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Mvela needs help from above
David McKay
Posted: Mon, 10 Jan 2005
[miningmx.com] -- MVELAPHANDA Resources (Mvela Resources), the empowerment company chaired by Tokyo Sexwale, will begin 2005 having to tackle some important strategic questions; principally, how it intends to grow the business.
To some extent, Mvela Resources is the victim of a force majeure. The improvement in the value of the rand, for instance, has impeded the ability of banks to finance empowerment. This can be seen from the slowing in empowerment-related transactions in the mining industry down from about R18bn in 2003 to R2-3bn in 2004 (based on when the deals were announced rather than when they were closed).
In addition, Mvela’s financing capability has been troubled by the impact of the strong rand on the cash flow from its investments: a 6% stake in diamond producer Trans Hex, and 22.5% stake in Northam Platinum. Both companies have struggled to grow earnings which
doesn’t bode well for Mvela’s future dividend flow.
Moreover, Trans Hex and Northam Platinum have attracted questions about their own growth prospects. Northam is lease-bound and high cost amid a decline in the basket price of platinum group metals. It will need corporate activity to find fresh ounces although it has the option of developing Booysendal, a property it bought from the Khumama consortium. For its part, Trans Hex has mature South African operations; its newly appointed CEO, Llewellyn Delport, has made a point of the company’s need to press on with new Angolan-based projects.
Trans Hex also faces the prospect of damaging legislation on two fronts. The royalty bill, that will be finalised in 2005, has proposed an 8% levy on diamond company revenues. In addition, the Beneficiation Bill, the details of which were unveiled at the end of last year, is proposing an export duty on diamonds in order to encourage beneficiation.
Meanwhile, the
attempted hostile takeover of Gold Fields by Harmony Gold has been an unwanted difficulty.
Mvela Resources will gain access to the cash flow of 15% of Gold Fields’ South African gold mines on completion of a five-year financing plan. The effect on Gold Fields’ share price certainly decreases Mvela’s own net asset value of which 40% is derived from Gold Fields. Lower NAV affects the ability of Mvela to finance new opportunities.
In addition, should Harmony be successful in its attempt to buy Gold Fields, Mvela Resources could also be forced into a more profound reconsideration of its long term investment in the gold company. “Mvelaphanda Resources intends to build meaningful positions of influence in its core investments over time, do we still keep an investment where we have no control?,” asks Mvela Resources’ investor relations manager, James Wellsted. “The capital may be better applied in other industries,” he says.
In the current arrangement, Mvela
has the option of increasing its stake in Gold Fields to 26%. Were Harmony to buy Gold Fields, Mvela Resources would see its stake reduced to 6% with no prospect of ratcheting up its position. It’s worth observing that Harmony has its own empowerment partner in African Rainbow Minerals which is a 20% shareholder.
First, though, the company must find a new CEO following the shock resignation in December of Nthobi Angel, a former President’s Office aide. Angel failed to get her hands around the mining business, much less impress investors and media that she had the ability to be the company’s leader.
Wellsted says Angel was tasked with overseeing the transition of Mvela Resources management from its parent, Mvela Holdings, which previously carried out the function, to the new executive management team appointed in early 2004. If that were so, it was never communicated to the market at the time of her appointment. In the meantime, Pine Pienaar, an executive director
of Mvela, will be acting CEO. Failure to find a replacement quickly in 2005 will only entrench the perception Mvela Resources is drifting.
Analysts are concerned about the lack of progress in Mvela Resources. “The management team doesn’t appear to have done much. Maybe it’s still too soon to judge, but I haven’t been impressed,” said one analyst who follows SA’s empowerment sector closely.
Mvela’s stated business case has been to capitalise on the flood of investments SA expects to spawn in the light of its empowerment charter. The Gold Fields transaction was a weighty, high-profile deal, but it has left the company’s empowerment interests heavily diluted. Pienaar argues that the balance sheet is still unencumbered, but there’s only so much against which the company can borrow.
Wellsted says many of the company’s challenges are not unique as they are shared by the industry as a whole. “The rand has cramped alot of companies ability to finance growth,” he
says.
So where now? One bet is that help will come from above.
Roughly 23% of Mvela Resources is owned by the Mvelaphanda Group, the investment company that last year reversed its industrial and property interests into Rebserve, a Johannesburg listed cash shell. This ‘new Mvela’ is effectively godfather to Mvela Resources providing the mining firm with fresh access to capital either by way of direct investment, or by providing Mvela Resources with the ability to follow its rights if Pienaar and his new CEO – whoever that will be – decide to find new deals.
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