RAND strength couldn't have come at a worse time for African Vanguard Resources (AVR), one of the newest empowerment groupings to emerge in SA's mining sector. Complex plans outlining financing totalling R250m were unveiled in January, the net effect of which was to provide AVR with 16% of profits from Doornkop, a gold expansion project on the West Rand owned by Harmony Gold. According to Sandile Zungu, executive chairman of AVR, those plans were put in peril by the surprise continued strength of the rand.

Now, however, AVR has secured crucial backing from Stanlib Asset Management, in return for a 20% stake in AVR. This development finally concludes the financing for AVR's participation in Doornkop.

It may soon be followed by another agreement in terms of which AVR is to buy participation in East Modder, a R150m East Rand gold mining project currently being eyed by listed gold junior Afrikander Leases. If completed, AVR's short-term cash flow pressures will be eased. The company has about R5m in working capital, but needs to improve its ability to pay down debt, particularly as the Doornkop project only kicks in during 2007.

Zungu says the last six months have been trying. 'The deal (on participating in Doornkop) was far from done. We had to restructure the terms of the equity involvement because of the falling rand. It was a crushing blow,' Zungu says of the currency's strength.

AVR's financing obligation was to arrange R30m in equity funding. Some R220m had already been engineered through a R110m debt facility provided by Nedbank, and another R110m representing the value of a call option bought by Harmony from AVR. The call option essentially provided Harmony with the proceeds of AVR's attributable production from Doornkop when the spot gold price breached R120 000/kg.

The new arrangement is that AVR will receive equity funding totalling R35m, of which R17,5m has been supplied by Stanlib Asset Management. In addition to AVR shares, Stanlib has the option of board representation, a responsibility to be carried forward by Darryll Castle, Stanlib's respected portfolio manager. Castle says the viability of the Doornkop project supported investment in AVR. Most of Doornkop's development has been paid for by previous owners, therefore the project represents early access and cash flow, and almost no capital demands compared with other mining projects of its size.

Nedbank has provided the other R17,5m in funding to AVR in the form of quasi-equity funding that can convert to shares in AVR at some point if necessary. Nedbank is less likely to take up a board seat because of potential conflicts; not to mention its primary role as a lender to AVR. It is thought, however, that Nedbank has been central in matching Aflease with AVR.

Aflease MD Neal Froneman can't comment on the possibility of talks with AVR, but he confirms there are plans to re-open East Modder, a project that has some 1m oz of gold in the ground. 'East Modder has superb margins and will probably represent one of the best assets in Aflease,' he says. There is also a possibility of including AVR in Aflease's plans to mine Durban Roodepoort Deep's North West province mines, either on tribute or through outright ownership.

Zungu is seeking investing in mining assets where the entry costs are minimal but management is capable. To some extent, Aflease's East Modder project provides those features.

The endgame is to list AVR, possibly on AltX, as a precursor to a primary JSE listing, Zungu says.

'My vision is to create an SA-based, globally competitive, diversified resources group,' he says. Other mineral classes will be included in the AVR portfolio, most notably platinum and base metals.

Sandile Zungu fact file It's a brave move for the 36-year old Zungu to seek hands-on mining involvement because his underground mining experience is limited, having only worked at Richards Bay Minerals, a surface operation. But he's a fast learner with proven academic credentials. Zungu is a mechanical engineer, holding a BSc from the University of Cape Town, as well as an MBA from the same institution. He also has business qualifications from Harvard Business School. In addition, Zungu has proven flexibility on his side, having done stints at Johnnic, Nail, African Merchant Bank and SAB. He is currently chairman of Denel and Barnard Jacobs Mellet and runs the investment arm of SA Rail & Harbour Workers Union, one of the many empowerment shareholders in the AVR ownership structure. Zungu also has an agreement with Israeli entrepreneur Beny Steinmetz to co-operate in the development of the Coega-based aluminium smelter.