Coal is far from dead

Written by Ciaran Ryan. Posted in Journalism

This article first appeared in Moneyweb.

The launch of Sibambene Coal this week puts paid to the idea that coal is a sunset industry.

Sibambene is a 51% black-empowered company, the first to be fully compliant with the Mining Charter III, and plans on investing exclusively in SA coal mining assets.

While several of the majors have divested themselves of their coal mining assets, particularly as Eskom comes under pressure to decommission its coal-fired power stations and replace coal with green energy, Sibambene sees opportunity.

Dr Sakhile Ngcobo, a director of Sibambene, says the company is on the hunt for coal assets in SA, and is speaking to mining majors looking to offload coal assets, as well as junior miners with a view to possible consolidation of assets.

Fellow director Vuslat Bayoglu, who also heads up mining investment company Menar, says despite a worldwide move to greener energies, there is a global shortage of coal amounting to more than 70 million tons a year.

South Africa has 30.8 billions tons of coal reserves, sufficient to last another 118 years, and is the world’s sixth-largest source of reserves. Current national production amounts to 260 million tons a year, of which 72 million tons are exported. Richards Bay Coal Terminal (RBCT) has an annual capacity of 91 million tons.

Investors beware of smooth-talking politicians

Written by Ciaran Ryan. Posted in Journalism

 

This article first appeared in Moneyweb.

Two cases involving state-owned companies illustrate the perils of taking politicians at their word.

The first involves Airport Companies South Africa (Acsa), which two decades ago enticed investors with the promise of a stock exchange listing. That never happened, leaving minority shareholders owning 4.2% with no exit option other than to sell back to Acsa.

Minority shareholders and Acsa have been locked in dispute over the value of the shares for the better part of a decade. The parties reached a settlement agreement in 2017, which was made an order of court. Acsa was ordered to buy back the minorities’ shares at fair value, which was to be determined by an independent referee.

When the independent referee, RisCura, came to a valuation of roughly R78 a share, Acsa – realising it would have to pay out about R700 million – hired a valuator of its own who arrived at a valuation nearly half this amount.

The government has since entered the picture, and has applied to the court to appeal the court order and rescind the settlement agreement.

Politicians in investors’ crosshairs

The minorities, in their replying affidavit, argue that government’s conduct is of such bad faith and its arguments so spurious that they are seeking personal cost orders against the key personnel involved: transport minister Blade Nzimande, deputy director-general of transport Rejoice Phewa, and the state attorney Dovhani Mphephu.

Should the minorities win this case and get cost orders against these individuals, we can expect a multitude of other cases seeking to hold government officials to account where they have used the public purse to pursue illogical or frivolous cases.

SA has cycled through multiple transport and public enterprises ministers since investors were first lured into Acsa in 1998. Times change, and promises made under one administration can be vaporised by the next.

Telkom had been through a reasonably successful privatisation around this time, paving the way for Acsa. Government’s entry into the dispute last year is predicated on the impact the settlement will have on state finances, though minority shareholders point out that the state has neither invested nor loaned a cent to Acsa since the early 1990s.

A lesson for investors

“There is a lesson here for foreign or local investors looking at interacting with state-owned companies,” says Alun Frost, financial advisor to the minority shareholders. “Exercise extreme caution. Promises to investors apparently mean nothing to investors. In our case, we have argued that the government has acted oppressively against the minority shareholders over a sustained period of time.”

There is another troubling aspect to the Acsa business model, adds Frost: it went from a purely commercial enterprise to a developmental tool of government. Evidence of this is the costly King Shaka International Airport in Durban, which Acsa was forced to take on its balance sheet. The initial budget of R3.5 billion was blown out of the water, with final costs tallying around R10 billion. Then government mismanaged the Acsa tariff regulator, which has been dysfunctional since 2006 – further impairing Acsa’s ability to generate reasonable returns.

Huge increase in demand for second passports

Written by Ciaran Ryan. Posted in Journalism

Most of them from non-white South Africans looking for a bolt-hole.

This article first appeared in Moneyweb.

South Africans looking for a bolt hole in case things go pear-shaped in SA are applying in record numbers for foreign passports. Most of these are high net worth individuals looking for a Plan B in case the political or economic future deteriorates, or for ease of foreign travel and doing business abroad.

Not all of these are planning to emigrate, says Amanda Smit, managing partner at Henley & Partners SA, a global citizenship and residence advisory firm. Many would like to keep their South African passports – maintaining a direct link to family and home – while taking advantage of the benefits of living and working abroad.

