ARM, Glencore assessing options on new coal-related BEE deal

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Patrice Motsepe, executive chairman, ARM

THIS month the High Court heard arguments from the Chamber of Mines and the Department of Mineral Resources (DMR) ahead of a declaratory order in respect of black economic empowerment (BEE). This follows an application brought to it by the Chamber of Mines which wants the court to decide whether historic empowerment deals can be recognised in perpetuity.

The hiistoric BEE deals in question are those in which the terms of the investment have ended allowing the empowerment partners to trade their shares. They would also be transactions which have collapsed and, therefore, no longer exist. The court had reserved judgement. It’s unknown when it will judge, but it could be a few weeks.

The implications are massive. Having to vendor-finance another round of BEE deals will be to heap expense on insult given the way Government published a new Mining Charter in June which contained regulations the industry had neither seen, nor had time to discuss. (The validity of the Mining Charter also has its court date in December in front of a bench of High Court judges, but that’s another matter.)

One of the many mining firms that will be hoping it isn’t sent back to the drawing board on BEE is Glencore especially as its may have to restructure, or even cancel, a coal-related BEE deal with African Rainbow Minerals (ARM) that ARM is struggling to afford.

As with many BEE deals of its day – the transaction is roughly 10 years old – ARM was required to service interest and capital on the transaction through the proceeds of its stake; in this case, a 20.2% in Glencore’s coal operations in South Africa and a 26% attributable interest in the Goedgevonden (GGV) mine held in ARM’s Participating Coal Business (PCB).

“The biggest issue in the [ARM] coal division remains the servicing costs of the coal partner loans,” said Leon Esterhuizen and Arnold Van Graan, analysts for Nedbank Securities. “The debt levels have continued to increase as interest was rolled up. As a result, the serving cost of the loans continues to rise, to the point where most of ARMCoal’s attributable free cash flow goes towards debt servicing.

“ARM is thus seeing no real cash flow benefits from these assets. ARM and Glencore are in discussions around the possible restructuring of these loans in order to improve ARM’s share of the cash flows,” they said.

Glencore spokesman Charles Watenphul confirmed discussions were underway to potentially restructure the loan. “However, it’s too early to speculate on how that is going to work out,” he said. ARM had not responded to inquiries at the time of writing.

For Esterhuizen and Van Graan, restructuring its coal BEE is just the thin end of the wedge. They believe ARM has been under-performing for a number of years because of its long-standing modus operandi of exploiting its credentials as a black controlled company, with 41.5% of the company owned by African Rainbow Mining & Investments, controlled by executive chairman, Patrice Motsepe.

In so doing, ARM often comes into business as a joint venture partner which is a mistake, the analysts say, because capital decisions are often made by the other, controlling shareholder. “We believe that ARM needs to be more than just the BEE credits that it brings to deals; instead, it needs to become a credible growing, capital-returning, sustainable diversified mining business,” they say.

In addition to restructuring the coal BEE with Glencore, Nedbank Securities believes ARM should consider realising value from its 15% stake in Harmony Gold which dates from 2005 when ARMGold, which was then Motsepe’s vehicle, merged with Harmony Gold.

In the past, the call has been for Harmony to simply sell its stake in Harmony. An alternate view, however, is that with the development of Harmony’s 50% stake in the Wafi-Golpu copper/gold mine, it could flip up its shares in its platinum assets to Harmony, thus diversifying the gold firm’s revenue stream, whilst simultaneously winning some exposure to the copper credits in Wafi-Golpu.

5 COMMENTS

  1. Dear fellow Readers,

    I am being called many things on this forum, but analyst-after-analyst come to the same conclusions as your “Armchair Critic”. I NOW welcome , belatedly, Leon Esterhuizen and Arnold Van Graan to my enlightened views!

    On the 9th Sept 2017 , i wrote the following about ARM ;

    ARM is extremely overvalued at R22bn….for a mining co. generating , without operational control, OCF = R2,87bn. There WONT any flurry of BEE deals anytime soon from which ARM benefited in the past!

    ARM Coal, is not meaningful as it is a BEE stake which is settled with an Interest payment of ± R500M/yr on PBT = R700M ( on a 100% basis). So the net attributable to ARM is a stipend payment to keep up the pretence at R70M/yr whilst Glencore & Anglo get the profits.

    The Balance of the Loan from Glencore is still some R1848M, so those are going to be difficult discussion. Thats what happens when you do a debt-deal at the peak of the boom!

    WELL, FELLOW READERS: WHO IS THE MOST INSIGHTFUL OF THE LOT?

