Investec has scored handsomely on its R460-million loan to troubled mining group JCI, once the flagship in the mining empire of Brett Kebble, who was murdered in Johannesburg last year.
Investec charges prime rates of interest on this loan, but this pales alongside the nearly R300-million “raising fee” it stands to make out of JCI for keeping the troubled mining group out of the hands of liquidators.
“We did a good deal for [JCI] shareholders,” says Investec CEO Stephen Koseff. “The company was going broke, and we provided a loan facility which allowed it to meet its immediate cash requirements.
“As part of this deal, we insisted that Brett Kebble goes and a forensic investigation be carried out.” Brett Kebble “resigned” from his positions at JCI, Randgold & Exploration (R&E) and Western Areas a month before being murdered last year.
Koseff adds that the bail-out allowed JCI to follow its rights in Western Areas. “This stabilised Western Areas and gave it room to breathe.” Analysts believe Investec drove a hard bargain, but nevertheless won a reprieve for shareholders and spared the group from being carted off to the mortuary.
A condition of Investec’s bail-out of JCI was a raising fee equivalent to a 30% uplift over 18 months in the asset value of the portfolio of assets that were stove-piped into a special-purpose vehicle (SPV) and valued at about R2,5-billion six months ago, and 10% of the increase in price in 2,2-billion JCI shares.
JCI was suspended from trading on the JSE at 16c in August last year, but a company report out on April 5 is expected to show that the company is still solvent, paving the way for the recommencement of trading in the shares.
Koseff says most of the assets in the SPV have doubled since August last year, when the agreement was signed. The SPV includes more than half of the Letsing diamond mine in Lesotho, valued at R900-million, an estimated 25% interest (approximately 30-million shares) in Western Areas. Western Areas in turn owns 50% of the South Deep gold project, the other half being owned by Canadian producer Placer Dome.
According to an observer close to the company, Investec has so far enjoyed an unrealised profit share of about R50-million on Western Areas, whose share price rose to R47, from R18, when the deal was struck.
The SPV also includes about 200-million shares in Matodzi, whose principal asset is its roughly 10% shareholding in JCI, a property portfolio valued last year at R243-million, a R250-million loan owing to JCI from Western Areas, and various other assets.
Investec’s uplift from JCI could be substantially higher than R300-million once it cashes up, which it must do in 18 months after the R460-million loan is repaid.
This does not count its exposure to the Western Areas hedge book. The mine was forced to hedge its future production to cover the R5-billion cost of sinking the 3km-deep mine, one of the largest remaining gold deposits in the world.
Western Areas’s financial results shows it fetched an average of $338 an ounce for the 234Â 000 ounces its produced last year, when the average spot price was $447 an ounce. This suggests the hedging banks, including AIG and Investec, made nearly R150-million for themselves.
A new twist to the story was the recent acquisition of 29,2% of Western Areas by the world’s fifth largest gold producer, Harmony. This has given rise to speculation that Harmony may make an outright bid for Western Areas, whose extensive reserves and relatively attractive cost structure blends well with its existing operations.
“We believe South Deep (Western Areas’s principal asset) is one of the great remaining ore deposits in the world, and this is the primary motivation for acquiring an interest,” says Philip Kotze, head of investor relations at Harmony.
The problem is that Western Areas has one of the most toxic hedge books in the industry, listed in its financial statements as a R2-billion liability.
Kotze explains that this situation is most acute over the next three years, and thereafter improves. Among the options to detoxify the hedge book are to buy it out from the banks, an expensive route, or increase gold production to dilute the effect of the hedge.
This is where Harmony is likely to focus its energies. It could couple Western Areas or South Deep with some of its existing operation to dilute the hedge book and give it a broader exposure to the spot gold price, which this week broke above $580 an ounce. Kotze says this has not yet been discussed with the Western Areas board, and Harmony does not have a seat on the board.
Meanwhile, the forensic investigation into the Kebble empire appears to have identified recoverable assets of R1,5-billion out of R1,9-billion previously unaccounted for in R&E.
JCI head of investor relations Brian Gibson says between R400-million and R500-million is still unaccounted for, but the forensics team is hard at work tracking this down. Exactly what was stolen from the company and by whom is not yet clear, as it was done through various complex structures, says Gibson. He confirms, however, that there will be significant claims against the Kebble estate.
What is now known is that Kebble sold nearly R2-billion-worth of shares in Randgold Resources in a desperate effort to bankroll his crumbling empire. He maintained, just before he was murdered last year, that he was the beneficial owner of these shares, which now turns out not to be the case.
The R&E forensics report shows that roughly R1-billion of this money went to JCI, which has accepted but not admitted a debt of R1,1-billion to R&E. A further R491-million was recycled back to JCI and R367-million to other parties. What subsequently happened to this money is not clear.
A complicating factor for R&E is an application to liquidate the company. Gibson says the directors will oppose it vigorously because the company is indeed solvent. JCI must also meet a claim for R1,1-billion from R&E. A statement from JCI is due out, “but it is common cause that the company is also solvent and capable of meeting the claim that is being formulated by R&E”, says Gibson.