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Mvela share sale to Kazakh firm raises questions

02 May 2010 - 02:15 By Jim Jones

As resource company unbundles it is being seen as SA's biggest BEE failure, writes Jim Jones

The R2.2-billion sale by BEE company Mvelaphanda Resources (Mvela) of shares in Northam Platinum to London-listed, Kazakhstan-based minerals group ENRC (Eurasian Natural Resources Corporation) raises more questions than it answers.

What has Mvela contributed to the welfare of South Africans as a whole rather than to the pockets of a lucky few? What contribution can ENRC make to Northam as a minority shareholder with, as yet, no board representation?

Nine years after its founding by Tokyo Sexwale, Mvela is arguably the most prominent BEE failure. It has been twisting and turning for well over a year to get off the hook of crippling debt and, indirectly, to help those of its BEE shareholders who have borrowed to finance their shareholdings. They include the Afripalm consortium (headed by Mvela chairman Lazarus Zim) and Mvelaphanda Holdings.

There was some initial promise as Mvela borrowed copiously to acquire what became an eventual R50-million shareholding in Gold Fields, a 62.8% stake in Northam and some smaller investments including part of diamond company Trans Hex. Dividends and share-price growth of these investments were expected to cover debt servicing.

Initially Mvela followed the stages of black empowerment elucidated by Zim in his 2009 chairman's statement. First: spend five to 10 years - the "charter window" - taking advantage of the mining charter's BEE rules to acquire stakes in "white-owned" companies; second: consolidate them; and, third, unbundle or break them up according to market forces not favouritism.

Mvela seems to have reached the third stage without passing through the second or even part of the first. It added little value to the various companies in which it held stakes, value that might have helped service the debt assumed in phase one. Yes, its BEE credentials might have helped win some mineral rights, but that was part of the "charter window".

Then, with its majority shareholding in Northam, Mvela fell foul of stock exchange rules on pyramids. Even the latest sale of 12.2% of Northam to ENRC has not released it from the pyramid hook. The Financial Services Board has decreed that Mvela must unbundle Northam by June 30, though this is subject to arbitration. As deputy chairman Bernard van Rooyen explained, this deadline places considerable time constraints on Mvela to restructure.

With about R4-billion in debt around its neck last year, Mvela's initial idea was to sell its 50 million Gold Fields shares for R5.5-billion or so, repay the debt, use what remained to follow a Northam rights issue, raise money to finance turning Northam's Booysendal platinum prospect into a producing mine and finally distribute the Northam shareholding to Mvela's own shareholders.

That came adrift earlier this year after Mvela sold about five million Gold Fields shares at just over R112 apiece, a sale that followed an earlier one last year of 11 million shares. The upshot was the ability to repay some R1.86-billion of the group's restructured debt, but the Gold Fields share price tumbled as this year got under way, making further sales unfavourable. Outstanding debt is now being repaid from the Northam shares sale as fortune smiled and ENRC emerged as a buyer.

A debt-free Mvela will now distribute remaining Gold Fields and Northam shareholdings upwards to its own shareholders, said James Wellsted, Mvela's commercial manager.

The Gold Fields shares can easily be sold. That could please Afripalm, which borrowed heavily in 2006-7 to buy 40million Mvela shares and 35million "A" shares for R1.15-billion.

Recently, Afripalm has been "collaring" some of its Mvela shareholding, partly to protect itself from a possible price fall that could stymie management of the debt contracted when it acquired Mvela shares at R29.20 against the current R52.50 that reflects Mvela's break-up value.

Northam CEO Glyn Lewis said he only heard of the ENRC sale in a "courtesy call" shortly before the public announcement. Wellsted said the transaction was one between shareholders, not calling for Northam's CEO to be involved.

Northam will keep its BEE credentials when the 50%-plus shareholding transfers to Mvela's shareholders. Afripalm and Mvelaphanda Holdings will between them own 26%

Lewis reckoned that the cost of developing the 100million platinum group metals (pgms) ounces Booysendal prospect will be R3-billion, adding that Northam already has half of that amount "in the bank".

It is not clear what value ENRC, whose principal domestic interests are in steel industry raw materials and aluminium, can immediately offer Northam apart, perhaps, from cash. ENRC's public affairs spokesman Elly Williamson said the purchase is merely portfolio diversification and that no management of board roles are envisaged.

The company manages and owns 70% of South African ferro-alloys company Samancor, is the world's largest ferrochrome producer and is cash flush.

Van Rooyen is impressed by ENRC's local managers, who are engineers. He adds that ENRC might simply choose to learn what it can of the platinum business from Northam and then move on.

Following a share swap with copper miner Kazakhmys, ENRC paid $931-million for 90% of Congo-focused copper and cobalt miner Camec (Central African Mining and Exploration) and $300-million for the Chambishi copper smelter in Zambia. It manages them both.

London-listed Camec also has the Bokai platinum pro-spect on Zimbabwe's Great Dyke with an inferred resource approaching 11million ounces of pgms and that at one stage was expected to be a producing mine in 2012.

So are there synergies between Northam and ENRC?

The Kazakh company produces about a quarter of its country's electricity, runs a large part of its railways, has logistics skills for moving bulk raw materials around the world (well, largely to neighbouring Russia and China) and could bring its ferrochrome skills to bear if Northam should wish to convert chrome from the UG2 platinum reef into a saleable commodity. And its controlling shareholders are also experienced at converting state-owned assets into privately-owned ones.