Pembani, Anglo coal deal on the cards?

[miningmx.com] – Phuthuma Nhleko, founder of Pembani Group and a non-executive director of Anglo American, sat out the December board meeting of the UK mining group owing to a “conflict of interest’ – a moderately interesting fact unless, of course, it can form the basis for some fascinating speculation as to how he plans to grow his business empire.

The hypothesis is that Nhleko has an interest in buying Anglo American’s South African coal supplies, assets that may have been discussed at the December meeting.

All Anglo said on the matter is disclosed in its annual report. The coal business was discussed at Anglo’s July board meeting and whilst there was no direct coal discussion in December, it did have “budget and business plans 2015-2017′ on the agenda.

Anglo American declined to comment when asked by Miningmx if Nhleko’s absence was related to a possible interest in the group’s coal mines. Pembani Group CEO, Kennedy Bungare, did not return messages left via e-mail and phone by Miningmx.

We do know, however, Anglo is a seller of some of its thermal coal assets supplying Eskom judging by comments made to by Anglo CEO, Mark Cutifani in February. Added to the non-core mines owned by Anglo American Platinum, Anglo could raise $4bn from its various divestments and help eat into its net debt which is troubling the $12bn mark.

It is thought that Anglo American is interested in selling the Kriel, New Denmark and New Vaal mines which comprise the bulk of Anglo’s Eskom-only supply.

In 2014, New Vaal produced 16.7 million tonnes (mt), while New Denmark and New Vaal supplied 3.8mt and 6.9mt respectively. The only other Eskom-only coal mines owned by Anglo are Mafube (1.7mt) and Zibulo (2.6mt).

Nhleko’s Pembani Group announced in May last year plans to “combine its interests’ with the shareholders of Shanduka Group, a company created by Cyril Ramaphosa, South Africa’s deputy president. (Ramaphosa has since closed off of his direct involvement in Shanduka’s businesses after returning to public life, although he has retained indirect economic interests through a number of “blind trusts’).

What’s interesting in the combination of Pembani and Shanduka is the strong presence it has in the energy markets. Pembani has investments in Engen, BHP Energy Coal South Africa, and Exxaro Resources while Shanduka is in joint venture with Glencore on South African coal assets.

As a result, it would make sense to build up critical mass in the coal sector, especially given its critical importance to the country’s energy security.

Pembani, given its association with Shanduka and that company’s particular provenance, would also be more likely to have the national interest at heart. This would neatly tick a box for mines minister, Ngoako Ramatlhodi, who said last year he was searching for a national mining champion.

Speaking to investors in London, Ramatlhodi said that with Anglo American and BHP Billiton having “outgrown us’ by listing overseas, it was time for another company to step up and establish the same presence in the industry, but with “a foot in the community’.

According to Ramatlhodi, this would be achieved by buying up the assets that may become available as the offshore companies restructured; he referred directly to platinum and coal assets. “We’re working on it in collaboration with the guys who are pulling out,’ he said.

Quite whether Pembani would have the firepower to absorb Anglo American’s South African coal assets is another matter, however.

On its combination with Shanduka, Pembani said the union would have a value of about R13.5bn ($1.1bn), only just over double the value imputed to Anglo American’s coal assets of some $500m in a report by CIBC Capital Markets’ analyst, Leon Esterhuizen.

“While we estimate a net asset value of $1.5bn for the whole South African coal portfolio, much of that is attributed to the export trade thermal coal assets, which produced 23.9mt of coal for export in 2014, at a higher price and margin than the Eskom supply portfolio,’ he said.

“Nevertheless, we believe that the operating cost profile of the Eskom assets is reasonably controlled and, as such, believe that the value of the Eskom-only supply assets are approximately $500m,’ he added.

Esterhuizen added that the requirement for South African government approval of any transaction may “… inhibit competitive tension’ and the realised price of any divestment.

“Despite this, or perhaps because of it, we believe that these assets may be of interest to the South African government and feed into its purported strategy of creating a new “black mining champion,’ especially given the strategic importance of domestic coal supply,’ he said.

Anglo American’s New Largo coal project was also under the hammer because it was “… prepared to step aside to allow Eskom to fulfil its goals of procuring from 51%+ BEE firms, rather than a deep necessity to sell,’ said another analyst.

Pembani is the rebranding of Worldwide Africa Investment Holdings, the investment vehicle Nhleko founded in 2004 and which he used to buy a stake in African telecommunications giant, MTN, as well as control of Afrisam in 2011 in conjunction with the Public Investment Corporation (PIC), a state-owned asset management company.