Mining magnate Patrice Motsepe this week unveiled the first full-year results of his new company African Rainbow Minerals (ARM) while revealing the next, and probably most interesting, chapter in his career.
The results show how far Motsepe has come as a mining entrepreneur — and the hard work that lies ahead in turning ARM into a world-class diversified resources company.
“When there are difficulties, opportunities are presented,” Motsepe said at the Johannesburg results presentation, referring to the strong rand that has bedevilled South African mining for the past year. He also reminded the investment community of the difficulty that the current climate poses for empowerment.
“There will be less and less empowerment deals in the mining sector,” he said, citing the cost of finance and currency risk as major factors.
“Investors only know the colour of money; we must avoid the mistakes of the early empowerment deals [relying on share price performance].” Motsepe added that no bank and no black entrepreneur should enter into a deal that had no economic rationale.
On ARM’s results, he reflected on what he described as “a year of two halves”, which he said had brought fundamental change.
In the year to June, the company saw headline earnings a share fall 79% from 176c to 37c. But this was followed by a second-half performance in which a R5-million loss was turned into R409-million profit, and basic earnings came in at R1,4-billion from a loss of R191-million.
The company’s net asset value rose from R5-billion to R8,2-billion while its total assets increased from R7,2-billion to R11,7-billion.
However, ARM’s gold division is still bleeding, while its platinum and nickel interests are far from being fully developed and the ferrous metals division is achieving far from optimal performance.
ARM was officially formed in May as a result of a three-way merger between African Rainbow Minerals Investment Holdings, Anglovaal Mining Limited (Avmin) and Harmony Gold Mining.
The company disposed of its 42% interest in Avgold to remain with 19,8% holding in Harmony, making the latter its preferred vehicle for housing ARM’s gold interests. This suggests ARM will in time have to increase its holding in Harmony.
Harmony is currently taking pain, largely because of the rand’s strength. The company underwent what it describes as a “difficult but rewarding year”, increasing production for the seventh straight year but suffering a 76% drop in operating profit to R586-million. Merrill Lynch mining analyst David Hall recently issued a 64% downward revision of Harmony’s earnings forecast for the 2005 financial year, from R5,97 a share to R2,14 a share, with a “buy” recommendation on the share.
Mostepe noted that ARM’s next transaction, to generate cash flow, would be “critical”, adding: “It must be done on favourable terms and conditions.”
Three proposals were currently under consideration, he said, while refusing to give details.
ARM’s platinum and nickel interests, housed in ARM platinum, are “at the bottom of the growth curve” and thus far from listing, said CEO André Wilkens. In the middle of next year the Modikwa mine, co-owned with Angloplat in North West province, will come on stream. The group is also looking for a partner in the expansion of the Nkomati Nickel mine in Mpumalanga.
Mostepe cited the group’s quality of assets and mature relationships with Anglo Platinum and Impala as two strengths.
On the ferrous metal front, ARM aims to, double the production of iron ore and is investigating a 10-million-tonne mine.
This ushers in a challenging period for Motsepe, who also has financial services interests through a 10% empowerment shareholding in Sanlam and is a new owner of Mamelodi Sundowns soccer team.
“My future depends on the executives who run the businesses,” he told the Mail & Guardian. The executives were chosen in interesting ways.
Wilkens offered Motsepe his first contract, to extract gold cheaply, when Motsepe was running his mining contracting company with three colleagues more than 10 years ago. Motsepe first encountered Harmony CEO Bernard Swanepoel as an opponen when Motsepe was running ARMGold. “He used to beat me every time,” he recalls.
ARMGold then entered a joint venture with Free Gold in the Free State. This was followed by a merger of the two companies, motivated by ARMGold’s falling reserves. “It was a survivalist tactic,” Motsepe said. He said history has vindicated him because ARMGold would never have weathered strong rand storms as a standalone.
Swanepoel described Motsepe as “a role model of an entrepreneur”, who understood the need to take risks to get returns.
At the time of ARM’s listing, the prospectus valued him at R4-billion. There is little to suggest his wealth and standing are under threat.