Shanduka aims for bigger and better things

David McKay | Fri, 03 Aug 2012 11:46

[miningmx] -- YOU'D HAVE TO be blind not to recognise what’s going on at Shanduka Group.

This is a 10-year-old holding company in which some 20 separate investments have been made over the years. But in the last year alone, the company has taken the scalpel to its portfolio in an effort to transform itself into an operating company with control over cash flow and strategic decision-making. If this is not a company preparing for an initial public offering, then I don’t know.

The company has acted. Firstly it has quit its 25% stake in the engineering and project management company DRA/Minopex. Gone too is its 11.8% stake in Assore, the iron ore and manganese investment company, for R2.7bn. It has also vended in its 30% stake in Kangra Coal to Shanduka Coal, which has helped finance taking control of that company from Glencore International. A feasibility review into acquiring control of Lonmin’s Limpopo Division is also, at the time of writing, due for completion.

But Shanduka Group has also been acted upon when Chinese sovereign wealth fund, China Investment Corporation (CIC), bought a one-quarter stake in the company in December. The shares were purchased from Old Mutual and Investec. This, in its turn, could lead to further acquisitions for Shanduka Group, says its CEO, Phuti Mahanyele who, at 41 years old, holds the reins of a potentially powerful and highly charged mining resources company.

Mahanyele confirms the bias is towards resources, although Shanduka Group does have exposure to the fast moving consumer goods (FMCG) market, with a recently acquired 100% stake in McDonalds SA and control of Coca-Cola in South Africa. However, with a shareholder like CIC, support for new investments is bound to be predominantly in energy and mining. “Resources will continue to be a big part of our business, but given the volatility in the industry, we still need more critical mass,” says Mahanyele.

A listing of Shanduka Group will be sooner rather than later; think three years rather than five or seven years, as stated previously. The question is whether Shanduka will list as a diversified play, in FMCG and resources, or focus on the latter. “We’ve still to work that one out,” says Mahanyele. FMCG and resources don’t really fit together, and it will confuse investors about the type of rating you apply to such a chimera.

For now, a major factor shaping Shanduka Group’s future will inevitably be its relationship with Glencore International, the Swiss commodities trading and mining company which is in the throes of merging with Xstrata. Assuming that merger is finally approved – and at the time of writing it increasingly looks so – opportunities will be thrown Shanduka Group’s way as Glencore restructures its enlarged organisation.

Mahanyele simply declines to comment on potential synergies with Glencore, but perhaps the worst-kept secret in South Africa’s coal mining business is that Shanduka Group founder and shareholder Cyril Ramaphosa, the former unionist and politician, will fuse his stake in Optimum Coal Holdings, which he helped buy with Glencore, with Shanduka Coal’s holdings. Already, Shanduka Coal produces some 7 million tonnes per year (Mtpa) of coal from its Graspan, Middelburg, Townlands and Springlake collieries, and has capacity to increase that to 9Mtpa.

Mahanyele has said in the past that the Ramaphosa/Glencore joint bid for Optimum Coal is unrelated to Shanduka Coal, but in all seriousness – how can it not be? The lines between Glencore’s coal business and those of Shanduka Coal are porous and the relationship fluid, especially as Glencore markets all of Shanduka Coal’s exports. In addition, Glencore’s recent 43.66% stake in Umcebo Mining is to form part of Shanduka Coal. Adding Optimum Coal Holdings to Shanduka Coal would create a 20Mtpa to 25Mtpa coal producer – enough to catapult it into a mid-tier coal producer behind the giants Anglo Coal, BHP Billiton Energy Coal South Africa and Exxaro Resources.

ENERGY

Also in the realms of speculation, there’s potential for Shanduka Group to add to its energy suite by investing in sub-Saharan Africa’s upstream oil and gas industries where activity has been robust, especially in the Mozambican gas sector. “One of the questions we’re tackling now is whether we invest in the early upstream energy sector or buy producing assets, which is less risky, but more expensive,” says Mahanyele. Mahanyele previously ran Shanduka Group’s energy division, so she has a particular interest in seeing it develop.

Shanduka has some exposure to the renewable energy sector and has been shortlisted as an independent power producer (IPP) in Government’s public tender scheme, but there’s also the enormous activity underway in Mozambique. The country’s Rovuma gas district has attracted investment from a number of multinationals, most notably a $1.9bn bid from Thai company PTT for UK exploration junior, Cove Energy, trumping an earlier offer from Royal Dutch Shell. Small explorers in Kenya and Tanzania such as Ophir Energy, Aminex and Africa Oil are also expected to attract the consolidating efforts of majors such as Norway’s Statoil, the UK’s BG Group and ExxonMobil.

Owing to the fact that building energy projects, often in remote regions of the world, leads to questions of transportation, Mahanyele says infrastructure development remains an important part of Shanduka Group’s, and CIC’s, ambitions. “One of the first things we did when we learnt of CIC’s interest in Shanduka was to have a discussion on strategic alignment. And we are aligned.

“Apart from the network of skills CIC provides, it more importantly provides us with a network of cheaper funding, especially for infrastructure build. This was very important. CIC is willing to invest in infrastructure and that capital is often difficult to raise, especially for things like building a rail connecting gas sources to a port,” Mahanyele says.

On the issue of funding sources, incidentally, Mahanyele says that from a portfolio structuring perspective, Shanduka Group’s shares in MTN (0.45%) as well as a 0.9% in Standard Bank and 7.5% in Alexander Forbes provide “optionality” for the company. “About 45% of our total portfolio is in listed companies and we like the optionality of this. We can continue to hold the financial assets and then make decisions about them as investments,” she says.

In all the activity regarding Shanduka Group’s portfolio, one area that demands particular scrutiny is its stake in Scaw Metals SA of 5% – before Anglo American’s R3.4bn divestment of a 74% shareholding. The buyout was led by Government’s Industrial Development Corporation (IDC), which has long been linked with plans to establish a state-owned steel manufacturer that would compete with ArcelorMittal SA. All Mahanyele will say is that steel remains “a strategic industry”.

Along with coal, platinum is the other main strategic resource in which Shanduka Group has an interest. The prospect of paying R1.1bn for a controlling stake in the Lonmin Limpopo province assets is looking good, Mahanyele says. “We are close to making a decision and we’re hoping it will be positive,” she says. “We are keen on the sector. Market conditions won’t weigh on our decision.” And, on the horizon, is the enormous transformative impact of the Glencore/Xstrata merger – for both Shanduka Group’s coal and platinum ambitions.