Michael Solomon, CEO, Wesizwe Platinum
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SA junior mining in the dock
Marc Hasenfuss
Posted: Wed, 18 Jan 2006

[miningmx.com] -- WAS the early volatility in Wesizwe Platinum purely an aberration testifying to the South African market’s difficulty with exploration investment or one of the biggest value erosions seen on the market in recent years?

Wesizwe CEO Mike Solomon argues that it’s worth exploring that before comparing the Wesizwe experience with failed Johannesburg listings such as Exxoteq, a shambolic Johannesburg energy listing, and Noble Minerals.

The cross that Wesizwe has to bear is that one of the prime movers in the founding of Exxoteq – Gerhard Muller – was also a prime mover in establishing Wesizwe. Muller served as a director of Wesizwe between September 2003 and May 2004, before Solomon and his current team took the reins in October that year.

Solomon says that it’s at that point the comparison between Wesizwe and Exxoteq becomes necessary in separating the wheat from the chaff.

A major concern for Miningmx in comparing Exxoteq to Wesizwe has been the allocation of shares at the outset of the projects. In both cases, Exxoteq and Wesizwe shares were issued to directors, founders, service vending partners and black empowerment partners at nominal sums (this time 0,001c/share). In the case of Wesizwe, 340 million of the 356 million issued shares at a par value of 0,001c/share were issued.

Solomon says that the principal difference here is that, apart from the original allocation of shares to the empowerment partners (aside from the Bakubung tribe), the majority of the other shares were issued in lieu of material contribution to the project.

Solomon says: “The venture capital of R115m to pay for the acquisition of non-Bakubung mineral rights (R60m) and exploration expenses was raised through a private placement at an original subscription of 600c/share.

“As the exploration project developed and a clearer understanding of the resource was constructed, the project principals (in line with an earlier agreement) enabled investors to acquire shares from them at par value. That protected the investors by adjusting the effective buying price of these investors to between 230c and 280c, depending on the length of time that the respective investments had been in place.”

Solomon says that no new shares were issued for these transactions and, therefore, there was no effective dilution to other shareholders other than the project sponsors.

Solomon says that in return for this contribution, the project principals had taken the initial project risk, provided the set-up costs, raised the venture capital necessary for acquisitions and exploration and had managed the project until such time as staff was appointed in October 2004.

Exxoteq – after dispensing the majority of issued shares at nominal value to empowerment parties, founders and directors – raised R11m from private shareholders by pitching shares at 500c/each.

However, Solomon maintains that Wesizwe allocated the majority of shares on the basis of material contributions to the project asset base.

But in both cases there seems to have been a somewhat overzealous philanthropy in the name of empowerment in the allocation of shares at par value to the non-contributing black empowerment partners.

Another similarity between the two companies is that both Wesizwe and Exxoteq have drawn funding from the general public rather than institutional investors. A lack of enthusiasm from institutional investors is usually a signal for investor caution, and there’s a clichéd contention that South African institutions don’t understand exploration companies or have an appetite for blue sky.

Solomon says: “Most new South African exploration listings go to Toronto, where they’re generally well received, and therefore there may well be some truth in that contention.”
Few South Africans appreciate exploration investment
He points out that if you consider platinum exploration activity by juniors in the Bushveld there’s a hive of activity, with 15 projects outside of the platinum majors (Anglo Platinum, Impala and Lonplats) managed by 14 different companies.

Excluding the Lonplats/Mvela joint venture and Placer Dome (as majors) there are 12 juniors operating platinum exploration projects. Of these, six are listed Canadian juniors (one is listed on Aim and Amex), there are two Australian companies (one listed and one unlisted) and three South African companies. Of the 12 platinum exploration companies, only Wesizwe is listed on the JSE.

Clearly, the exploration projects are being supported on the Australian, Canadian, US and British bourses.

What are fundamental issues here in South Africa’s unwillingness to support its own exploration projects? Solomon believes that part of the reason may be historical, as most exploration in South Africa has been undertaken by the major mining groups.

