Exxaro wants BEE equity changes

Brendan Ryan | Thu, 25 Feb 2010 16:39

[miningmx.com] -- THE need to dilute black economic empowerment (BEE) stakes in mining companies below legislated levels was under serious discussion with government according to Exxaro Resources CEO Sipho Nkosi .

Interviewed after Thursday’s presentation of Exxaro’s results for the year to end-December Nkosi – who is the current president of the Chamber of Mines – said the issue was being addressed through the Mining Charter review forum.

That forum had been set up as a result of the work of the tripartite Mining, Growth, Development and Employment Task Team (Migdett) created in December 2008 between government, the mining industry and organized labour.

Migdett’s strategic focus is ensure the mining industry is positioned “to achieve, higher growth, the creation of decent jobs and transformation” and a key mining summit is to be held during March.

The need for mining companies to maintain a specified BEE shareholding is viewed as a major constraint because it puts severe limitations on their ability to raise funds for growth.

They are frequently forced to rely excessively on debt – or to pass up business opportunities altogether – because the BEE partner is unable to raise the funds to follow its rights in an equity raising.

If the BEE partner cannot follow its rights then its percentage shareholding could be diluted below the level that must be maintained to ensure compliance with the legislated empowerment requirements.

The issue was highlighted by former Mvelaphanda Resources CEO Pine Pienaar last year when he told Miningmx, “ the fatal flaw in the Mining Charter is the obsession with measuring black empowerment in terms of percentage equity stakes instead of taking an approach based on value. I think it’s often far better to have a 5% stake in a strong business than 51% of a weak business.

“You need to be able to dilute for value and I hope that, over time, the politicians will accept that and realise there are enough other checks and balances in place to achieve their empowerment aims.”

Exxaro is now running into this problem because of its ambitious growth plans and the huge demands these will make on the group’s balance sheet starting with the expansion of its Grootegeluk colliery to supply Eskom’s new Medupi power station.

The cost of that expansion has just been pushed out to R9.5bn from R9bn previously because of the delays caused by Eskom’s review of the coal supply contract.

Exxaro is currently 55% BEE controlled. In terms of the agreement through which it was created that percentage cannot fall below 50,01% before 2016.

Reason is that Exxaro, in turn, empowers Kumba Iron Ore through the 20% stake it owns in Kumba’s operating arm - the Sishen Iron Ore Company (SIOC).

The financial constraint this puts on Exxaro was highlighted at Thursday’s results presentation by finance director Wim de Klerk.

Exxaro is planning to spend R3.2bn in capital expenditure during 2010 of which R1.3bn will be on the expansion of Grootegeluk.

De Klerk pointed out Exxaro had a number of financing options including taking more debt onto its own balance sheet and organizing off-balance sheet project financing.

He commented, “Our debt to equity ratio is only 29% and we could increase this to 40%. We have been advised that, because of the proven stability of our income at the bottom of the commodity cycle, we could actually push this beyond 40% but being conservative we would like to stick to the 40% target.

“We are looking at developing the Medupi project in such a way over the next two years that we de-risk the project and can then raise project finance which would sit off our own balance sheet.

“We can also obviously raise funds through placing shares and dilute the BEE partners from the present 55% level to the 50,01% level.”

Nkosi said there was renewed focus on the state of BEE deals in the mining sector because of South Africa’s need to grow and because many of the BEE deals done so far were “under water” as a result of the global recession.

“If business is to grow in such a way as achieve national targets like doubling the size of the tax pool in South Africa in 20 to 30 years then something has to be done about this situation otherwise the country is not going to move forward,” he commented.

Turning specifically to the Medupi expansion De Klerk said the review process with Eskom over the supply contract had been completed and Exxaro expected to put out a SENS announcement within a few days.

He said the first coal to be supplied to Medupi from Grootegeluk in terms of the contract would be during the second quarter of 2012 instead of the fourth quarter of 2011 as originally agreed.

When that delay was first announced in December De Klerk said it would result in a six months delay to the start-up of the first generating set at Medupi which was denied by Eskom.

De Klerk today declined to comment on when he believed Medupi would start generating power.