Benefits and privileges

“South African high net worth individuals (HNWIs) recognise that dual citizenship or residency provides more benefits and privileges for them and their families including ease of travel, security for the future and expansion of business and banking,” says Smit.

She says the number of foreign citizenship inquiries from South Africans shot up 125% in the second half of last year over the same period in 2017.

This translated into a 53% increase in applications for foreign citizenship in the second half of 2018. There was a 364% spike in inquiries in October 2018 over the same month in 2017.

In other words, it appears that South Africa’s human capital is taking the same flight path as its financial capital.

According to data from the UN Conference on Trade and Development (Unctad) for 2017, South Africa was the third biggest exporter of capital as a percentage of GDP in the world. The so-called Ramaphoria effect appears to be doing little to stem an exodus that started under former President Zuma.

Suspended nuclear company execs smell rat over adverse audit

Written by Ciaran Ryan. Posted in Journalism

This article first appeared in Moneyweb.

The Auditor-General says there are doubts over the ability of SA Nuclear Energy Company (Necsa) and its subsidiary Pelchem to continue operating.

That is what he told Parliament’s portfolio committee on energy earlier this month. Auditor-General (AG) Kimi Makwetu said Necsa’s liabilities exceeded its assets, and that Pelchem – which makes fluorine-based products for use in steelmaking and other applications – continues to make losses.

What a turnaround a year makes. Last year, Necsa and its NTP Radioisotopses subsidiary were among the few state-owned companies to win clean audits. In 2017, NTP earned revenue of R1.3 billion, generated profits of more than R300 million and paid tax of over R80 million to the state.

In November last year energy minister Jeff Radebe suspended three Necsa board members for “insubordination” and “defiance” and within 48 hours had replaced them with a new board – an astonishing display of efficiency given the usually tortuous hiring processes that take place at this level of the public sector.

Breach of protocol

The three suspended board members are chairman Kelvin Kemm, CEO Phumzile Tshelane and audit and risk director Pam Bosman. They say the AG had private meetings with Radebe last year concerning Necsa, but Necsa was not invited to the meetings. “We were very suspicious because that action breaches established protocol,” says Kemm.

In December last year the trio brought an urgent application seeking to overturn the minister’s decision. The case was due to be heard earlier this month but was removed from the urgent roll when Radebe plonked an 800-page court file before the judge. Court rules demand that anything over 500 pages must be placed on the ordinary roll, which means the case will now be heard in June. By that time the election will have passed and Radebe may himself be replaced as energy minister.

Barrick and Newmont at war over who will be king of the mountain

Written by Ciaran Ryan. Posted in Journalism

This article first appeared at Moneyweb.

We are now in the era of the gold mining super-deal. The only question that remains is who will emerge king of the mountain.

Yesterday Barrick CEO Mark Bristow (pictured) put forward an unsolicited US$18 billion offer for Newmont Mining that he says will unlock S$7.5 billion in shareholder value through better sharing of mining facilities and other synergies. But for that to happen, Newmont would have to abandon its S$10 billion share buyout of Goldcorp, a deal that would make it undisputed king of the gold mining world, and tie the knot with Barrick.

Mining groups are in a race to hoover up the best assets in the world and extend their average life of mine. The gold price remains stubbornly subdued, while ore yields are falling and costs rising.

Barrick is barely two months into its S$18.3 billion merger with Randgold, and is now making a pitch for the biggest prize in gold mining. Has it bitten off more than it can chew? No, says Bristow. The same management team that turned Randgold into the envy of the gold mining world is now in place at Barrick, while Newmont is plagued by an exodus of key management – some of them now at Barrick. The “New Barrick” team is sufficiently resourced to take on this whale-sized meal.

Addressing the media and analysts yesterday, Bristow spelt out the case for a Barrick-Newmont merger: in addition to unlocking more than S$7 billion in synergies, it would create the world’s largest pool of Tier 1 assets (defined as having a 10 year life with annual production of at least 500 000 ounces in the lower half of the cost curve). It would also generate enough cash flow to drive future growth.

The real prize for Barrick is the ability to tear down fences between it and Newmont in the gold-rich Nevada region, allowing it to rationalise transport fleets and share processing facilities. The Barrick offer was “far superior” to Newmont’s proposed acquisition of Goldcorp, says Bristow, with expected Barrick/Newmont annual synergies 7.5 times larger than the quoted annual synergies for the Newmont/Goldcorp transaction.