Solomon says: “Until relatively recently there has simply not been a significant independent exploration sector in the country. Part of the reason may have been bad experiences with companies like Exxoteq and Noble Minerals and the much earlier junior failures of the late eighties.”

However, Solomon says to a large extent that there’s a fundamental lack of understanding in South African investment circles, both private and institutional, as to the investment imperatives in exploration projects.

Solomon says that many commentators on Wesizwe’s listing have also remarked on the long lead time between the onset of exploration (when initial investment is required) and the company producing platinum (hence generating dividend flow).

“The long lead times between exploration and mining are a reality with all exploration companies, not just Wesizwe.” Solomon says that others have commented on the discrepancy between balance sheet (where mostly intangible assets are reflected as R44m) and market capitalisation (currently around R750m).

“Few South Africans – either institutional or private investors – appreciate what the Canadians and Australians understand in the exploration investment imperative. And that is the rapid increase in value between ‘moose pasture’ and the assessed net present value (NPV) of the project at the production of a bankable feasibility study and the onset of mining.”

Solomon points out that, typically, exploration properties are acquired by application to the State for prospecting permission (which costs very little) or buying existing rights for cash or equity participation.

He says that even if the cost of the surface rights for the farms hosting the mineral rights aren’t expensive, the costs of this phase may be millions to tens of millions of rand. “At this stage little may be known about the properties unless prior exploration has taken place, in which case the cost of this exploration and the risk premium will be built into the purchase price or the acquisition of data from the original explorer.”

Solomon says that, currently, the asset value reflected on the balance sheet is simply the cost of setting up the project. “There will be little or no inherent or quantifiable value attached to the minerals themselves, but cost to the investor has nevertheless been incurred and a provisional assessment by a competent person of the value of the mineral rights (expressed on the balance sheet as an ‘intangible assets’) may be made.

“The next stages of value creation are during the exploration project, which may cost tens to hundreds of millions of rand. And that’s the high risk phase for the investor, as without the investment and subsequent expenditure the value potential for the project cannot be qualified or discounted. Without this work being done, there’s no value and there’s no guarantee that the cost incurred will yield results.”

However, Solomon says that should the project be successful the NPV on the bankable feasibility study for an average platinum mine may range from hundreds of millions to billions of rand – several multiples of the cost of establishing that value.

He says that though the period over which this exploration and bankable feasibility study takes place may be three to five years (or more), in an investment context it’s usually a comparatively short period of time over which these multiples can be achieved. “It’s in this short-term growth in shareholder value that the investment imperative lies.”

Still there’s no question that on listing and for the next day of its public life, Wesizwe’s share seems wedged between cynical disbelief and wide-eyed enthusiasm. Solomon has repeatedly explained that it will be some time before Wesizwe will actually produce any platinum, but in the interim it is taking firm steps to shake off any Exxoteq ghosts by putting its capital to good use in the ground.

He’s strident in his assertion that Wesizwe is not a “pump and dump” operation. “I’m very serious about building a viable and credible company and consider the company’s creative social and economic development plan as key to our business strategy.”

Solomon sees the monetising of the community assets through the listing (the Bakubung Ba Ratheo tribe owns a 33% stake in Wesizwe) as being founded on good business sense as opposed to altruism.

The business case for Wesizwe will, of course, lie in the differentiation of the company as a successful niche player in broad-based and community empowerment. That may even position Wesizwe favourably as an empowerment partner for larger mining companies who are still underweight in empowerment points.

And having already achieved an inferred resource with the R115m funds raised, Solomon should not – like Exxoteq’s embattled CEO, Gerhard Brink – find himself in a financial squeeze before even embarking on any serious exploration activity.
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Solomon reckons that with the local antipathy towards exploration companies a lot hangs on Wesizwe’s success or otherwise for other aspirant exploration entrants to the JSE.

Setbacks and hitches in junior mining contenders can be fatal, especially with South African venture capital/blue sky investors usually adopting the “once bitten, twice shy” philosophy.

With Wesizwe already hinting at a capital-raising exercise in early 2006 the brittle share price needs all the good news it can get.