Choked by success, Mvela given second wind

Arne Frandsen, CEO Pallinghurst Resources

» Mvela confirms Incwala as shareholder
» Incwala to buy 23% of Mvela Resources

> JSE:MVELAPHANDA RESOURCES LIMITED:
3252c

Click here to find out more about how to use this button

Choked by success, Mvela given second wind
David McKay
Posted: Thu, 22 Dec 2005

[miningmx.com] -- INCWALA Resources CEO, Arne Frandsen, is calling his company’s purchase of 23% of Mvelaphanda Resources (Mvela Resources) the first deal in the second wave of empowerment in South Africa. This is, in his words, a period of consolidation. But for Mvela Resources, the reinvention of South African black empowerment is less important than the business consequences of securing a new shareholder.

Mvela Resources has been a spectator in all of the R23bn in empowerment deals since September. The largest of these recent transactions, the creation of the new Kumba Resources worth R16bn, was an arrangement from which Mvela Resources was allegedly directly prevented from participating.

Now, when mining firms fulfill the ownership transfer of the empowerment legislation, they say ‘the usual suspects’ have been excluded, a declaration that their deal is broad-based and excludes companies such as Mvela Resources.

That is probably the price of Mvela Resources’ pioneering role in empowerment. It was the first empowered mining firm to list on the JSE Securities Exchange in 2002 (actually a reverse listing into East Daggafontein). And as a prelude and consequence of that listing, it rapidly racked up big ticket acquisitions: a 22% stake in Northam Platinum in 2000, paid off more than seven years ahead of schedule; a 3% stake in Trans Hex in 2002; and the high profile 15% stake in the South African gold mines of Gold Fields, a complex R4.2bn deal signed in 2004.

But Mvela’s first mover advantage, and rapid rise to prominence, raised the hackles of empowerment commentators who feared that redistribution of wealth intended by the mining charter was, in the hands of Mvela, a transfer from one hegemony to another. This came to a head when Tokyo Sexwale, Mvela Resources chairman, was recently labelled a ‘black oligarch’ along with Patrice Motsepe who chairs another listed empowerment firm, African Rainbow Minerals. Ironic.

Pine Pienaar, Mvela Resources CEO, acknowledges the growing perception that the company is suddenly (unfairly) a politically unwise empowerment partner whereas it used to be first choice. “Public perception increasingly in that Mvela Resources is a narrowly owned and controlled entity and this has to some extent impacted on its involvement in recent, sizeable transactions done in the resources sector,” he said.

Another problem for Mvela Resources is that its purchase of Gold Fields’ South African mines, which included the issue of some 85.6 million shares raising R1.9bn, probably over-extended its financing capability. After that deal, the company couldn’t use any more paper to finance deals since its empowerment status was already beneath the 26% threshold stipulated by the South African government.

Mvela Resources’ balance sheet may yet be unencumbered, but its stake in Northam, and much smaller stake in Trans Hex, were unlikely to provide enough cash flow to support debt funding of a deal large enough to significantly add to Mvela Resources. In short, this was a company that grew too large, too quickly.

Exogenous factors haven’t helped Mvela’s cause. Amid the industrial merger of parent Mvelaphanda Group with Rebserve last year, Mvela Resources became the ‘Orphan Annie’ of the structure. Topped by industrialist Steven Levenburg – who Mvela Resources says doesn’t take a shine to resources – Mvela Resources was struggling to compete for capital.

So financing constraints, and the obvious frustrations of a relatively unsupportive parent company, meant that Mvela Resources has for months been unable to meet its key strategic goal which is to be a lead empowerment partner in the scramble for equity.

According to Pienaar, there’s five-year scrap under way among black firms as white firms endeavour to meet the 2009 deadline imposed by the mining charter. By that date, mining firms must have transferred 15% of their equity to black firms.

We are friendly shareholders

But in the wake of the Gold Fields deal, Mvela has achieved precious little, a fact given focus by the meagre pickings of a proposed R30m purchase of manganese explorer, Burk Mining unveiled in September but abandoned less than three months later.

An obvious question is whether Frandsen’s Incwala intends to more than just take an investment in Mvela ultimately angling for a reverse takeover instead.

“There’s two reasons why companies are listed. To make the CEOs look good – and I have no need of this – and to raise capital,” he said. “The capital markets are deep enough for Incwala’s purposes without listing. All our shareholders are committed and I don’t want the discount to net asset value of Mvela.”

It is likely, however, that Incwala and Mvela will consider the merits of joining their platinum properties: “A logical step in future would be to realise further synergies between the two companies, particularly their complementary investments in the platinum sector,” said Pienaar in his letter to Mvela Resources shareholders.

Frandsen, however, dismisses of talk of swapping Incwala’s 18% stake in Lonplats for Mvela shares. “I do like precious metals, and I back the idea of Mvela’s strategy to secure operational control over its assets,” he said.

The likelihood is that the two partners may seek to buy out Northam Platinum. In the meantime, Frandsen said Pienaar and his management team have the full support of Incwala. “We are friendly shareholders,” he said.

Incwala is also a rich shareholder. The company’s value has vaulted to $700m as of September from $360m in 2004 and a platinum price of between $900 to $1,000/oz means Incwala, which receives a dividend from Lonmin, will be debt free within “a very short space of time if we want,” said Frandsen.

Free news alerts: click here to subscribe

Adding Incwala to its shareholder base – its biggest single shareholder ahead of 12% shareholder, Capital Group in the US – also beefs up Mvela’s empowerment equity to about 30% handing back facility to mix cash with paper if needed.

Having seen sentiment swing for and then violently against it, this will provide important succour to Mvela Resources and perhaps impart new momentum to South Africa’s first empowered mining company.