Forget cigarette smuggling. The big money is in stealing coal

Written by Ciaran Ryan. Posted in Uncategorized

This article first appeared in Groumdup.

We’ve heard about gold theft, but coal theft is the biggest game in town. It’s costing Eskom and coal companies billions of rands a year. It’s highly organised and a major concern to police.

You might wonder who would bother stealing coal, rather than gold or platinum. But precious metals are highly controlled and not easy to steal. Coal is a cinch. Steal enough of it and you can make a fortune – and many people do.

Coal theft is highly organised and backed by big money. The gangs behind the theft have sufficient cash to invest in fleets of trucks.

Thousands of trucks deliver coal each day from the Mpumalanga coal mines to Eskom, or to the railway sidings for eventual delivery to the Richards Bay Coal Terminal for export. The better quality coal goes to the export markets, the lower quality coal to Eskom power stations.

The most common way of stealing coal requires the connivance of security and machine operators within the mines. A 28-ton or 34-ton truck turns up at the coal mine, usually at night when the security presence is more low-key, and is loaded with coal. Then, with the help of company insiders, the truck by-passes the weigh bridge, which is a crucial control element in all mines where the weight and identity of the truck is recorded. The truck drives out and delivers its cargo to an undisclosed buyer, who often re-sells the coal to Eskom. This can happen several times a day at the dozens of coal mines across Mpumalanga and elsewhere, according to Mike Elliott, business rescue practitioner for the Gloria Coal Mine.

Lawlessness at Gupta mines was behind deadly tragedy

Written by Ciaran Ryan. Posted in Journalism

This article first appeared in Groundup.

A methane gas explosion ripped through the Gloria Coal Mine on 4 February, trapping 22 men underground. They were allegedly trying to steal cable. Rescue efforts have been hampered by the continued presence of the deadly gas. Five men died trying an unofficial rescue attempt. The bodies of seven of the 22 have been found, but cannot yet be brought to the surface. One person was rescued alive.

Gloria mine is part of Tegeta, the formerly Gupta-owned group that is now in business rescue. More than 1,000 workers stopped getting paid in October after the group ran out of cash. Business rescue practitioners are trying to sell the mines – including Optimum and Koornfontein coal operations – to new buyers.

Because mining operations were suspended, armed men have been overwhelming security and stealing cable relatively unbothered. This appears to have been what happened at Gloria mine, but it went terribly wrong.

Workers and family members of the men have been holding vigil at the mine through the week, waiting for news of their loved ones and the prospect of the mine returning to work. Their wait has so far been in vain.

We now have a better picture of the sequence of events leading up to the tragedy. It is likely that all of the 22 people trapped underground were killed in the explosion. The mine cannot reopen until their bodies have been recovered (or, improbably, some are rescued alive). There are also reports that other mines in the area have been targeted by the same men, including Optimum Coal Mine, Blinkpan, and the nearby railway siding.

At Gloria mine, the men made a fatal mistake by cutting the overhead electricity cables which powered giant fans that flushed out methane gas from the mine. Poisonous methane gas leeches from the underground coal and must be ventilated to allow mining to occur. When the fans stopped blowing, all it took was a spark to ignite an explosion that ripped through kilometres of underground tunnels.

On a tour of the mine last week, mine management highlighted the scale of the theft and vandalism. Most of those involved are believed to be Lesotho nationals living in a nearby informal settlement.

“They are highly organised and they have come in gangs numbering 40 or 60, and they are armed. So they can easily overwhelm our unarmed security, and even the police,” says Mike Elliott, the business rescue practitioner for the mine. “They tend to come at night when it is dark, so they can more easily infiltrate the mine.”

It’s war over Eskom privatisation plans

Written by Ciaran Ryan. Posted in Journalism

This article first appeared in Moneyweb.

President Cyril Ramaphosa in his state of the nation address announced the unbundling of Eskom into three operating units. His brother-in-law Patrice Motsepe has emerged as a potential buyer of the assets likely to come up for sale.

The National Union of Metalworkers of SA (Numsa) says Ramaphosa has confirmed its worst fears: the ANC plans to privatise state-owned enterprises (SOEs), continuing two decades of looting and corruption.

Ramaphosa said Eskom will be broken up into three parts: generation, transmission and distribution. He also confirmed that non-core assets would be sold.

Read: SA to split Eskom in rescue plan – Ramaphosa

“This is nothing more than privatisation through the back door and we reject it,” says Numsa general secretary Irvin Jim.

