A once model state-owned company is being ruined by design, say union members. From Moneyweb.
Former energy minister Jeff Radebe left a trail of destruction across the energy portfolio, not least of which was his irrational disregard for nuclear or clean coal in the energy mix.
That was the view of Nehawu (National Education, Health and Allied Workers’ Union) members picketing outside Gate 3 of the secretive Pelindaba headquarters of the SA Nuclear Energy Company of (Necsa) this week.
“There is a suspicion among workers that the company is being run into the ground – on purpose,” said Zolani Masoleng, Nehawu branch chairperson at Necsa, speaking to Moneyweb this week. “The Department of Energy has been presented with a turnaround strategy, which proposes the retrenchment of 400 staff members and possible sale of public assets without the knowledge and consultation of organised labour. This is being done without consulting labour as required in terms of Section 189 of the Labour Relations Act.”
The suspicion is that the nuclear company is being wrecked so that its licence can be handed over to a foreign buyer – widely believed to be US diagnostic imaging company Lantheus Medical Imaging (LMI) – a Necsa customer.
Nehawu is demanding that the current Necsa board be sacked, along with NTP’s board and its MD, Tina Eboka. NTP is a Necsa subsidiary that produces medical isotopes and other products. Last year Radebe sacked the previous Necsa board and suspended chairman Dr Kelvin Kemm, CEO Phumzile Tshelane and director Pamela Bosman on grounds of “defiance and ineptitude”.
The suspended executives are fighting the former minister’s decision in the Pretoria High Court, and argue in their papers that he interfered in management appointments and over-stepped his ministerial powers, by blocking a non-binding agreement with Russian nuclear company Rosatom.
The Safari-1 nuclear reactor at Pelindaba has been shut down three times in the last 18 months, over safety lapses that were essentially lapses in paperwork (though one worker was airlifted to hospital in the last week after being exposed to a toxic fluorine gas after a cylinder rupture – which some in the company believe was sabotaged). The reactor is used for the production of life-saving medical isotopes, used in the treatment of cancer and exported to more than 60 countries. The shutdown resulted in a daily loss of about R3.5 million, reducing a once model state-owned company into a financial mess, that is now pleading for a R500 million bail-out from government.
In a statement issued this week, Nehawu said newly-appointed Necsa chairman Rob Adams, is anti-working class and ignoring labour laws. Adams was formerly CEO of Necsa. “We feel validated to hold this attitude because he left Necsa in financial tatters in 2012 with 250 employees served with retrenchments notices. He left Necsa to join Aveng Nuclear Manufacturing division, which also collapsed and retrenched its employees,” says the statement.
“To prove that his management style was a disaster to workers at Necsa, within a space of one year in 2013, through the intervention of Nehawu and the reduction of inefficiencies originating from his time as CEO, Necsa was able to achieve a turnaround of R100 million from a deficit of R75 million at the start of 2012/13 financial year to a surplus of R29 million at the end of the period. As a consequence of this, the board at the time was able to clean his mess and took a decision to lift section 189 notices.”
Necsa’s financial troubles started after the appointment of Jeff Radebe as energy minister and are a recent and entirely avoidable creation, says Masoleng. “It is false to claim Necsa’s financial problems will be solved by cutting the wage bill. The problems are much broader than that.”
Nehawu says it has learned that Necsa plans to close or sell several Necsa subsidiary companies, including Pelchem, Pelindaba Enterprises and the vast Necsa property at Pelindaba. Also rumoured for sale are several NTP subsidiaries: NTP Logistics, Gamma-tek and AEC-Amersham.
“As a matter of principle we stand in opposition to the surrender of public resources to private individuals. Public resources are for public benefit,” says Nehawu’s statement.
It says Necsa’s turnaround strategy cannot be complete without replacing the Safari-1 as a matter of urgency and expanding nuclear energy in SA.
Responding to the Nehawu statement, Necsa says “the board inherited a dire financial situation when it assumed office in December 2018, with cash flow shortfalls of hundreds of millions of rand and empty order books across divisions. Much of this can be attributed to policy uncertainty around the new nuclear build and urgent decisions needed to be made. The Necsa Board quite properly entered into discussions with the shareholder in the first instance.
“The board will engage with all stakeholders and role players in accordance with the provisions of the law.”
For the better part of a century, the JSE ruled the corporate seas. This was the default venue for any company seeking capital to grow. A JSE listing was – and still is – a badge of corporate achievement. To get there, you must surmount an Everest of legalistic and regulatory tick boxes. The prize is public visibility and a ready market for your shares.
If the JSE built the best mousetrap out there, why would two new exchanges come along to steal its cheese? But that’s exactly what A2X and ZAR X are doing.
Both exchanges have been established because their founders believe there are inherent distortions in SA’s financial landscape. For example, retail investors in SA account for less than one percent of all trades on the JSE. The big funds and investors are doing all the trading, so the pricing and market systems are skewed in their favour. High transaction costs and lack of accessibility are two reasons why retail investors choose to acquire shares through Collective Investment Schemes (CIS) rather than directly on the exchange.
Here’s another problem with the current picture: these managed funds are all massively invested in a pool of about 40 old economy stocks. Smaller, newer companies just don’t get a look-in from those with the funds to invest.
Notwithstanding its monopoly, the JSE recognised that without modernisation, capital would flow to more congenial markets where trade was quicker, cheaper and less risky. So it pumped millions of rands into new computer systems and revamped its listing rules to match the very best in the world. It launched new products, such as stock futures and options. For a country that generates around one percent of the world’s gross domestic product, the JSE punches well above its weight, and for many years has ranked among the top 15 largest exchanges in the world.
Enter the newcomers
A2X and ZAR X are two startup exchanges challenging the JSE’s monopoly. They expect to grow rather than cannibalise the existing market for share trading in SA. Not that either of them is anywhere near toppling the JSE from its lofty perch. In January 2019, the JSE clocked up trades worth about R700 billion.
A2X currently has 17 ‘counters’ on its exchange, and last year generated about one percent of the JSE’s trade value. But CEO Kevin Brady expects to grow this share to between three and five percent in fairly short order. A2X’ technology is licensed from Aquis Exchange, which was launched in 2013 and now accounts for five percent of all European stock trades.
