Lonmin inks new deal with Bapo
An empowerment scheme that converts mineral royalties into company shares has been presented as a deal that will build a strong relationship between Lonmin and its longtime adversary, the Bapo ba Mogale traditional community near Rustenburg. But the fragmented community has critics among its members who feel they are getting a raw deal, and industry analysts canvassed by the Mail & Guardian believe royalties are a safer bet than equity in the platinum miner.
The Bapo settled in the area of Bapong and surrounds – underneath which lie some of the earth’s richest platinum deposits – about 200 years ago. In 1970, a lease agreement was established and the mine, known today as Lonmin, arranged to pay the community royalties on the minerals extracted.
The community had hoped the deal would bring wealth but that has never materialised. The Bapo are plagued by factionalism and have become particularly disillusioned since R300-million of their royalties were recently depleted through the maladministration of the account – which was put under the administration of the North West province in 1994. The account has since been frozen by the public protector as part of an investigation. The Bapo voted in favour of a new deal with Lonmin at a community meeting on July 29.
The deal requires that the Bapo, like the nearby community of the Royal Bafokeng, waive their statutory right to receive royalties on the mineral rights of their tribal land from Lonmin in exchange for a lump sum of R564-million, which will be used to buy shares worth 2.25% of Lonmin and which cannot be traded for a minimum of 10 years.
A top of that, R100-million will be paid to the Bapo for its administrative costs, in tranches of R20-million each year for five years, and a community trust will be set up and funded with R5-million per year indefinitely.
Lonmin will also commit to spending a minimum of R200-million in procuring goods and services from the Bapo, for a minimum of 18 months, which is expected to create jobs. Administration will be conducted through Bapo Ba Mogale Investments.
Banks appointed by both parties valued the deal at R664-million. Lonmin has touted it as a win-win situation that will help it to reach an empowerment target (as required by government) of 26% by the end of this year.
Some community members, however, are suspicious of the deal. Tshepo Maakane, who was until his recent suspension an elected member of the traditional council, has concerns about the transparency of the process (see box) and is considering legal action.
Looking at the benefit of investing in royalties or equities, analysts determined the latter is riskier.
Grant Sporre, commodity strategist at Deutsche Bank, said: “Personally I would rather take the royalty, but it depends on your risk appetite. The equity arguably has more leverage and upside – but a royalty on revenue from extracting the minerals is a lot more certain if you want a secure income stream.”
A metals and mining analyst at Noah Capital, Michael Kavanagh, said: “I wouldn’t want to own the equity but if you can get it at a cheap price then perhaps it is worth owning. I would prefer to take the royalty, personally,” he said.
Brendan Boyle, a former journalist who now works as a senior researcher at the Centre for Law and Society at the University of Cape Town, was present at the community meeting where the deal was voted in. He said that, according to a Lonmin submission to the North West standing committee on public accounts, the average royalty paid to the Bapo since 2000 is R27.434-million.
Royalties peaked at R82.3-million in 2008 and bottomed out at the contractual minimum of R468 153 in 2012. “At the total value of R664-million, the transaction cost equals eight years of peak royalties, 24 years of average royalties and close to 300 years, allowing for escalation, of minimum royalties,” he said.
An appointed member of the tribal council, Churchill Madumo, said: “We are in a situation where we think that royalties are short-lived. One day the mine will operate outside of Bapong and that will be the end of royalties. With equity, once the mine operates outside of Bapong we will go along with the mine.”
Jan Geenen, head of business development at Lonmin, said: “Had the Bapo made a deal with Lonmin 10 years ago when metal prices were higher, like at the time Royal Bafokeng did a deal with Impala, it would have been a very different deal because the economics would have been different. And maybe they would have ended up with a much higher percentage,” he continued. “But you need to understand this is an industry where profit margins are under huge pressure, following a five month strike. The longer this deal is left or not done the greater the likelihood would be that the community would end up with nothing.”
Geenen said the real prize was for the Bapo to become a partner in a business that can supply Lonmin with good services. For the traditional council too this appears to be a highlight: “This corporatisation is like a rebirth for us,” said Lehlohonolo Nthontho, advisor to the chief. “Even if Lonmin doesn’t give us dividends we expect profits from the procurement [when leveraged] to become higher than royalties being paid.”
Community expectations are realistic, said Madumo: “They don’t expect to drive Rolls Royces, they only want roads, flushing toilets, water; they only want lights and bursaries and employment.”
Ousted traditional council members unhappy
Tshepo Maakane claims he and another elected member were pushed out of the Bapo traditional council because of their concerns about the empowerment deal between the Bapo community and Lonmin. Existing members of the council, however, say they were suspended for ill discipline in relation to abusive SMSs.
Maakane said there was not enough opportunity given to interrogate the deal and said the valuation generated by the banks should be made publicly available.
The council said all the information, derived from a valuation by Nedbank Capital, was contained in pamphlets and information forms, which were handed out by ambassadors who went door-to-door – covering about 15 000 houses – to explain the deal to the community prior to voting.
Maakane countered that the ambassadors themselves did not understand the issues properly.
Of the estimated 40 000-strong Bapo community, 779 voted – largely in favour of the deal.
Maakane argued that 779 people, 1.9% of the community, could not be considered a fair indication of overall sentiment.
Peter McElligott, Lonmin’s head of legal, said there was not a facility big enough to house 35 000 to 40 000 people, but transport was available nonetheless. He said 779 was considered a good turnout; a legal challenge was not expected. “At the moment it is a done deal … The community has spoken, it’s a bit late for anyone to launch a legal challenge.”