[miningmx.com] — KUMBA Iron Ore got the world to take notice in
November last year when 6,209 of its lower graded workers each received a
staggering R576,045 payout on the maturation of the company’s employee share
ownership scheme (Esop).
The recipients were not the usual white-collared suspects found in the boardrooms of
the company’s Centurion headquarters, but those who earn their keep much closer
to the coalface of Kumba’s iron ore mines, typically earning between R5,000 and
R20,000 a month.
The payout was an opportune public relations event at a time when the
nationalisation of mines was a favourite topic for debate, with Kumba CEO Chris
Griffith branding the payout “a benchmark for empowerment goals and ideals in our
country’.
Yet, while the enormity of Kumba’s payout ensured Esops were recognised as a way
to go, such schemes have for better or worse been part of South Africa’s mining
landscape since the Mineral and Petroleum Resources Development Act (MPRDA) and
Mining Charter came into existence.
In essence, Esops offer workers on job levels A to C of the Patterson grading system
the capital appreciation and dividend distribution benefits associated with normal
share ownership. These shares, or similar financial instruments – they can be issued
at company or subsidiary/project level – are usually kept in a trust until the scheme
matures. Most Esops are financed with dividend distributions, although there has
been a trend in recent years to throw in some free shares as part of a total package.
Most importantly, all qualifying employees are equal beneficiaries – a point that
Xstrata was forced to accept when a stalemate situation over this issue arose during
its negotiations with the National Union of Mineworkers (NUM); a standoff which led
to a strike at the diversified miner’s local operations.
Esops have also become a preferred method of black economic empowerment
especially for unions, as South Africa’s historic legacies still determine that by far
the majority of lower paid workers are black.
“It can be real empowerment, because over 80% of the workforce is black,’ says
NUM General Secretary Frans Baleni. “Also, over a certain period of time workers
can have more benefits, which are not part of their normal package.’
Yet Esops can also have a downside, at least from the perspective of unions. Says
Baleni: “If it functions well, like Kumba, you may have workers deciding not to
participate in a strike. Fortunately I haven’t seen that happening yet.’
As for the enormity of Kumba’s payout, R2.7bn in total, it was not so much a product
of grand design than a reflection of the iron ore market’s bewildering and
unforeseeable dynamics since 2006 when the company first launched the scheme,
which it labelled Envision.
It was structured, in fact, on a not too dissimilar model, and around the same point
in time, than that of Impala Platinum (Implats). In the case of Implats, however, the
approximately 26,000 beneficiaries of the Esop got paid out a much more modest
R3,000 when the schemed matured after five years.
not to participate in a strike.
The big differentiator between what Kumba and Implats returned was the share
performances of the companies over the period of the scheme. When the Implats
Esop matured last year at R175 per share, it was not far of the original strike price
of R162. Kumba, on the other hand, saw its share price rise from less than R100 to
over R500 over the same period. Envision beneficiaries received the additional
benefit of Kumba being one of the JSE’s best dividend payers in recent times,
receiving payouts totalling R279m during the five years of scheme at an average of
R55,000 per employee.
As for Implats, the scheme at least managed to stay afloat. AngloGold Ashanti’s
Bokamoso (Harvesting the future) Esop had to be restructured in 2011 when the
first two maturity dates of the scheme saw the gold producer’s shares below the
R320 issue price of 2006. AngloGold also had to scrap the interest charge levied on
the original finance provided to pay for the shares, while building in a minimum
payout floor of R40 per share on future vesting dates. Along with this safety net, a
payment ceiling was also implemented to cap payouts at R90 per share.
Another example of an Esop that went awry was that of De Beers, structured in April
2006 as part of the Ponahalo BEE transaction, which for a while had to be kept
above water with disproportionate dividend payments before it got restructured.
Further examples of the success, failures and restructuring of Esops are plenteous,
but for every success story, like Kumba’s, one will find one that didn’t work out as
planned.
Frans Baleni, General Secretary at the NUM, says when unions and employers
started off negotiating Esops in 2006 they were “not fully aware of the complexities
of this animal’.
STRAIGHT OPTION SCHEMES
His view is echoed by that of Gavin Hartford, founder of The Esop Shop and a former
negotiator for the National Union of Metalworkers of South Africa, who says
negotiating parties have been on a steep “learning curve’ over Esops during the past
four years.
Hartford says that while employers like to mention social inequalities and the
distribution of wealth when schemes are launched, they remain mostly interested in
the regulatory spin-off.
“Initially Esops were nothing else than straight option schemes,’ Hartford said.
“When the financial crisis taught us the risk associated with that we started
introducing free shares – typically a third of the total package – so despite the
market and ownership structure they [employees] have some guaranteed benefit.’
Hartford also questions whether Esops are by nature an answer to the ideal of
wealth distribution.
“Ownership is appropriate for people who have money,’ he says. “Esops have
created once-off instances where miners hand over cash; how much you get depends
how lucky you are with the markets.’
He suggests profit-sharing systems will be a more beneficial and relevant option for
workers as they will empower employees to gauge the extent of their potential
payouts in the workplace, and are not as irrelevant and far removed as the complex
dynamics of the markets.
This point is underscored, to some extent, by the decisions of the Implats Esop
beneficiaries, where 26,000 of the 28,000-strong workforce opted to receive the
R3,000 payout, choosing not to wait for the Implats share price to improve. Also, a
profit-sharing option will in any event be out of the question if the Esop is initiated
to attain empowerment credentials.
Employers’ efforts to financially educate their workers are also lacking, Hartford
says. “The payouts get gobbled up in disposable income. We don’t know how much of
that money really goes to build savings, homes and retirements.’
When it comes to choosing a particular model for the negotiation of an Esop, unions
take their cue from the commodity involved.
A case in point is the recently launched Esop of Harmony Gold, which – similar to
the restructured AngloGold deal – features both a minimum payout guarantee and
maximum payout ceiling for the “loan share’ component of the deal. The free-share
component can be traded at the prevailing share price once it matures.
“With AngloGold we came in with one hell of an assumption that there will only be
upside,’ says UASA’s Franz Stehring. “We didn’t repeat that mistake with Harmony.
It’s a marginal group and you’ll rather accept something modest than lose
everything.’
In the case of platinum, unions are prepared to take on more risk, despite the
sector’s well-recorded woes of recent times and the record of poorly performing
Esops. “Platinum is in a much better space than any of the gold miners,’ says Baleni.
There also seems to be a growing preference for longer-term schemes, with unions
and employers pointing to Gold Fields’ scheme, which is based on life of mine. In the
case of South Deep the term is 15 years, with the provision that Esop members will
retain their beneficial interests even if they left the employ of Gold Fields.
Says Baleni: “How can you get an empowerment credit for a five-year Esop? Life of
mine is much more fair,’ adding that regular negotiation processes can be counter-
productive and onerous.
Another circumstance where Esops may not be practical is new upstarts, which have
been designed from inception to be fully BEE compliant.
“Two years ago we had 25 employees; we now have about 400 with a further 1,000
contractors,’ says a CEO on one such company. “As a growth company we fully
intend to increase our number of employees. It would be very complicated to have
an Esop for an unknown future number of workers.’
For the time being though, Esops will remain to stay.
“This will remain the answer against nationalisation for a very long time,’ says
Stehring, a sentiment he shares with Baleni. “If the mining industry do these things
well it will be the beneficiaries that will defend the corporations,’ Baleni said.
– The article originally appeared in the Miningmx Mining Yearbook. The
Yearbook is available for sale at retailers as part of the 2 August edition of Finweek.
Electronic copies can be bought at www.mysubs.co.za/Finweek-Eng.