Unlike the JSE, A2X isn’t a market for raising capital. It’s appealing to companies already listed on the JSE to allow ‘secondary listings’ on A2X, where transaction costs are roughly half that of the JSE. In practical terms, A2X will charge about 0.49% of the transaction value, against the JSE’s average of about 1.2%.
The arrival of A2X means traders and investors have an alternative market for shares such as Naspers, Standard Bank, AVI, African Rainbow Minerals, Sanlam and Growthpoint.
The rate of adoption by JSE-listed companies is accelerating. Once marquee names such as Naspers, Standard Bank and Sanlam announced secondary listings of their shares on A2X, scores of others started showing interest.
“Our offering for investors and brokers is our low transaction costs, which we’re able to achieve through technology and innovation, and we pass on these savings to the users of our exchange,” Brady says.
A2X now has a total market capitalisation of about R2 trillion, and is attracting interest from big players such as high frequency traders, quantitative funds that use complex statistical techniques to trigger buys and sells, and liquidity providers that generate profits by buying and selling stocks when demand is high.
One of the challenges A2X had to overcome was to convince brokers – the lifeblood of any exchange – to invest in smartorder routers that check prices and execute trades across multiple markets in microseconds. Should Naspers’ price on the JSE deviate from A2X momentarily, buyers will quickly snap up shares on the cheaper market. To participate in A2X, brokers also need to upgrade their front-end systems to allow trading across multiple markets, and this means further training for staff in brokerage houses. Post-trade systems also have to be upgraded to allow for the clearing of trades executed on A2X. Clearing and settlement involves the transfer of money for shares between buyer and seller, and this is undertaken over a three-day period.
Fast and frequent
“Speed is vitally important when you’re trading in multiple markets,” says Brady. “This is why brokers need to upgrade their systems to optimise their trading opportunities.”
One area where SA lags other countries is financial regulation. As things stand, A2X needs the permission of companies to trade stocks on its market. In other countries, no such permission is required. The Financial Markets Act is currently being amended to remedy this. Once that happens, A2X will be free to list any stock it wishes.
The launch of ZAR X in 2017 was a watershed in SA’s financial markets, marking the arrival of the first competitor to the JSE in 58 years. It’s the only fintech in SA operating as a stock exchange – and the only one focused on enabling financial access and inclusion. The exchange has some heavyweight endorsements, including from the Public Investment Corporation (PIC), which bought into ZAR X. The PIC’s head of corporate affairs, Deon Botha, says the transaction provided the PIC with an alternative platform from which to trade and list companies. It should also accelerate transformation of the financial system. “We believe that transformation of this industry is necessary if we’re to realise our long-term objective of achieving real and tangible inclusive growth,” he says.
Unlike A2X, ZAR X is both a primary and secondary exchange – meaning it facilitates the raising of capital through the issue and sale of shares, and the subsequent trading of those shares on the exchange.
ZAR X currently trades three stocks – Senwes, SenwesBel and TWK – all of them, coincidentally, in the agricultural sector. The first two were listed in February 2017, and were adopted when orphaned by the then Financial Services Board, which strangely declared war on the lightly regulated ‘overthe- counter’ market.
“We saw a gap in the market for an alternative to the JSE, which is heavily focused on institutional investors,” says ZAR X cofounder Geoff Cook. “The relative size of funds managed by institutional investors forces them to focus on large companies to the relative exclusion of small to mediumsized companies that have found it difficult to raise capital. We need to look for a new pool of investor capital and therefore wanted to bring in more retail investors to offer a listings platform for companies looking to raise capital and gain exposure to the broker market. Our aim was to afford retail investors with as little as R1 000 the opportunity to buy into successful companies. To do this, you have to offer very low transaction costs with zero monthly fees.”
On average, brokers will require a balance of at least R50 000 to open a trading account, with some brokers requiring a minimum investment of R3 million, which means the vast majority of South Africans are excluded from opportunities for growing wealth through share investing. The JSE has had a patchy history in attracting small and medium-sized companies to the exchange, in many cases because of the high costs of listing and administratively heavy listings regime. ZAR X has slashed its listing costs to make it more attractive for companies to gain exposure to the exchange and has adopted a paperless principles-based listings regime.
ZAR X has a number of other advantages over the JSE. All trades are pre-funded and pre-cleared, meaning the accounts of both the buyer and seller are checked beforehand to ensure they have the cash and the shares to trade with each other. This means transactions are cleared and settled in seconds, rather than the three days it typically takes at the JSE. Information is also free, which means brokers can transact low-value transactions profitably. Then there’s the ZAR X Mobi app, which enables South Africans to open a trading account and trade from their smartphone.
By using technology to slash transaction costs by up to 80%, ZAR X enables small and medium-sized companies to list alongside large corporates, and that potentially represents a huge step forward for raising capital in SA.
The costs of listing a company on ZAR X are substantially lower than on the JSE. “We want companies of substance, but our rules are issuer-friendly. In other words, we make it easier and cheaper for companies to get listed. For example, you don’t need an exchange-approved sponsor to list on ZAR X, which can be a major obstacle and cost for companies seeking access to the capital markets,” says Cook.
Although there are just three listings at present, the pipeline is full of interesting opportunities. Another three or more listings are planned for the first half of 2019, but this is likely just the start of a major ramp-up. Tax legislation was recently amended to allow for the listing of Real Estate Investment Trusts (REITs) on exchanges other than the JSE, and another possible addition to the exchange is the listing of registered CISs, of which there are roughly 1 500.
Then there are so-called 12J (under the Income Tax Act) venture capital investment vehicles that offer 100% tax deductibility if the investment is held for at least five years. For individuals paying the top marginal tax rate of 45%, the tax deduction can be claimed in the year the investment is made, so a R1 million investment into a 12J company effectively costs just R550 000. None of these 12J companies have yet been listed because of the regulatory difficulty in restricting investment to qualifying individuals and trusts. That problem has been solved by ZAR X, says Cook.
ZAR X CEO and co-founder Etienne Nel says it’s the only exchange in SA capable of imposing 12J-specific trading restrictions on a realtime basis. “This means that venture capital companies have tight control over investor activity and can, therefore, maintain compliance.
