Investors in South Africa’s mining sector could be forgiven for having had an eerie sense of déjà vu this month when state-owned financier the Industrial Development Corporation (IDC) challenged Anglo American’s acquisition of a majority shareholding in iron ore mining group Kumba Resources.
Although the IDC’s challenge was made at Competition Tribunal hearings, it soon became clear that the issue was one of black economic empowerment rather than competition regulation.
Empowerment — in its Freedom Charter sense — was envisaged by a first draft of the mining charter, leaked in August last year. The outcome was a massive fall in the mining and resources indices on the JSE Securities Exchange as investors sold their shares before high-level meetings between business leaders and government ministers brought the frenzy to a halt.
The subsequent release of the Mining Charter put fears of Zimbabwe style land-grabbing to rest, and the mining and resources indices on Africa’s largest stock exchange soon moved back into the black.
It was clear, however, that no future transaction which holds the promise of a major acquisition or change in the corporate landscape can now happen without it being scrutinised first by the flag-bearers of black economic empowerment (BEE).
In that sense, the IDC’s stance that Anglo’s acquisition of Kumba could stifle its ability to promote BEE came as no surprise.
Market commentators, however, believe that the political risk of investing in South Africa has increased in the process, even if only in terms of perceptions about investing on the JSE.
Question marks over the IDC’s raison d’être abound, as Anglo countered by stating that it had indeed envisaged sustainable BEE in the local iron ore industry. Kumba had in fact already concluded a so-called anchor empowerment agreement with the Tiso Kgalagadi consortium in November 2001. In terms of the agreement Tiso secured a 4,8% shareholding in Kumba.
Overshadowing this week’s Competition Tribunal hearings was, however, a prior statement issued by IDC chairperson Wendy Luhabe, in which she stated that the IDC’s objective “is not to take control of Kumba, either on its own behalf or in support of BEE shareholders”.
While this statement was seen as a departure from the IDC’s position presented at previous tribunal hearings, Neo Sowazi, the IDC spokesperson on BEE related issues, told the Mail & Guardian on Thursday that Luhabe’s statement was made for “clarity” purposes rather than constituting a departure.
The IDC would, however, not comment further on any issue pertaining to the tribunal hearings or BEE until the hearings were concluded, Sowazi added. This is expected to be around the first week in July.
Anglo says it will only invest in Kumba if its investment translates into a “meaningful” stake. While it is initially seeking around 34%, CEO Tony Trahar told the hearing that Anglo intended holding 49%. This, according to Trahar, had the blessing of President Thabo Mbeki and the Minister of Trade and Industry Alec Erwin.
Anglo has no major interest in iron ore other than the 20% stake it has recently acquired in Kumba as well as an option on another 14,9% of Kumba.
Kumba is one of the largest South African-based mining companies listed on the JSE. While it is a focused metals and mining company, it has a diverse commodity portfolio consisting of iron ore, heavy minerals, coal, base metals and industrial minerals.
Kumba’s maiden results after its unbundling from Iscor were of stellar proportions, partly thanks to a weak rand with revenue up from R2,6-billion to R3,1-billion.
But all that changed the following year when a stronger currency, together with lower iron ore prices and the continued severely depressed market for zinc, had a major impact on operating profit. Net operating profit for the nine months ending March 31 this year was in fact 22% lower than that of the corresponding period last year.
For the quarter ended March 31 this year, iron ore production was 9% lower than in the comparable period.
The question of affordability could also be a stumbling block for BEE: Anglo executive director Michael Spicer was unequivocal when the M&G spoke to him on Thursday that Mining Charter requirements would be implemented.
But he added that there are a variety of ways of addressing the issue of ownership. In that sense, the underlying assets might, for example, be more attractive than running the risks inherent in trying to get a big stake in Kumba. In this way, BEE is driven in terms of asset value.
While Spicer would not identify potential BEE partners, he did say that the Tiso consortium as Kumba’s empowerment partner might not necessarily be the only BEE player.
Reuel Khoza, CEO of Eskom Enterprises, and Moss Mashisi, who led the Johannesburg World Summit Company, have emerged as members of a group looking to buy 26% of Kumba.
Kumba chief executive Con Fauconnier told a Black Business Council workshop in Johannesburg in April this year that while investing at controlling level should not be discounted, inherent difficulties encountered include the fact that dividend yields from listed investments are generally insufficient to service debt.
To illustrate this, Fauconnier cited an example of a R500-million investment in Kumba equity using debt. This would attract minimum 14% interest amounting to R70-million of interest a year. The dividends on the 20-million shares acquired would amount to only R17-million, based on the 2002 declared dividend, resulting in a loss for the investor.
Fauconnier believes that so-called value-growth propositions will enable empowerment players to enter the industry by acquiring stakes in underlying assets such as new projects.
“In this way, their investment will generate sufficient value through the project’s growth curve to pay off the debt that has funded the investment. The empowerment investors would have the option of rolling the investment up to controlling entity level once initial investment funding has been repaid,” Fauconnier added.
South Africa represents only 3% of the steel market. The only two other global players in the iron ore industry are BHP Billiton and Rio Tinto.
Spicer believes Anglo’s intention to increase its stake in Kumba is addressing an “urgent” window of opportunity to use Kumba as the major vehicle to expand the South African iron ore industry into a viable international competitor. The tribunal hearings have already delayed any action on Anglo’s part, he added.
Market commentators believe that the tribunal will confirm the competition commission’s earlier findings in favour of Anglo, and that the issue of “meaningful” BEE will, accordingly, be laid to rest.
Anglo announced in February that its divisions and operations have recorded R2,4-billion in procurement transactions with BEE small and medium enterprises and related business development initiatives during the 2002 financial year. This represents an impressive 63% increase on the previous year’s figure of R1,5-billion.
By the end of last year the company had been associated with R16,5-billion of BEE deals, comprising more than R10-billion in larger empowerment transactions and about R6,5-billion on procurement from BEE small and medium enterprises.
If Anglo does not get the tribunal’s approval to build its stake in Kumba up to 49%, such a development would be viewed as “unfortunate”, Trahar told the tribunal. He added that it would imply a change in the government’s empowerment strategy.
Whatever the outcome, market fundamentalists who believe the free market should be left to its own devices, with a focus on acting within regulations but with scant regard for the spirit of the law, may have been reminded that corporate actions in South Africa can no longer be planned without proper regard to the national interest.