  2. To avoid being accused of selectively choosing my facts, herewith is my full reviews of ARM results :

    SALIENT POINTS

    1. Assmang dividend ( R2,8bn) came to the rescue in the nick-of-time …. Current Liabilities= R2,6bn with Cash =R1488M…something is NOT kosher at ARM. THERE IS NO MONEY IN THE BANK ACCOUNT OF ARM!( R1,1bn is restricted cash!)
    2. ARM Ferrous Division ( Assmang JV) the only contributor in the ARM portfolio. With dark clouds gathering ( 62%Fe price decline) in the horizon….
    3. ARM , without Operations of its own, has corporate costs of R1,5bn/yr. Minority shareholders must start asking the Exec.Chairman some searching/pointed questions…
    4. Modicum analysis reveals that ARM is actually a giant-BEE scheme with one majority-owned and poorly managed asset ( Implats might start agitating soon!). The majority JV assets are also passed their prime ….
    5. ARM is extremely overvalued at R22bn….for a mining co. generating , without operational control, OCF = R2,87bn. There WONT any flurry of BEE deals anytime soon from which ARM benefited in the past!

    ANALYSIS

    As is always my preference , i prefer to delve to CGU( mine level) assets , and this time is no different :

    1. ARM ferrous : Assmang must truly be commended for using this high 62%Fe to return capital ( not to be confused with return on capital) to its investors. The dividend (attri ARM( 50%) =R2,8bn) from a stupendous EBITDA = R9,2Bn , was handy for ARM. It truly saved the day. To illustrate , as per the Cash Flow statement, from the OCF = R2,87 if we subtract the R2,8bn aforementioned, the is R70M for a company = R22bn. So ARM is a well-and-truly a typical BEE scheme! NO OPERATIONAL CONTROL JUST HOPING FOR DIVIDENDS TO BE DECLARED! Furthermore, there was an ill-timed sale of Dwarsrivier mine which was sold for R450M , only for Assore to make R900M in the 8months it took operational control. But it was a good year for this division given the prevailing 62%Fe price. ARM has major debts coming due and will require all the dividends it can master to effect the payments. Given the negative outlook for 62%Fe, and with R14,9bn tied-up in Assmang ( ARM total fixed Assets = R26,4bn), there is lot of crossed-fingers at the ARM c-suits for the current 62%Fe & Mn to hold a little longer to recoup some of this massive Invested Capital. As for Lubambe Mine, Who actually spends $456M developing a Cu mine with R+R = 1,32Mt Cu ? This was doomed to fail from the get-go , more so for planned prod =45kt/yr which was never achieved!

    2. Other ARM Divisions : These are an assortment of various asset-level BEE deals etc spanning mainly Platinum and Coal. Everybody knows my sentiments on the PGM industry. For Two Rivers Mine, Cr2O3 sales at R352M (FY16: R130M) contributed all the profits at R325M for FY17. This mine seems to enjoy undue benefit from Implats refinery given its conc price realisation of $764/6Eoz ( currently normally = ± $650/6Eoz). The decline in grade to 3,9 g/t is a worry given that TCC increased 18% y/y, so NOT good when everybody else’s TCC are trending lower. No wonder the Exec.Chairman of ARM is always lamenting about it blaming everybody (Community, DMR , Unions etc) and sundry bar his management team. Modikwa and Nkomati are just in a funk and unable to keep their head above water. Furthermore, with onerous SIB Capex = R1,3bn/yr , things are just getting worse for this PGM operations ….

    ARM Coal, is not meaningful as it is a BEE stake which is settled with an Interest payment of ± R500M/yr on PBT = R700M ( on a 100% basis). So the net attributable to ARM is a stipend payment to keep up the pretence at R70M/yr whilst Glencore & Anglo get the profits.

    CONCLUSIONS
    I posit that if there were no imminent cash needs , ARM would have been obligated to pass the full Assmang dividend of R2,8bn onto its shareholders. So the Dividend = R1,4bn is too low given the windfall from Assmang. Why? The other assets are just NOT generating cash…. Furthermore, the keeping-up-with-the-jones’s-nextdoor attitude is crippling with corporate costs at R1,5bn/yr.
    Alarmingly, the ARM bank account is truly bare… Cash = R1488M ( restricted cash = R1099M (FY16: R1064M) ), with current liabilities = R2569M (FY16: R3696M). This is worrying, more so if the counter-parties are the likes of Glencore at R1433M. BEE deal debt perhaps?

    In summary , it seems that ARM is only good at structuring BEE deals AND NOT operating mines for a long-haul. Nkomati , Dwarsrivier, Lubambe and Two Rivers Mines, where ARM had operational inputs, if any, are struggling. I can add Harmony Gold to this list as well. ARM seem to lack the wherewithal and persistence to turn mining ops around OR to get its hands dirty. So they are holding out for dividends and other payments to meet their obligations. This is evident in its Trade & receivables at R2,1bn ( FY16: R2,45bn) and low cash in the bank…

    There are other more compelling diversified miners ( i.e South 32) who offer real accretive growth …NOT growth dependent on the Goodwlll of others via BEE deals!
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