“Nowhere is radical change more desperately needed than in the capital markets,” adds Nel. The model that has dominated for more than 60 years is stagnant, with no broadening of the capital markets. It’s also hopelessly skewed against the private investor.”
A2X and ZAR X employ about 12 people each, and have hitched their business success to cutting-edge technologies that have started to get them noticed in the broker and investment community. The JSE has been around for more than 100 years, so perhaps it’s time for some new blood to bring excitement and disruption to the financial markets.
It launched South Africa’s industrial age to support its mining activities, but since 2012 has halved the number of its assets. Where to now? From Moneyweb.
When the EFF’s Julius Malema talks of white minority capital, he is referring of course to Johann Rupert and the Oppenheimers for the most part. These are the families that helped build South Africa and, for better or worse, guided its political discourse in a direction favourable to their business interests.
Anglo American founder Ernest Oppenheimer would be hard put to recognise the group he founded in 1917. By the 1980s it accounted for a staggering 25% of SA’s GDP and owned an estimated 60% of the JSE – the result of an international embargo that forced SA companies to reinvest profits locally, turning the JSE into an incestuous and distended bubble.
The group that built its castle on diamonds and gold in southern Africa is now a very different animal. Since 2012, it has halved its number of assets, but now delivers 30% more product from each retained asset. That doesn’t mean it is a smaller group. The repurposing of Anglo into a more profitable machine translates into a group that delivers 10% more physical product in aggregate across the portfolio at a 26% lower unit cost (in nominal terms) than in 2012. It’s also doubled the productivity per employee.
There wasn’t a corner of the economy Anglo hadn’t conquered
That’s a long way from where Anglo was in the 1980s. Back then, there wasn’t a corner of the economy that Anglo hadn’t conquered. Think of FNB, Scaw Metals, Highveld Steel, De Beers Diamonds, AECI, paper producer Mondi, Boart International and the British South Africa Company with its mining and agricultural operations across the sub-continent.
That’s not counting the best gold assets, platinum, coal, copper and base metals. Anglo had it all. It was largely responsible for the industrialisation of the country, pouring money into businesses that would feed its core mining operations.
Gencor was partially spun out of Anglo in 1980 as a kind of Afrikaner empowerment deal for its time. Gencor became mini-me to Anglo, with its own portfolio of financial, mining and manufacturing assets. Anglo had Mondi in the paper sector, Gencor had Sappi. Anglo had FNB, Gencor had Absa and Sanlam, and so on.
These assets have been shuffled many times over and now appear in portfolios elsewhere, but these were the hands and the businesses that built South Africa.
Anglo was huge, but not particularly efficient. A behemoth of this size is a breeding ground for sloth. Management had little incentive to up its game because weak profits in one part of the empire would be topped up from good profits elsewhere.
All highly illegal today
And let’s be honest – competition law back then wasn’t what it is today. Anglo’s price-setting muscle went virtually unchallenged, and it was not uncommon for directors to be invited onto competitor boards. All highly illegal today, but widely tolerated back then.
By 1994, the international embargo was lifted and foreign banks rained down on SA in search of deals. Their message was simple: we’ll help you break up your clunky conglomerates and get you battle-ready for the global gladiator arena. Some of this advice was of questionable merit, and many a South African company was hoodwinked into bad deals and untested foreign markets. But for the most part it worked.
There is no denying that Anglo attempted to ameliorate the uglinesss of apartheid. With the urbane Harry Oppenheimer at the helm, it shored up the Progressive Federal Party (which later morphed into the Democratic Alliance) as a buffer against the ruling National Party’s more savage instincts, and introduced basic labour and human rights into the workplace. In many ways, it set the tone for the rest of corporate SA. It’s easy now to downplay or interpret this as featherbedding for the inevitable political liberation that was to come, but back then, Harry was not afraid to insert himself into the political debate, and he did it with grace and, dare one say, some bravery.
There are few executives today willing to stand up to the bullies in government the way Harry did to the Nats.
Anglo supported urban housing for black people through the Urban Foundation, and in 1985 became the first SA company to recognise trade unions, out of which we now have President Cyril Ramaphosa – then an impoverished trade union leader who led the 1987 mining strike that crippled the industry. This marked the turning point for mining employment, which has been in steady decline ever since. Many on the political left argue that Ramaphosa was groomed for his current role by Anglo and its peers, and it’s hard to argue with this. If that’s the case, Ramaphosa’s benefactors will fully expect their man to make good on the IOUs accumulated over the years.
Even at its height, the Oppenheimer family never owned more than 9% of Anglo, though it exercised control through a system of cross-holdings.
Today, the family owns less than 1%. The big shareholders now are institutional investors like the Public Investment Corporation (PIC), which invests funds on behalf of government pension holders.
In 1992, two years before SA’s first democratic elections, Anglo opened its Venetia Diamond Mine in Limpopo. It is now the country’s largest diamond producer, with an output of three million carats a year. In the same year it acquired a majority interest in the Quellaveco copper project in Peru, the first of several South American investments.
With the noose of sanctions now loosened, Anglo scrambled to pick up quality mining assets abroad as a hedge against SA’s uncertain future. It may have been an architect of SA’s emerging democracy, but it was certainly not going to bet the house on it.
In 1994, the year of democracy, it was time to share some of its spoils with black investors. It carved up Johannesburg Consolidated Investments (JCI) to sell Johnnic and JCI to the National Empowerment Consortium and African Mining Group. At the time it was the country’s largest BEE deal and launched Ramaphosa on his path to riches. This was also the year it formed Namdeb Diamond Corporation, with Anglo and the Namibian government each owning 50%.
Over the next three years it acquired coal, copper and nickel interests in South America and a zinc and lead mine in Ireland. In 1998 it merged its gold interests with those of Ghana’s Ashanti Gold to form AngloGold Ashanti, then the largest gold producer in the world.
A decade later, by 2009, Anglo had divested itself of its last remaining shares in gold mining. For a company built on gold, this marked a point of no return.
Anglo without gold is like Donald Trump without tweets.
Precious metals are inherently fickle, relying on jewellery, central bank and to a smaller extent industrial demand to lift commodity prices. Platinum is essentially an industrial metal, but even here the gyrations in platinum and palladium prices make any kind of future planning difficult. From hereon, Anglo would refocus around base metals and minerals with more predictable demand, and in diverse geographical markets.
