When Atul Gupta, the head of the politically connected Gupta family, went to bed last Tuesday he was personally worth R16.6-billion in listed shares. By lunchtime the next day (assuming he did not have a particularly early lunch) he had lost R12.5-billion of that, at least on paper. By this Thursday morning he had made R1.4-billion of that back again.
Such are the fortunes of investors in Oakbay Resources and Energy, the company listed in late 2014 that sits at the heart of the controversy around the Gupta family’s move into Eskom coal supply contracts.
Last week the thinly traded Oakbay lost 75% of its value at a stroke when a series of minuscule trades took the share price from R30.48 to R7.55.
For some of Oakbay’s owners, notably Atul Gupta, the losses are as theoretical as they are enormous. The state-owned Industrial Development Corporation (IDC), however, took a much more real R85-million knock as a result of that particular market convulsion.
And it is the IDC’s experience over the past six years, first as a lender to and more lately as part owner of Oakbay, that raises the question: who will fund the Oakbay group’s R3.29-billion appetite for growth this year?
With the acquisition of new coal assets still pending, Oakbay presents as its sole asset and prospect for growth Shiva Uranium, which, despite its name, actually operates as a small gold mine in North West province. Shiva was created in 2010 when it bought mining assets from Uranium One – a company now wholly controlled by Russian state nuclear corporation Rosatom – in a transaction that was more than 90% funded by the IDC.
The IDC coughed up R250-million for the creation of Shiva in April 2010. By December 2015 the Oakbay group valued Shiva at R10.7-billion on a net-asset basis.
That more than forty-fold increase in value translated into significant gains for the likes of Shiva empowerment partner Duduzani Zuma, the son of President Jacob Zuma, and the Gupta family. But it has not translated into repayment for the IDC.
IDC left out of pocket
The IDC loan was due to be repaid in full in April 2013, with interest calculated at what the IDC this week described as the equivalent of a nominal 22% a year, which would make the total payment worth north of R450-million.
Instead, the loan was radically renegotiated in June 2014, with changes backdated more than a year. As part of the debt restructuring the IDC took up R257-million worth of shares in Oakbay Resources at R9 a share in lieu of interest, leaving it with 3.57% of that listed company.
Had the IDC held Oakbay to a loan instead, even at a more favourable renegotiated interest rate, the portion of the loan swapped for equity would have been worth about R300-million today, by a conservative Mail & Guardian calculation. Instead, for the week between February 10 and 17, the equity it holds is worth R215-million, a shortfall of some R85-million.
Oakbay Resources this week referred questions to Gupta family spokesperson Nazeem Howa, who could not be reached directly and did not respond to messages left on Tuesday and Wednesday.
After more than a week of no trading, on Wednesday the Oakbay share price recovered some 11% of the value it had shed last week, climbing back to one cent above the original listing price at R10.01 on another minuscule trade. The recovery dramatically reduced the IDC’s loss in swapping debt for equity, leaving it only R10.9-million out of pocket.
Responding to questions this week, the IDC said it had to date received repayment of R130-million of the original R250-million loan. A proper analysis of its return on investment would show the original loan had “accrued a return of R252-million”, the corporation said, with the capital secured against Shiva assets.
“We take a long-term view in all our investments,” the IDC said in a statement to the M&G. “Our decision whether or not to sell is not informed by share price movement. We have a number of investments in the commodity market which have all experienced a decline in share price over the last few months … Oakbay is not immune to this.”
‘No suggestion of manipulation’
Yet the Oakbay group is apparently having no trouble raising money. On Tuesday Oakbay shareholders are due to vote on the acquisition by Shiva of Tegeta Exploration, a company already controlled by the Gupta family and its empowerment partners. Tegeta, in turn, intends to buy the assets of Optimum Coal out of business rescue after previous owners Glencore failed to reach a pricing agreement with Eskom.
The Optimum acquisition is currently being considered by the competition authorities.
Tegeta plans to pay R2.15-billion for the Optimum assets and “the consideration will be settled in cash”, Optimum’s business rescue overseers said this week. They would not disclose the source of the funds.
The IDC said it “is not a funding partner” in the Tegeta transaction and “[has] not been approached for this specific transaction”.
Oakbay has committed itself to more than R1.14-billion of additional spending in the near future. When it listed, at R10 a share, the company said it intended to raise at least some money through the equity markets. With the share price climbing above R50 and then settling down at about R30, the capital needed for expansion was dwarfed by a market capitalisation of more than R24-billion.
At Wednesday’s opening share price of R7.55, however, Oakbay’s current shareholders would have to sell nearly 55% of the company to raise all the money they are looking for. At the Thursday morning price, the required funds equal some 41% of the company.
The Gupta family has indicated that it is willing to have its shareholding diluted, but that it wants to retain control of Oakbay.
The huge volatility aside, indications were that R7.55 was a fair market price for the share at the time, with no suspicions of foul play.
“The JSE did look at the trade,” said Peter Redman, senior technical adviser on market regulation at the JSE, in response to M&G questions on the possibility of rigging. “Three individual trades took place and there is no suggestion of manipulation.”
Disclosure: The writer owns 10 shares in Oakbay Resources, bought at an effective value of R304.90 and worth R100 at the time of publication.