Shanduka faced with overhauling history

[] — SHANDUKA Resources’ R2.8bn investment in Incwala Resources will be, I’m tempted to say, the first of many empowerment deals to be recapitalised. To be honest, however, a revisitation of Incwala’s empowerment transaction, unveiled in 2004, had been coming for a while.

Rowan Smith, speaking to Miningmx in a podcast, said Shanduka Group, of which he is MD, and which also controls Shanduka Resources, had been watching Incwala Resources with interest from Incwala’s inception. Did he detect a fundamental weakness in its formation that would one day provide Shanduka with an opportunity?

In any event, he’d been “talking to’ the empowerment consortium in Incwala for the last two years which probably means he opened negotiations with them just as the platinum price began to weaken, halving to $800 per ounce in 2008.

The problem for the consortium in Incwala, which has an 18% interest in Lonmin’s principal operating subsidiaries, Western Platinum and Eastern Platinum, and a 26% stake in the Akanani platinum project, is that it was dependent on dividend flow to repay the initial investment, vendor financed by Lonmin.

When the platinum price hit a wobby, some two years ago, life got hairy for Lonmin. In May 2009, it announced its first interim loss ever, passed the dividend and then joined the wall of global corporates tapping the market for fresh funds, raising in June $457m via a rights offer.

The value of shares in Lonmin also hit the skids amid efficiency losses, the perception exploration assets had been bought at the top of the market, and deep-seated management troubles. It was, in fact, around this time that Brad Mills, former Lonmin CEO, quit the company. As for growth, some $650m worth of growth projects had been shelved.

When the platinum price hit a wobby, some two years ago, life got hairy for Lonmin

Smith confirmed Shanduka had settled with financially distressed consortium members in Incwala after injecting R300m in cash and loaning R2.5bn from Lonmin. (According to Incwala’s website, a broad-based set of empowerment partners is represented by Dema Capital, Thelo Group and Vantage Capital. There’s also an Esop (Employee share option scheme) held in the Masakane Provident Fund.)

This R2.5bn will have to be repaid. It’s felt, however, that Shanduka is better positioned than some of the initial consortium members. Shanduka Resources already derives cash flow from its coal business, and its well backed by Shanduka Group’s founder, the well connected Cyril Ramaphosa.

Still, just how will Shanduka repay its debt, and does this imply a capital raising listing is on the cards?

Smith ruled out a listing of Shanduka Resources, but believed its investments could come to the boards, as it were, such as its coal and platinum holdings, the “purer plays’ as Smith terms them.

This is interesting because it’s clear Smith and Ramaphosa favour a structure much like that of Mvelaphanda Resources, Tokyo Sexwale’s fledgling due to be delisted later this year. In terms of such a structure, Shanduka Resources would be the unlisted property but would spin out its business units.

Yet there issues to be considered. One that Smith laudably conceded he couldn’t answer was whether changes to how vendor financed deals are repaid might affect Shanduka’s agreement with Lonmin. Repayment of the R2.5bn loaned by Lonmin is over a five-year term.

You may recall last year’s mining code which expressed in one clause that vendor-financed deals might ask of the dealmakers to be concluded in a two-year period, or that the concept of such transactions might be turfed altogether in favour of, effectively, free carries.

The notion was poo-poohed but it has raised its head at the recent mining summit in a document my colleague, Allan Seccombe secured. We, like Smith, don’t know how this will pan out.

You can listen to the podcast with Smith, and which also features comments from Exxaro Resources Trevor Arran on its and Anglo’s zinc assets, here.

Super profit tax

It’s with some relief to see Zambia has no intention of following the Australian government’s route of imposing super profit taxes on its mining investors.

The Zambian government imposed a 25% windfall tax on its mining companies in 2008, intended to build schools, roads and provide for health services, and then abandoned the idea a year later. Said Fairfax in a client note: “Mines minister said that Zambia needs to attract investments and thus will not impose windfall tax similar to the one proposed in Australia’.

So it was with the question of windfall taxes on my mind that I met with Victor Kasongo, mines deputy minister in the Democratic Republic of Congo in Johannesburg recently.

He, too like Zambia, doesn’t envisage such a plan but there are alternate proposals underway to establish a sovereign fund in the Congo in which government will sell 49% of unclaimed properties to new investors. The monies attracted by the fund will be used for development, but one wonders how attractive this will be since government will continue to control the investments.

One of the reasons Angola’s diamond industry has struggled to really take off is partly owing to Endiama’s insistence that it must control the diamond properties. Not unless the properties are real dripping roasts are international firms likely to stay invested in such an agreement.

It’ll be interesting to keep tabs on the Congo and, for that matter, on Kasongo. He has been recently promoted to the presidency where he will manage the development of natural resources and minerals, hydrocarbons, forestry and other strategic assets.

It’s worth noting that following closure of Congo’s mining review, the country has attracted some interesting prospectors including Xstrata, which is looking for iron ore there, Rio Tinto (diamonds), and more substantive investments by AngloGold Ashanti and Randgold Resources.