Another key milestone for the group was the decision in 1999 to migrate Anglo’s primary listing to London, prompting questions over its patriotism and protests over what looked to be a traitorous desertion of its home base. The explanation given at the time was the same one invoked by all South African companies (Old Mutual included) genuflecting to the world’s financial mecca – capital was cheaper and more accessible in London.
Part of the rationale for listing in London was to enable Anglo to compete against its international mining peers. It has successfully done this and is today a leading player in global mining, though still with a significant footprint in SA. At the time of the London listing, interest rates were around 22% in South Africa and 6% in London.
PIC’s investment grew to R56bn
There is no doubt that the London move was the right one from a purely business point of view. In 1999, Anglo’s market value was R128 billion. At the end of 2018 it was R458 billion. The PIC has seen its investment in Anglo grow from R23 billion in June 2013 to R56 billion as at December 2018. South Africans still own about 35% of Anglo’s shares, so much of the wealth creation has been repatriated.
Another milestone was the 2001 delisting of De Beers from the stock exchange, converting it to a private company held 45% by Anglo, 40% by the Oppenheimer family and 15% by the Botswana government. De Beers, the house that Cecil Rhodes built, would forevermore operate beyond the glare of public scrutiny. Around the same time Anglo acquired substantial coal interests in Australia and bought Exxon’s copper interests in Chile, including the world-class Los Bronces mine.
Two years later it added the Collahuasi copper mine in Chile to its portfolio, building its annual copper output to around 500 000 tons.
In 2003 it acquired a majority interest in Kumba Iron Ore, the largest iron ore producer in Africa. In 2007 it commenced construction of the Minas-Rio iron ore project in Brazil, including a 529km pipeline to transport the ore to a new port facility. This project was to Anglo what the Lake Charles chemical project is to Sasol – badly timed and mired in delays and cost overruns. Anglo first acquired a stake in Minas-Rio in 2007 and a year later took control of the project in a $5.5 billion deal with Brazil’s MMX. By 2013, Anglo had taken a US$4 billion bath on the project. It ended up seriously overpaying for what is a decent quality asset, posting a black mark against Cynthia Carroll’s tenure as CEO.
The great culling
After Carroll came Mark Cutifani as CEO. The period from 2012 to today marks the great culling of Anglo’s less profitable assets. The notion that it has divested itself from SA does not hold up to scrutiny. It still has a massive presence in the country, generating 50% of all mining Ebitda (earnings before interest, tax, depreciation and amortisation) in SA, and it is still the largest investor in SA mining by a country mile, with R72 billion earmarked over the next five years. Part of this includes the landmark US$2 billion investment in diamonds through the Venetia underground project in Musina, Limpopo, and a US$200 million venture capital fund together with the PIC.
The reinvention of Anglo since 2012 has paid off handsomely. It has lifted its mining margin from 30% in 2012 to 42% today, despite a lower average commodity price basket. Its overall position on the margin curve (effectively a cost curve adjusted for product quality) has improved from the 49th percentile to the 37th percentile – ranking it among the best in the industry.
The share price graph tells the story of its turnaround since 2016:
South Africa’s relevance to the group in terms of headcount and economic contribution (figures as at December 31, 2018)
Source: Anglo American plc Tax and Economic Contribution Report 2018
And that, very briefly, is the story of the first 102 years of a very South African company despite being named Anglo American.
It’s a been long and litigious road for two companies in rescue, and another volley has just been fired. This article first appeared in Moneyweb.
Business rescue was written into the Companies Act to save firms from annihilation, but for two – Optimum Coal and Vantage Goldfields – it has become a long and litigious road.
This is probably not what the framers of the law had in mind. Business rescue practitioners for Optimum Coal, one of eight Gupta-owned companies placed in rescue in February last year, have had to face down close to 50 court cases over the course of little more than a year. Some of these were opportunistic attempts to liquidate the company and feast on the spoils, others were attempts to remove the practitioners. All of the cases went in favour of the rescue practitioners.
Something similar appears to be playing out at Vantage Goldfields, which was placed in business rescue three years ago after a support pillar collapsed at the Lily mine in Mpumalanga, resulting in the death of three workers.
Mike McChesney, long-time CEO of Vantage, says there are two bidders for its two gold mines – Barbrook and Lily – but standing in the way is Fred Arendse and the Siyakhula Sonke Corporation (SSC). They had asked the Mpumalanga High Court to force Vantage Goldfields to hand over shares, which would give SSC control of the company and its assets.
Acquisition and rehabilitation cost money
The problem, according to McChesney, is that neither SSC nor its subsidiary Flaming Silver Trading have anything like the money needed to acquire the shares and rehabilitate the mines. Meanwhile, close to 1 000 workers continue to sit on the sidelines waiting for the court to rule one way or the other, while the nearby town of Louisville dies a slow death. Vantage is the largest employer in the town.
Trade unions and community leaders are becoming increasingly frustrated at the prolonged rescue process, now bogged down in court, that has kept them out of work for more than three years.
The Industrial Development Corporation (IDC) has committed R190 million in loan funding to restart the mines, provided the eventual buyer can come up with equity funding of R50 million.
The first volley in the court battle between SSC and Vantage was fired last week. SSC, which received Section 11 support from the Department of Mineral Resources for the transfer of mining rights, now wants Vantage to hand over shares in the company. The case was complicated by an application by a former director of SSC/Flaming Silver, Ferdi Dippenaar, to be joined to the proceedings. According to a statement by SSC, Dippenaar was dismissed from the board “for serious misconduct, inter alia, leaking confidential information to the Vantage directors, whom he subsequently joined forces with to frustrate SSC/Flaming Silver’s efforts to reopen the mines.”
That’s one version of what went on.
Dippenaar supplied an affidavit to the court alleging that SSC never had the money to consummate the deal and was effectively trying to get the assets for next to nothing.
SSC put out a statement this week claiming partial victory in court last week. The court ruled that Dippenaar be joined as an intervening party in the main application (relating to the transfer of shares from Vantage to SSC), which has yet to be heard. Dippenaar lost one part of his application, where he asked the court to have the shares agreement between Flaming Silver and Vantage declared null and void on internal procedural grounds. But this does not affect the main case.
