EXXARO Resources today defended its proposed black economic empowerment (BEE) transaction saying there were powerful political and business incentives to concluding it, even though new regulations regarding empowerment in mining were uncertain.
The market has been critical of the deal in which Exxaro intends to replace its previous 50%+ empowerment structure with a new dispensation in which it will be 30% black empowered. Sources have remarked that the deal is dilutive and hasty given that a redraft of the Mining Charter was being contested in the High Court during December.
“The politics of today in South Africa is around transformation and inclusive growth,” said Mxolisi Mgojo, CEO of Exxaro in a presentation and conference call with investors. “Why didn’t we wait? In any form of Mining Charter you will never get away without doing BEE,” he said, referring to uncertainty regarding the contents of a new Mining Charter.
Mgojo added that the firm’s business activities extended beyond the ambit of mining. It held joint ventures in energy and sold coal to the cement and steel industries which were ruled by empowerment regulations set down in the Department of Trade and Industry’s broad-based black economic empowerment (BBEEE).
“We need to be empowered for the renewable energy sector, and so it’s important to retain those licences and be unequivocally clear. We need to minimise the risk to existing shareholders in the way it has been constructed,” he said of the deal structure in which the replacement BEE structure will have access to shares at a discount.
“Yes this type of transaction can be dilutive and, therefore, how we have constructed it is to be something sustainable, equitable, and that protects shareholders from dilution.” Shareholders will vote on the BEE proposal at Exxaro’s annual general meeting which is scheduled for November 20.
But some analysts expressed their dissatisfaction. Asked if the company was confident it would receive shareholder support for the transaction, Exxaro CFO, Riaan Koppeschaar conceded there had been no irrevocable undertakings. The UK’s Blackrock, the Vanguard Group, a US asset manager, and South Africa’s Coronation Asset Managers and Investec Asset Management number among Exxaro shareholders.
Since details of the new BEE transaction were announced about 12 months ago, Exxaro has unwound its old BEE structure which it now intends to replace with a new one. This has required Exxaro to buy-back the shares held in Main Street 333 (MS333), which is the vehicle through which Exxaro CEO, Mxolisi Mgojo, and the firm’s former CEO, Sipho Nkosi, own their shares, among others.
In terms of the BEE proposal, MS333 will reinvest a portion of its shares in Exxaro, along with another participant, the Industrial Development Corporation (IDC). MS333 also buys additional discounted shares in Exxaro.
Asked why certain directors in Exxaro were benefiting from the transaction, whilst others not, Koppeschaar said: “It wasn’t designed to benefit any particular shareholder. He added that it was important that directors had “skin in the game”. In any event, MS333 hadn’t yet nominated directors to the new structure, he added.
Responding to another question as to why the IDC was involved in the structure and should benefit from the share discount, especially as its participation did not earn Exxaro empowerment credits, Koppeschaar said that the bank had to be incentivised as its shares would be locked up for a significant time.
BEE TERM CRITICISED
Another criticism is that new BEE partners would be able to start realising their shares from about seven years into the term of the BEE structure when the life of mine of certain assets, such as the Grootegeluk coal mine in Limpopo province, is about 30 years, implying that another costly BEE transaction would have to happen before long.
However, Koppeschaar said that had BEE shareholders in the previous structure been allowed to sell a portion of their shares when the Exxaro share price was over R200/share, they may have been allowed to remove their debt and hold unencumbered empowerment shares – a practice that is now frowned upon.
In terms of the Mining Charter redraft proposed by mines minister, Mosebenzi Zwane, mining companies are required to extend their equity level empowerment to 30% from the 26% target in the 2010 Mining Charter.
This would mean Exxaro BEE partners would have no wriggle room to sell any of their shares. But Koppeschaar said if the Mining Charter were to ask for 28% equity empowerment, Exxaro could see 2% of shares sold by BEE partners at a point. “But such a transaction would have to happen with shareholder consent,” said Koppeschaar.
“We feel comfortable,” he said in respect of whether the transaction would be supported. “Every shareholder may have a different requirement. What I’m saying is there will always be some dissenting shareholders, but at this point, we’ve got a positive response. We think we’ve got sufficient support,” he said.