structure to secure the long-term future and stability of Incwala.
The funding for the deal with Shanduka Resources was financed through a combination of the proceeds from a rights issue, which raised $229-million, and $56-million that was funded from Lonmin’s own financial resources - “as well as rolling over some loans”.
It led to higher net debt than planned at the outset of the year, but Lonmin believed the loan would be lucrative in the long run.
According to Lonmin’s 2010 annual report, Incwala was paid advanced dividends of R80-million in 2010 to service its debt. Loots said this helped to service the debts of other shareholders and Shanduka had yet to see a single cent. The empowerment vehicle also received advanced dividends before the demise of its former majority shareholders. As Ramaphosa has said: Shanduka’s investment is under water. “If we were to use the Lonmin share price today to measure the value of our stake then, yes, it is definitely under water … our break-even price, if you use the Lonmin share price, is about £14 or £15,” Loots said.
Share price dropping
The company’s share price has continued to drop since the Marikana shootings on August 16 and was trading at about £2.6 this week. When Ramaphosa appeared on the scene in 2010, Incwala was valued at about $600-million, based on Lonmin’s statement that the 50% owned by its BEE partners was worth $304-million. But as of September 30 2012, Lonmin said Incwala was worth much less - $398-million.
“There are lots of options,” Loots said of Shanduka’s choices at the time of debt repayment in 2015. “Refinance, walk away … Hopefully things go better.”
Steyn Speed, Shanduka group executive for corporate communications and stakeholder relations, said the company had faith that Lonmin would find its feet again.
“Lonmin is in a difficult position at the moment for a whole number of reasons. It has to do with the industry and it has certain implications for our investment. We have faith in the company and faith in the industry that it will recover.”
Lonmin said it believed Shanduka would be able to repay the loan.
Certainly, there is potential. Despite Lonmin’s market value of just R7.6-billion at present, its net asset value is more than R24-billion.
Should things turn around and dividend flows help Shanduka Resources to service its debt, the company would be in the pound seats once this debt was settled.
The Lonmin-Shanduka agreement ensures that if there is significant future value created for Shanduka through its Incwala shareholding, a portion would be shared with Lonmin, according to Lonmin’s 2010 annual report.
Earlier this year, Lonmin recognised debt facilities worth $1-billion and last month shareholders voted in favour of a rights issue for a proposed $817-million. Before the vote, the company said amended loan facilities were conditional to the completion of the rights issue and receipt by the company of at least $700-million of net proceeds by December 31 2012.
Peter Major, a mining analyst at Cadiz Corporate Solutions, said this left little more than $100-million for capital expenditure. “It’s not enough capex to do what they need to do, but it’s enough to get them back to normal production … But by the end of year two, they’ll need capex of over $400-million.”
Major said there was room to cut costs, given the failures of Lonmin’s mechanised mining, although it could take a “year or two to get the whole mine back to conventional [operating levels]”.
Although shareholders would probably follow their rights, they were unlikely to get dividends for the next three or four years, Major said.
The big “if”, he said, was the platinum price. “As long as platinum stays at $1 500 an ounce, then I think Lonmin is okay. If platinum falls below $1 400 an ounce, then it’ll be important for the rand to lose a similar or more amount.”
Community cries foul
Exactly why Cyril Ramaphosa’s company could buy out Incwala’s major black economic empowerment (BEE) partners is a bone of contention for the Bapo ba Mogale, on whose land Lonmin operates.
The Bapo rejected Shanduka’s offer of R38-million for its 2.85% stake and instead expressed an interest in becoming the majority shareholder in Incwala.
The original disadvantaged South African shareholders, the Bapo had pre-emptive rights to buy out the distressed shareholders.
But Hugh Eiser, legal representative for the Bapo, said this right was ignored by Lonmin, which favoured the politically connected Shanduka Resources.
Lonmin did not respond to questions about this. Eiser asked why a loan to buy out the shareholders was not offered to the Bapo community. In response, Lonmin said it needed a partner who could add value.
“The board believes that Shanduka, as the majority shareholder in Incwala, has a proven track record of investing in the natural resources sector, strong leadership qualities and has demonstrated the financial capacity to participate in transactions together with Lonmin.”
With only 18% black ownership in its subsidiary Lonplats, Lonmin must reach the 26% required by the mining charter by December 31 2014 and is looking to achieve this through a broad-based solution.
“The company is considering a range of options involving the issuance of additional shares which could dilute the interests of shareholders.”