“Dippenaar’s contention that Flaming Silver did not have the funds to complete the transaction with VGSA [Vantage Goldfields SA] remains as part of the main application to be adjudicated and to which he is now a party,” says McChesney. “The judgment does not address the primary dispute between Flaming Silver and VGSA and that litigation continues pending a further hearing on a date to be determined.”
A previous agreement between Vantage and Flaming Silver for the sale of the mine assets was cancelled in March, when Flaming Silver failed to raise the funds required to reopen the mines and pay outstanding creditors, despite having had more than 16 months to do so.
The business rescue practitioners, Rob Devereux and Daniel Terblanche, have also been cited as respondents in the case, and will have to await the outcome before making a decision on the future of the mines.
“When business rescue started, it was creditors who made life difficult,” says Devereux. “The frustration now centres around shareholder issues, which is outside the ambit of business rescue.”
Meanwhile, two serious and financially qualified bidders are waiting in the wings to acquire Vantage, says McChesney, with more than 1 000 workers and their families awaiting news of their future.
The damage is likely to spread beyond Tongaat, with investors applying a risk premium to stated figures on other stocks. This article first appeared in Moneyweb.
Trade in the shares of sugar and starch producer Tongaat Hulett was suspended on the JSE and London Stock Exchange on Monday while new management assesses the extent of financial misreporting by the company.
The shares were suspended at the request of Tongaat itself. In a Sens announcement, Tongaat says it aims to publish its consolidated financial statements for the year to March 2019 by the end of October this year. The listing will be reinstated at that point or sooner, providing sufficiently reliable information can be released.
This follows an announcement on May 31 that Tongaat would have to restate its equity by R3.5-R4.5 billion after incorrectly counting revenue from land sales. It would also have to reverse capitalised costs related to cane roots, projects, maintenance and inventory. What may have happened here is that Tongaat undercounted actual expenses by ‘capitalising’ them – which has the effect of removing them from the income statement and recording them as assets on the balance sheet.
The audit profession, already in damage control for signing off on Steinhoff’s fake figures and facilitating other corporate debacles (such as the looting at VBS Bank), will be bracing itself for another round of public opprobrium.
Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says one likely effect of the Tongaat accounting mess will be for investors to apply a risk premium on all published financial figures.
Investors ‘just can’t rely on the figures’
“Given the current spate of audit and reporting scandals, investors are likely to add a risk premium on financial results and reduce the stated figures with this risk percentage,” says Van Wyk. “They just can’t rely on the figures presented. This doesn’t bode well for the audit profession, but the impact is likely worse for the broader SA economy as increased risks means increased interest rates and an increase in cost of living expenses.
“We need CFOs [chief financial officers] that are skilled managers not ones that are technocrats. SA needs street-smart CFOs who can see the wood for the trees and not be manipulated or bullied into applying liberal interpretations of IFRS [International Reporting Financial Standards] when preparing financial statements.”
Suspension of the trade in Tongaat shares seems a logical move by Tongaat, though it has also triggered speculation that conditions at the company are worse than already believed. To allow trade in its shares to continue would encourage wild speculative activity. By suspending trade, Tongaat can get ahead of the news cycle and control the information flow while audit firm PwC, which has been brought in to investigate certain practices at the company that could impact previously reported financial information, delves into the extent of the misstatement.
The Sens statement says the Tongaat board has “reached a conclusion that the need to restate the March 2018 Financial Statements, and the consequential impact on the 30 September 2018 statement of financial position, renders reliance on the unaudited interim results for the six months ended 30 September 2018 Interim results no longer appropriate. This follows further discussions with the JSE and the Company’s auditors, forensic investigative team, legal advisors and management.”
All this suggests the results released last year are largely a work of fiction, with land sales counted before they were due, and inventory and other capitalised costs padded to allow executives to earn fat bonuses.
The taxman targets foreign earnings in excess of R1m – but at what cost to the country? This article first appeared in Moneyweb.
Financial emigration is on the rise – by 30% over the last two years, according to Claudia Apicella, head of Financial Emigration, a specialist advisory group targeting financial emigres.
The main reason? The imminent change in the law requiring South Africans working abroad to pay tax of up to 45% on any earnings above R1 million. The new rules come into effect in March 2020.
“In 2017 the National Treasury and SA Revenue Services (Sars) announced that they would be introducing major changes in the tax exemption on South African expatriates,” says Apicella.
Many South Africans working abroad earning more than R1 million have decided to cut their financial ties with the country as a pure tax relief mechanism.
“Taxing South Africans working abroad is the wrong move,” says economist Mike Schüssler of Economists.co.za. “It may provide a bit of a boost in tax collections in the short term, but at what cost to the country? We are taxing ourselves into poverty and this move aimed at taxing expatriates’ income is going to encourage more people to leave the country.”
South Africans are already over-taxed, handing over 41% of annual earnings above R700 000 (not counting Vat, local government taxes, and pension and medical aid contributions), compared to the US where a marginal tax rate of 38% kicks in at the equivalent annual earnings of R6 million.
We know that roughly one million South Africans live and work abroad, and the number of South Africans applying for foreign citizenship soared 53% in the second half of last year.
This latest move by Sars and National Treasury to pull South African expats into the tax net is accelerating a brain drain that has been going on for decades. Johannes Wessels, director of the Enterprise Observatory of SA (Eosa), pointed out in a recent Moneyweb article that as high-skilled emigration continues, SA will continue its slide from middle to lower income country rankings. We’ve already slipped by more than half over the last 20 years. With more skilled South Africans headed for the exit door, an already over-burdened pool of taxpayers will have to shoulder more of the tax burden. The only way out of this quagmire is massive job creation.
Source: Enterprise Observatory of SA
Financial emigration requires a declaration that you intend to permanently reside outside of SA, with the formalisation of your non-resident status with the South African Reserve Bank and Sars.
“The financial emigration process is predominantly pursued by individuals earning a surplus of R1 million in foreign income and we find most individuals are between the ages of 25 to 55,” says Apicella.
“Hundreds of thousands of South Africans have left South Africa to pursue a better future. The definition of what a better future entails is relative to one’s circumstances. This has resulted in shortage of skills within SA and will continue to have an impact on the economy.”
