/ 28 April 2016

The winners and losers in the Guptas’ Optimum Coal deal

The sale of Optimum Coal in Mpumalanga has hit an employee trust for mineworkers
The sale of Optimum Coal in Mpumalanga has hit an employee trust for mineworkers


At the end of March, the Gupta family and President Jacob Zuma’s son Duduzane spent R2.15-billion on Optimum Coal, either a true lemon of a company or a decent bargain at the price, depending on which set of books you look at.

But for the company founded by Deputy President Cyril Ramaphosa, Shanduka Resources, the same transaction came at a hard cost of more than R128-million.

Not that it was close to being the biggest loser.

The finalisation of the Optimum sale was the final nail in the coffin of a once-lauded series of empowerment transactions that placed a select few among the wealthiest in the land. Between them the empowerment entities involved lost not much under R1-billion.

It also wiped out at least R213-million in paper assets for a community trust that once helped matric pupils in Mpumalanga pass mathematics, and another minimum of R213-million for an employee trust that sought to cushion mineworkers from disasters such as large medical bills not covered by their own insurance.

That left as clear winner – in a sequence of events that included loud accusations of political inference and dirty dealing – a consortium of banks, which were repaid in full the R2.7-billion in debt amassed by Optimum.

At the end of March, Tegeta Exploration, a company jointly controlled by the Gupta family and Duduzane Zuma, took control of all Optimum’s assets, making Tegeta the owner of both an Eskom supply contract and the mines that are to provide the coal.

Their R2.15-billion in cash – the origins of which no party involved would reveal – did not fully settle the loans that had been advanced to Optimum by Investec, Nedbank and the parent company of First National Bank.

Settling the remainder was left up to the single largest previous shareholder in Optimum, international commodities trader Glencore, which put up another R518-million.

That payment bought Glencore, and its fellow former shareholders, out of R2.18-billion in penalties Eskom says Optimum owes it for supplying it with poor-quality coal.

The burden of that potential payment now falls almost entirely on the Gupta family (see “The lemon – or bargain – the Guptas bought” ).

Other former and present shareholders did not contribute to buying their way out of the Eskom trouble, but were left with nothing as the deal rolled over them.

The most tangible loser was Shanduka Resources, the company created by Ramaphosa in 2002. At the time of the Tegeta purchase, Optimum owed Shanduka more than R128-million in what one insider said was a loan Shanduka had extended to keep Optimum afloat during one of its many troubled periods.

Ramaphosa sold his last stake in the Shanduka group almost exactly a year ago, fulfilling a promise – to divest himself of all business assets that could create perceived conflicts of interest – which he made when he took up the deputy presidency.

The sale was between two private companies that volunteered no information on it, so it is not known how the Optimum loan was valued. Shanduka’s buyer (and the ultimate loser in the Optimum transaction), the Pembani Group, an obscure investment holding company, flatly refused to answer any questions about the matter, citing “a policy not to comment on its investments activities and/or market speculation”.

Ramaphosa personally joined with Glencore when it started to take control of Optimum in 2012. The terms of the partnership were never disclosed, but Ramaphosa was believed to have owned an equity stake worth up to R1-billion at its peak.

Optimum was created in a 2007 empowerment transaction by BHP Billiton that was still subject to bitter litigation as recently as February 2015, as one party excluded from the deal tried to shoulder its way in.

Optimum was a prize worth fighting for. When it listed on the JSE in March 2010, its value rocketed to R8-billion, making some of its larger shareholders hundreds of millions of rands – on paper – overnight.

These included white mining and mineral investors with somewhat dubious track records, but also the likes of Eliphus Monkoe, who would in 2012 be named the 10th-richest black African in South Africa.

Monkoe left South Africa after the 1976 uprising, finished his schooling in Nigeria and trained as a mining engineer in Moscow and Siberia.

He worked in junior positions in East Africa and Zimbabwe before joining Anglo Coal as a trainee in 1991. He worked his way up through Sasol and Ingwe, before putting together an empowerment group at his then employer, BHP. By 2012 he was apparently worth R530-million.

Monkoe died in mid-2014. His investment company owned 5.28% of Optimum at the time of the Tegeta purchase as one of the empowerment companies that retained its stake when Glencore and Ramaphosa took control of Optimum in 2012 and delisted it. At a company value of R2.15-billion that stake would have been worth R114-million.

Other owners at the time of the Tegeta acquisition included an employee trust and a community trust, which each owned 9.93% of Optimum. In 2012 the community trust had amassed about R12-million in capital from dividends and was spending about R3-million a year on programmes that, at their height, provided school lunches to 2 430 children in the municipality where Optimum operated.

The lemon – or bargain – the Guptas bought

If Optimum Coal were to be liquidated, its assets would fetch about R1.5-billion, according to a recent valuation. It runs coal mines in a country with a huge, and growing, reliance on coal, and has access to export facilities to feed the coal hunger of the likes of China. At the end of February it had some R81-million in cash and near equivalents in the bank.

By those measures, the R2.15-billion Tegeta paid for Optimum has the makings of a fair price. But that is before you look at the operational numbers that plunged it into bankruptcy protection in the first place.

Business rescue documents show that the coal Optimum exports earns it about R579 a tonne, which earns a nice round 60% gross profit before tax and mandatory expenses relating to labour and surrounding communities.

But for the first three months of this year, at least, export coal was not an important part of Optimum’s business. A full 88% of its total production went to Eskom – at a price of just over R155 a tonne, making for an average price of R208 a tonne of coal sold.

In the month of March, about half that, or R102 a tonne, was required just to wash the raw coal and transport it by rail, through roads and on trucks.

By the time the much more expensive mining costs – blasting, labour, electricity – and general overheads were included, it actually cost Optimum R178 for every tonne of coal it sold in March.

As a result the company burned through R101-million in cash in March and R105-million in February.

But the true threat Optimum faces is the looming Eskom penalty claim. Eskom believes Optimum owes it R2.18-billion for failing to provide coal of an agreed-upon quality.

In a series of provisions that seem iron-clad, Tegeta took full and final responsibility for that potential debt. And Tegeta’s guarantees were underwritten by Oakbay Investments, the Gupta family vehicle that owns or controls most of the family’s assets, including the listed uranium miner Oakbay Resources.