“The ANC and its cronies looted and destroyed Eskom and now they have identified privatisation as a convenient way to cover up for more than two decades of rampant mismanagement, looting and corruption. The ANC is punishing workers for its failures. The unbundling of Eskom will result in massive retrenchments and job losses. For the consumer, it will mean that electricity will cost more, and it will be even more inaccessible to the poor and the working class.”

Adil Nchabeleng, energy analyst and head of Transform RSA, says “unbundling” is code for privatisation. Ultimately the plan is to sell each individual power station, and the private sector is cheering this announcement. The result, however, could be massive job losses across the energy supply chain and further price increases for consumers.

Cable thief gangs haunt mines in Mpumalanga

Written by Ciaran Ryan. Posted in Journalism

This article first appeared in Moneyweb.

Last week a gang of more than 40 suspected cable thieves overwhelmed security guards and made their way down the 127 metre shaft where they set about cutting copper cable underground.

They previously cut the main power supply to the mine, so the giant fans blowing air into the underground working areas were disabled. This fatal mistake allowed methane gas to accumulate, resulting in an explosion that has trapped 22 miners and hindered rescue efforts due to the continued presence of poisonous carbon monoxide. Five bodies have since been recovered, and one person was rescued alive.

Gloria Coal Mine is one of the former Gupta-owned mines now under business rescue. This was no isolated hit by the gang, says the business rescue practitioner, Mike Elliot. “Several mines in the area have been targeted by copper theft gangs, including Optimum Coal Mine.”

Last year Optimum, another formerly Gupta-owned mine now in business rescue, was temporarily disabled when overhead cables supplying power to trains transporting coal from the mine were cut. Optimum had to replace the cables at a cost of more than R3 million. On another occasion, dragline cables on coal excavators were cut up for sale on the black market. Each time the gangs hit a coal mine in Mpumalanga, production is disrupted. Louis Klopper, business rescue representative for Optimum Coal Mine, says the mines are surrounded by farms, making it easy for thieves to disappear once the police are called.

What is unusual about the Mpumalanga cable thieves is their level of organisation.

Hey Tito, how about a flat tax of 20% instead of this monster?

Written by Ciaran Ryan. Posted in Journalism

This article first appeared at Accounting Weekly.

Pictured: Tito Mboweni, finance minister, South Africa

With Budget Day fast approaching it is worth dreaming of a better tax system.

So, here we go. Hey Tito, how about a flat tax of 20%? It will save the economy, pay for social grants, and get business going again.

It would be great if we could hit the reset button and start our tax system all over again. If we did, we wouldn’t come up with the monstrosity now in place. A flat tax would avoid a stupid tax revolt and a just as crazy wealth tax. Finance minister Tito Mboweni has a golden opportunity to fix SA in one fell swoop.

A flat tax of 20% means no more VAT, income tax or any other forms of tax. It would be easy to administer – saving thousands in salaries and advisory fees. Most importantly, it would promote economic growth.

This is not exactly a radical idea. Most East European countries, including Russia, have adopted flat taxes. Russia dropped its tax rate to a flat 13% in 2000 and almost doubled its tax receipts as a percentage of GDP in 2001. The first European nations to go this route were Estonia (with a flat tax rate of 26%) and Latvia (25%). Though these rates were high, these economies achieved average growth rates of 6,1% in 2001.

Why Hong Kong is so prosperous

Hong Kong has a flat tax of 15% on business and property income, and a graduated tax of 2-17% on labour income. High income individuals pay a flat tax of 15% if they forego personal exemptions. As The Economist noted: “The territory’s tradition of simple and low taxes…is widely seen as a main reason for its stunning rise to prosperity.”

A flat tax would also give SA a huge competitive advantage in attracting investment in a world where tax arbitrage is a key factor in business location.

Economist Jasson Urbach says SA would be a very different place if we had adopted a flat tax all those years ago when it was proposed that a flat tax of 19%, with an exemption for income below R75,000 for compassionate and practical reasons, would have generated all the income the government needed.

“Since tax as a proportion of GDP has risen by about 3% of GDP since 2012, so the flat tax rate should rise at a similar rate. However, this does not make much of a difference to the flat tax rate – less than 1%.”

The critical point here is the cut-off level for tax: at R75,000, this means all income below this level is tax-exempt, which mainly benefits the poor.

SA Institute of Business Accountants (Saiba) CEO Nicolaas van Wyk is a long-time advocate of a flat tax. “If we truly want to be an open and free society then our tax system should support this. We want our citizens to achieve both economic and political freedom. Lets get a tax system that actually supports this idea.