The most favourable countries for emigration include New Zealand, the UK, Mauritius, the UAE (notably Dubai), various countries in Asia, Portugal and the US.
Treasury and Sars decided to change the rules governing expat earnings after realising that most SA passport holders and permanent residents who left the country did so without formalising their financial affairs.
Sars now asking ‘innocent’ questions
Sars also stepped up tax audits on those expatriates who left the country and simply decided to ignore their taxes.
Says Apicella: “While some did not consider it necessary to submit tax returns in South Africa, others submitted zero tax returns to Sars. In some cases, individuals even indicated that they were unemployed on their tax returns while earning expatriate salaries.
“While many expatriates may hope that Sars will drag its feet, the 2017/18 South African tax return already included targeted questions dealing with expatriate tax status. The questions may appear innocent enough, but we have seen this trigger an automatic verification or audit process. Where the question is marked false, this is a criminal offense, thus creating an even more serious problem.”
Tongaat must restate its 2018 figures. But will it end there? This article first appeared in Moneyweb.
Just when we thought the worst was behind us, along comes Tongaat Hulett with an announcement that it overstated its 2018 figures and will have to adjust them downwards. Then there was the public spat between retailer Choppies and its suspended CEO. But we’ll come to that in a minute.
Alarm bells started ringing in February when Tongaat’s share price slumped nearly two thirds to 1650c over a period of days. From a purely timing point of view, it seems some people had wind of this before others since the price drop occurred well before the financial year-end.
No doubt the JSE will take a close look at this. Tongaat will have to restate its equity by between R3.5 billion and R4.5 billion due to the incorrect recognition of revenue and profits in terms of International Reporting Financial Standards (IFRS).
Also to be revised are “growing cane valuations” and it will be forced to reverse costs capitalised for cane roots, projects, maintenance and inventory.
Based on last year’s reported revenue of nearly R17 billion, Tongaat will have to shave this by 20-26%. Profit figures will also take a pounding once the numbers are restated. Deloitte, the auditor, will have some explaining to do, and will surely dread the comparisons already being drawn with dog-in-the-manger Steinhoff, of which it was the auditor at the time accounting irregularities were first reported.
Tongaat’s debt-equity ratio has been climbing steadily over the last four years and will have to be pared back through asset sales.
In 2018 IFRS amended its revenue recognition criteria for land sales. Without more detail from Tongaat, it is difficult to surmise what went wrong other than Tongaat not adhering to the new accounting standards.
IFRS deals with a number of revenue recognition scenarios, particularly where there are concerns about the collectability of money from property that is being co-developed with outside partners. In simple terms, it was easy to fudge the figures under the old accounting standards and report revenue that was neither cash-based nor collectable with certainty. Property deals in the works are inherently complex, with multiple legal contracts and their associated liabilities that make it difficult to assess when revenue should be recognised and by whom.
Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says red lights were flashing when Rob Aitken stepped in late last year as an acting chief financial officer, a position that was made permanent in February this year. A new CEO, John Hudson, was appointed in February.
“Connecting the dots between the CEO, CFO and auditors reveals the Bermuda Triangle of financial reporting,” says van Wyk.
“In this case it’s not ships and planes that disappear but billions in shareholder value due to this unholy alliance.”
He adds: “What facilitates this is the misreading of the Companies Act vis-à-vis financial reporting standards. Corporate executives and their auditors forget that the Companies Act trumps IFRS. The act places the needs of users above that of the directors. IFRS allows directors to apply judgement as to when revenue and expenses should be recognised.
“The act requires adherence to IFRS when preparing financial statements but also requires that these statements are fairly presented, not misleading and not incomplete. It’s clear that neither the auditors nor management passed muster when it comes to the Companies Act even though the low bar of IFRS may have been passed.”
The company recorded revenue of R8.8 billion for the six months to September 2018, and R17 billion for the full year to March 2018. The last interim results show it collected R630 million from land sales in October 2018, leaving land debtors of R1.934 billion, “most of which is expected to be collected over the next 12 months, as administrative, planning and other conditions are fulfilled,” according to the results announcement.
This is possibly one source of the revenue misstatement, particularly if the planning and administrative conditions were not fulfilled.
Tongaat is a huge landowner in and around Durban, and has released more than 3 500 hectares of formerly agricultural land for sale and development. It has been a major supplier of land for new development areas around King Shaka International Airport, Ballito and Ntshongweni (west of Durban).
Indications of potential trouble in the property portfolio were flagged in September last year when it conceded that the current economic climate was not conducive for land sales. The company negotiated two sale agreements and said it was taking steps to obtain the necessary planning approvals to conclude those transactions, while focusing on collecting proceeds from previously concluded land deals. It’s likely that some of these fell through the slats and revenue was counted before the deals were hatched, which looks good come executive bonus time.
There are now calls for the repayment of executive bonuses tied to misstated profit figures.
Tongaat holds a substantial asset base including controlling interests in sugar operations in SA, Swaziland, Botswana, Namibia, Mozambique and Zimbabwe. It also has an extensive property portfolio, which it has been selling and developing in recent years, as well as starch operations.
Assets to be sold
The company says it is committed to selling certain assets and is making progress in reducing interest-bearing debt, which stood at R5 billion in March 2018. This will strengthen the balance sheet and improve its liquidity position. “The company has obtained independent valuations of its various businesses as well as its land portfolio, which is currently reflected in the financial statements at historical cost,” says the statement issued by the company this week.
It has been negotiating with its debt funders to waive their rights arising from any breach of financial covenants contained in the facilities agreements for the measurement date falling on March 31 2019.
Negotiations with its funders for a moratorium on repayments – other than interest on its long and short-term SA debts – are at an advanced stage. Annual interest payments have climbed from R609 million to R878 million over the four years to March 2018.
What’s also alarming, but on a smaller scale, is the very public spat between retailer Choppies and its suspended CEO Ramachandran Ottapathu.
Choppies shares have been suspended on the Botswana Stock Exchange and JSE since November last year after it failed to produce its 2018 annual report on time.
What makes this mess even more convoluted is that Ottapathu is the company’s largest shareholder, with nearly 20% of the shares. He was suspended “as a result of an aggregation of activities and conduct” which the company would make public in due course, according to a Sens notice released on Monday.
