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Impala alters BEE deal on royalty fear
Allan Seccombe & David McKay
Posted: Thu, 28 Sep 2006

[miningmx.com] -- IMPALA Platinum (Implats) has changed the structure of its empowerment transaction because it probably won't be permitted to offset royalties paid to the Royal Bafokeng Nation (RBN) against those due to the state, it said.

Under the revised transaction, Implats will issue shares worth R12.1bn to the RBN, its principal black economic empowerment (BEE) partner, as an advance payment of all royalties due to the RBN under a 32-year royalties agreement.

The royalties amount to R10.6bn, with the R1.5bn difference being a discount that will be recorded on the Implats balance sheet as a “BEE charge.”

“Discussions with National Treasury made it apparent that Impala Platinum will probably not be able to offset any existing royalties payable to the RBN against royalties payable to the state under the revised draft Royalty Bill,” Implats said in a statement.

not able to offset any existing royalties
The original empowerment transaction unveiled on July 4, and approved by shareholders, would have resulted in RBN taking a 7.44% stake in Implats by converting a 49% interest in the Impala Refining Services (IRS) business.

The original transaction also included an employee share ownership scheme to transfer two million shares to workers or 4.4% of its shares. That part of the deal remains intact.

Once the transaction is concluded before the end of this year, subject to a number of conditions including regulatory and shareholder approval, RBN will own 13.4% of Implats.

One of the benefits is that Implats will no longer have to pay annual royalties of R858m to the RBN, giving the company's cash flow a welcome boost, said David Brown in an interview with Miningmx.

"Our interests with RBN have also been aligned," he said. "In the previous deal, there would have been questions about aligned interests if we'd done a deal that was good for Impala Holdings but not so good for IRS, such as a concentrate supply deal in Zimbabwe," he said.

Niall Carroll, a director at the Royal Bafokeng, ruled out a sale of Implats' shares after 2014. RBN is obliged to retain the newly issued 9.389m shares until then.

"If the opportunity presented itself we would be buyers rather than sellers," Carroll told analysts.

Brown told an analysts' presentation that the company would revisit its dividend cover policy because there would be more cash coming into the company.

"The old deal complicated matters. This deal is much easier to understand, it's straight forward, it's shares and no more royalties. I think shareholders should like the deal," said Stephen Roelofse from Sanlam Investment Management. He hadn't crunched the numbers yet to see the impact on earnings.

Implats' shares were last trading down 1.7% at R1,300 each, but volumes were tiny with less than 70,000 shares swapping hands.

Commenting on the discount of R1.5bn or 12%, Roelofse said: "It's quite a discount, but it's probably better to have done the deal like this."

Brown conceded that by issuing shares there was dilution to shareholders. But it was upfront whereas the previous deal, which enabled RBN to convert its shares in IRS to Impala Platinum shares, also involved dilution over a longer period. "We've also secured the cash of IRS where previously we'd have shared it," he said.

The new draft of the Royalty Bill is due to be published this October for comment, Implats said. The royalties will come into effect in 2009, the government has said.
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The first draft of the Royalty Bill released in 2003 provoked a storm of criticism from the mining industry. The bill proposed charges of between one and eight percent on revenue.

Companies have argued the charge should be levied on profits. The diamond sector took particular umbrage to the proposed bill because of the eight percent royalty for diamonds. Finance Minster Trevor Manuel has remained adamant the charges will be levied on revenue.

Implats said because of the uncertainty about the royalties it entered into the revised transaction on the understanding that the National Treasury has recommended to Manuel that legislation be tabled in parliament to a normal life-of-mine tax deduction on any payment in advance of royalties due to communities.

Brown told analysts Implats felt "very comfortable" that this would take place.

It also has the understanding that Implats would receive offset credits for royalties paid by itself against those paid to the state.