Mvela may buy Optimum Coal

[] — LAST week I mused about Mvelaphanda Resources’ (Mvela Resources’) possible takeover target, the one that will enable the R6.23bn empowerment group to remain listed on the JSE (thus removing its pyramid structure). I now understand, courtesy of an unsolicited tip-off, that it’s running the rule over Optimum Coal Holdings which owns the Optimum colliery.

I hasten to add that this is only speculation; furthermore, Mvela Resources has declined to confirm it.

The feedback from industry sources is that if Mvela Resources is considering such a deal, it’s a good one. The colliery was sold by BHP Billiton Energy Coal SA (Becsa) in May 2008, and took a lot of BHP staff with it. It’s therefore well operated and would put Mvela Resources clearly on the map in terms of thermal or steam coal production.

Optimum, situated about 200km east of Johannesburg, produced 11.6 million tonnes of steam coal in its 2007 financial year of which just under half was for the export market. The remainder of output is sold domestically to the Hendrina power station, but it’s this contract with Eskom – agreed on a cost plus basis – that is hurting the viability of the mine.

In addition, Optimum needs R2bn in fresh investment which, set against falling coal prices, probably explains why the colliery, needs a “big brother” to help fund its future. The current owners of Optimum, of which there is more below, always wanted to list the mine, but it never came to pass.

Optimum Coal Holdings is a 65% black-owned entity with a broad base of beneficiaries. Warrior Coal Investments, founded by Optimum director Peter Gain – formerly of Metallon Corporation – is also a shareholder. CEO of Optimum Coal Holdings is Mike Teke, formerly Impala Platinum’s human resources director.

There is talk that the deal could extend well beyond Optimum and include Becsa. I’m not sure about this, but BHP Billiton CEO Marius Kloppers has in the past spoken of disposing of non-core assets. He perhaps has assessed the time it will take Transnet to build the capacity that would allow Becsa to expand, and deems the South African coal holdings peripheral.

Becsa would represent a mammoth deal for Mvela Resources, but perhaps that would justify the significant excitement with Mvela at the current time. We shall see.

BEE rumbles

It’ll be interesting to see how Mvela Resources funds Optimum. That’s because it’s now easier to fall foul of black economic empowerment (BEE) rules. New amendments to mining-related empowerment deals suggest that buyers of assets can’t be indebted to vendors in perpetuity – or the vendor loses empowerment points on ownership.

According to a recent note by RBC Capital Markets, the South African government gazetted the Codes of Good Practice for the SA Minerals Industry in April. Elements of the document were ownership, management control, employment equity and beneficiation among others.

In RBC’s view, the document says that “any sale to a BEE body would not accrue full credit if this BEE body still has debt associated with this purchase two years after the deal was done”. Also, says the bank, ownership occurs only once the BEE party has no more debt.

“Given the requirement by law that the companies must be able to prove that 26% ownership has changed hands by 2014, it would imply that all debt will have to be paid off by then,” said the authors of the report. “We do not believe this to be possible.

“In our view, the new codes raise new questions and will serve to destabilise the now ‘accepted’ BEE activity when investing in South African companies again.”

Intrigued, I took this document to two bankers – both of whom head up the resources divisions of their banks – to ask whether the Codes of Good Practice were a dramatic departure from empowerment rules, those established since 2004 and which are now up for review by government. I also phoned the minerals and energy department, but didn’t get a response.

The feeling is that the Codes of Good Practice simply aligns the earlier mining charter legislation with the later empowerment legislation produced by the trade and industry department, and which is the ruling document for empowerment in all other business sectors.

“In the DTI codes, it’s not all about ownership. You can score high in other areas, accrue enough credits, to pass the empowerment test,” said one banker.

I guess moving the goalposts for empowerment in mining is not the best but a more holistic approach to BEE, taking the emphasis away from just ownership, is to be applauded.