Ottapathu told the press he has had to defend himself against unstated charges and would bring the matter of his suspension to court at the soonest opportunity. The latest results for Choppies date back to December 2017 when it reported a 23% increase in revenue for the six month period, and a 22% increase in profits. There are concerns over the retailer’s reporting of its inventory, but that’s a story for another day.
Subject of defamation suits against six South Africans again came up. This article first appeared in Moneyweb.
Last week’s annual general meeting of Perth-based mining company Mineral Commodities (MRC) started off with an order from CEO Mark Caruso to switch off all mobile and recording devices.
“Why so?” asked environmental activist Louis de Villiers, a South African currently residing in Australia.
It was downhill from there. Activists wanted to know, as they did at the previous year’s AGM, whether defamation suits against six South Africans either critical of or opposed to its mining activities in SA might harm MRC’s public image. MRC and Caruso are suing the South Africans for a total of more than R11 million.
The noise level against MRC has certainly ratcheted up a few notches, with the launch last month of a grouping of civil society organisations called Asina Loyiko: United Against Corporate Bullying. The group aims to fight Slapp (Strategic Litigation Against Public Participation) suits brought by corporate interests with the intent to suppress free speech and stifle academic freedom.
The group accuses MRC of launching Slapp suits against local activists as a way of shutting down opposition to its mining activities.
Two attorneys with the Centre for Environmental Rights (CER) were sued by MRC and Caruso after giving a presentation at the University of Cape Town in which they criticised the company’s environmental practices at Tormin on the west coast.
Last month the CER attorneys lost a case in the Western Cape High Court where they asked MRC to disclose documents related to its Tormin mining operation. The judge found that the CER attorneys should have argued their case in greater detail, as it was placing an almost impossibly burdensome task on the company by asking for so many documents.
Claims and counterclaims over killing
At last week’s AGM, De Villiers wanted to know what the company is doing to support the hunt for the killer of anti-Xolobeni mining activist Sikhosiphi ‘Bazooka’ Rhadebe, who was gunned down by unknown assailants in 2016. Two South Africans, social worker John Clarke and activist Mzamo Dlamini, have been sued for defamation by MRC and Caruso for supposedly alleging the company was involved in the murder of Rhadebe. The company has denied any involvement in the killing, while Clarke and Dlamini deny making the claim.
Clarke is alleged to be the main thorn in the side of the company, and faces 19 claims totalling R5 million for defamation – a figure that keeps growing as he shows no sign of relenting in his criticism of MRC.
De Villiers says that while asking his question on the Rhadebe killing, Caruso shut him down and wanted to know “how long have I been in Australia, am I a citizen of Australia, and then suggested that I’ve abandoned South Africa, which I clearly denied”.
Why no answers?
De Villiers also wanted answers to questions raised at the previous year’s AGM, such as clarification on whether the company intended divesting itself of the Xolobeni project, as suggested in the previous annual report. Last year the company promised to get back to De Villiers on the questions raised, but has failed to do so, he says.
MRC’s Xolobeni mineral sands project on the Wild Coast has an estimated resource of 346 megatons yielding 5% heavy minerals. This is a juicy deposit, now frozen in the ground as pro and anti-mining activists argue their corners. Mining minister Gwede Mantashe has visited the site several times in an attempt to resolve disputes between the opposing sides.
In apparent contradiction of previous claims that MRC had plans to divest from Xolobeni, its 2018 annual report states: “The company continues to consider that the Xolobeni Mineral Sands Project has compelling socio-economic benefits for the area which can be developed in conjunction with the eco-tourism and agricultural initiatives that are being put forward by various stakeholders.”
Consultation doesn’t amount to ‘consent’
MRC subsidiary Transworld Energy and Minerals Resources (TEM) lost a Pretoria High Court case last year when it was ruled that fully informed consent, not just consultation, is required of traditional landowners under the Protection of Informal Land Rights Act before mining rights are granted.
MRC’s revenue for the 2018 financial year was A$5.4 million, a 12% decrease on the 2017 figure. This was largely due to lower concentrate volumes, which was offset to some extent by better prices for zircon, rutile and ilmenite concentrates. Pre-tax profit was A$10.4 million, a drop of 25% on the prior year.
Another MRC subsidiary, Mineral Resources, produces zircon, rutile, garnet and ilmenite concentrates at Tormin on the west coast of SA, while TEM owns the prospecting rights for Xolobeni. The company also has a majority interest in a graphite mine in Western Australia, and a number of joint ventures in Iran for the production of gold, copper, potash, lithium, cobalt and nickel.
Remuneration resolution rejected
The AGM didn’t go all MRC’s way. The remuneration resolution required more than 75% of shareholder support, but only 61% voted in favour of it. This means another vote must be held within 90 days, and all “vacating directors” cease to hold office before the 90 days is up. According to Australian stock exchange rules, all directors (except for the MD) are forced to resign if the remuneration report fails to get at least 75% support two years in a row.
“This doesn’t happen too often,” says De Villiers, “and is, I believe, a huge hit against the company, demonstrating serious discontent among shareholders.”
De Villiers says he will now lay a complaint with the Australian Securities and Investments Commission over the banning of recording devices at the AGM.
Results in world’s second-largest diamond find, while coal exports take off. From Moneyweb.
Just when it looked like Botswana had hit ‘peak diamond’, Vancouver-based Lucara Diamond announced in April that it had recovered a 1 758 carat diamond from its 100% owned Karowe mine in the east of the country.
This is one of the largest diamonds recovered in history, and the largest ever found in Botswana. It is the second time in four years the mine has recovered a stone of more than 1 000 carats.
Lucara snagged the 1 111 carat Lesedi La Rona stone, which at the time was the third largest diamond ever found and the second largest of gem quality, in 2015.
The Lesedi La Rona (‘Our light’ in Tswana) was bought by British jeweller Graff in 2017 for US$53 million. It was later cut into one stone of 302 carats and 66 smaller stones. These stones were reportedly sold for more than three times the purchase price.
Botswana’s regulatory stance
Speaking at the Junior Mining Indaba in Johannesburg yesterday, Botswana Chamber of Mines CEO Charles Siwawa highlighted Lucara’s find as one of the successes stemming from the government’s mining-friendly regulatory stance.
