The strange battle for Nkwe Platinum
The platinum sector is in the doldrums; depressed prices, labour trouble, and threats from government to seize the rights to mines that are mothballed. None of these factors add up to an attractive investment but there are enough platinum bulls around, so much so that the control of one potential Rustenburg mine – with rich but risky prospects – has turned into something of a a battleground.
A minority shareholder in a local black empowerment vehicle this week nearly went to court, and might still file for an interdict, to stop a deal involving a Hong Kong investment entity registered in Cyprus and an Australia-listed company nominally headquartered in Bermuda.
At the end of the tangle of companies is a potential platinum mine in Rustenburg, the same area in which Anglo Platinum has indicated it could close and sell shafts, at the cost of as many as 14 000 jobs.
The mine does not yet exist and would be able to go into production by no earlier than 2015. It also faces a potential legal overhang, a dispute about rights and licences. Yet different parties are jockeying to control it, complete with allegations of dirty tactics and underhanded dealing.
"They know this project is worth almost a hundred million ounces, that we’ll be mining there for the next 60 years, and it’s not too deep,” said Andile Nkuhlu. “There are obscene profits there, over time.”
Nkuhlu is the minority shareholder threatening legal action to undo a deal that would, he argued, see a change of control in black empowerment holding company Genorah. Genorah, in turn, owns 60% of Nkwe Platinum, a development company listed on Australia’s ASX.
Thanks in part to the recent turn in the platinum market, Genorah and Nkwe are in financial trouble, with a cash crunch insiders said was dire. The company’s inability to repay a loan saw the lender start to sell off shares in lieu of payment last year, which lead it to hastily arrange a different facility.
What Nkwe and Genorah hold, though, is a feasibility study that shows a potential profit margin of nearly 56% on a project called Garatau.
The project would cost more than R5-billion in funding, Nkwe told its shareholders in the last quarter of 2012, but that would be paid back within 10 years, after which the project should yield upwards of R157-million per year in pure profit.
In order to get there, Genorah and Nkwe need a little cash in the short term, and a lot of cash in the long run. One potential funder is Mvelaphanda, the group created by Tokyo Sexwale.
“We are positive towards the South African mining sector, and can therefore confirm that we did engage to start a due diligence process to recapitalise the Genorah structure,” Mvelaphanda’s Mark Willcox said this week. “We believe that some of the legal challenges there have been settled.”
At least one other group, based in China, also expressed interest in funding Nkwe.
But instead of either of those, the company’s executive directors concluded a deal with investment fund African Minerals Exploration and Development (Amed). The deal was struck with what appears to have been extreme haste, over the December period, and at terms Nkuhlu described as unpalatable. Which is why he, and other shareholders holding a total of 26.5% in Genorah, threw spanners in the works.
In court papers prepared by the minority shareholders, they argued that Amed outmanoeuvred Genorah entirely, creating a situation where the fund would effectively take control of Genorah (and, through it, Nkwe), for the grand total of $4.5-million – plus nothing more but the promise of further funding. They also argued that bargain price was arrived at through an irregular process – they stop not quite short of alleging fraud.
If it is allowed to proceed, Nkuhlu said, it would be disaster.
“It creates this perception that Nkwe will receive cash, but it is structured so that Amed doesn’t have to give up that cash; the conditions are too onerous. It will deny Nkwe access to the capital markets to raise money. That could stop the entire project.”
Nkuhlu – a former ANC Youth League leader, who has held various positions within the ANC and survived campaigning for Thabo Mbeki in 2007 – also saw a political dimension. “Giving this for some small change to a foreign fund” when platinum was already considered a strategic resource, he said, would not help when it came to facing regulators.
Nkwe managing director Maredi Mphahlele this week largely dismissed the concerns and actions of the minorities. "It is not an issue of control as is being spun,” he said. “There are obviously people who are unhappy, [but the deal] is not under threat."
In fact, he said, it was effectively done, and shareholders would be informed about the terms of the recapitalisation – which “has been misunderstood” – through normal company announcement processes.
Mvelaphanda’s Willcox stressed that his company had no part in the dispute, and maintained equally good relations with all Genorah shareholders. Would it still be interested in a deal?
Others too were watching the dispute, and would possibly be parted from their money at the right price.
“The problem with the platinum mines you have now is that they cost money to mothball and keep on care and maintenance,” said an industry insider. “This project we’re talking about is very rich, but right now it is not costing you any money. By the time it starts producing, the demand for platinum will be back. Smart people buy when the market is down.”