“What’s interesting about this diamond is that it was discovered by a junior miner, not one of the majors.”
The latest Lucara find is so large and rare that it is difficult to value. By way of comparison, the famous 3 106 carat Cullinan Diamond, recovered in 1905 from the Premier mine in Cullinan outside Pretoria, is the largest gem-quality stone ever recovered and is reckoned to have a value of more than $2 billion today. That stone is now known as the Great Star of Africa and is nestled in England’s royal sceptre on display at the Tower of London.
More big finds expected
Lucara CEO Eira Thomas says the recovery of two stones larger than 1 000 carats in four years affirms “the coarse nature of the resource and the likelihood of recovering additional, large, high-quality diamonds in the future, particularly as we mine deeper in the [Karowe] orebody”.
The company has recovered 1.4 million carats at Karowe since commissioning its diamond recovery plant in 2015.
Earlier this year Botswana’s Orapa mine announced the discovery of a 41.11 carat ‘fancy blue’ diamond, which was then cut into a 20 carat polished stone of extreme rarity due to its unique colouration. The diamond has been named Okavango Blue and is expected to be sold later this year for a record price for a stone of this rarity. Orapa is the world’s largest diamond mine by area, and is jointly owned by De Beers and the Botswana government. In 2018, it produced 12.2 million carats.
Botswana has issued more than 1 000 exploration licences in recent years for commodities ranging from gold and diamonds to copper, nickel, iron ore and manganese. The government has the right of first refusal to acquire 15% equity in any promising discovery. Exploration licences are easily obtained and generally issued within a month of application.
Coal mining has taken off in the country, with much of the product finding its way to SA for sale to coal traders and exporters.
“Our coal deposits are not as good as those in the Democratic Republic of Congo or Zambia,” says Siwawa, “but they are profitable, provided you do robust feasibility studies and keep your costs in the lower quartile of the cost curve.”
The development of the Trans-Kalahari railway line, linking Botswana to SA and Namibia, was put on ice nearly a decade ago when coal prices slumped. The project was conceived during the previous commodity super cycle when coal prices shot above $130 per ton, but was shelved as prices then fell to around $50 a ton. The project appears to have been revived to reduce the costs of exporting coal. Botswana is reckoned to have about two-thirds of all Africa’s coal reserves.
They want the bank to adopt a policy on lending to coal operations. From Moneyweb.
This is almost certainly the future of annual general meetings (AGMs) in SA. Get your environmental ducks in a row or it is going to get noisy.
Protesters were gathered outside Standard Bank’s Simmons Street head office on Thursday calling for shareholders attending the AGM inside to vote for a resolution compelling the bank to adopt and disclose a policy on lending to coal projects.
Non-governmental organisation Just Share says this is the first time that a South African bank, or any listed company, has faced a shareholder resolution on climate change.
The resolution was proposed by the Raith Foundation and shareholder activist Theo Botha, and supported by Just Share. When asked by Tracey Davies, director of Just Share, why the bank recommended voting against the resolution, CEO Sim Tshabalala said the bank fully supported the Paris Agreement on climate change, and agreed that climate change represented a “clear and present danger”. The bank was embarking on a process of adjusting to the requirements of climate change as it affects its activities, he said, but was compelled to balance this against developmental objectives.
‘Unlocking potential’, or putting millions at risk?
Environmental activist Greer Blizzard of Just Share pointed out that Standard Bank is one of the lead arrangers for a US$2.5 billion loan to support the East Africa Crude Oil Pipeline through Uganda and Tanzania, which the bank claims will unlock East Africa’s potential. However, the oil to be transported through this pipeline will emit more carbon than the whole of Uganda and Tanzania currently does each year.
Thousands of people will be displaced, and the pipeline will run for several hundred kilometres though the Lake Victoria Basin, putting the drinking water of millions at risk.
A coalition of African and international environmental activists recently wrote to the bank urging it not to proceed with financing the project. They point to several studies showing major opportunities for financing renewable energy infrastructure which would meet the region’s energy needs in a clean and rights-compatible manner, which would represent a much less destructive use of the bank’s finances.
“Will the bank agree to meet with local people and listen to their concerns about the East Africa Crude Oil Pipeline?” asked Greer.
CEO agrees to meet with locals
Tshabalala said he would, adding that the bank supported the Task Force on Climate-related Financial Disclosures (TCFD), joining more than 500 organisations around the world committed to improving climate-related disclosures.
The TCFD’s mission is to “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.”
Some 55% of shareholders voted in favour of the bank adopting and disclosing a policy on lending to coal-fired power plants and coal mines.
“This was a significant result,” said Davies after the vote. “Firstly, for a majority of shareholders to vote in favour of the resolution despite [the] board recommending against it really shows that there is much more awareness and understanding of climate risk among our investment industry than it might appear.”
Greenhouse gas resolution
A second part to the climate-related resolution would have required the bank to report to shareholders its assessment of the greenhouse gas emissions resulting from its financing portfolio and its exposure to climate change risk in its lending, investing and financing activities. This resolution was defeated, but still managed to swing 38% of shareholders to vote in its favour.
Davies says this was an impressive vote in favour of climate-related disclosures, considering this was the first time it had been tabled. “Generally it takes several years to raise awareness behind climate-related disclosures among shareholders, and this is a far better result than has been obtained in other AGMs around the world when such resolutions were first introduced.
“It is clear we are moving rapidly in the right direction.”
Just Share commended those shareholders who voted in favour of the resolution, including Mergence Investment Managers, Old Mutual and Aeon Investment Management. ”We encourage other shareholders who voted in favour of the resolution to publicly declare that they did so,” says Davies.
“In SA, where we are still so heavily reliant on fossil fuels for energy, climate risk and the transition to a low-carbon economy pose unprecedented risks and opportunities for our society and economy. The financial sector has a crucial role to play in driving this transition and today’s developments prove that institutional investors are starting to demand it do so.
“Banks should already, at the very least, be disclosing the extent to which they are exposing their businesses, shareholders, and the planet to climate risk via their financing of fossil fuels.”
Shareholder resolutions have become one of the most powerful tools for raising awareness about climate change risk, and for forcing the business and financial sectors to take action to mitigate and avoid that risk, says Just Share.