Kebble vulnerable to shareholder activism

[] — ALLAN Gray, the Cape-based fund management company, has raised the prospect of legal action if Brett Kebble, CEO of recently suspended Randgold & Exploration, has irretrievably sold down the company’s stake in Randgold Resources.

That would be one conclusion from intriguing comments made by Stephen Mildenhall, chief investment officer of Allan Gray, which has interests in a number of Kebble aligned firms, principally a 25% stake in Western Areas.

Speaking to Business Day, a South African newspaper, Mildenhall said Allan Gray would “consider its options’ regarding the alleged sale of 9.9 million shares in Randgold Resources by Randgold & Exploration. At a market value of some R1.3bn, the sale of these shares is a large enough transaction to have required the sanction of Randgold & Exploration shareholders. This is in terms of South Africa’s Companies Act, a fact Mildenhall acknowledges.

The word from the Kebble camp is that Brett Kebble regards the loaning of the shares as “a technicality’. That sounds familiar if not ominous since a court investigation into Brett Kebble’s alleged share price manipulation, dating back to 2000 and involving the shares of Harmony Gold and former gold company, Randfontein Estates, has similarly been explained by Kebble.

In an interview with Miningmx, Mildenhall repeated his concerns: “We would take it very seriously if Randgold & Exploration had sold its shares in Randgold Resources. It’s a very significant event. We will consider all our options.’

Brett Kebble isn’t currently speaking to the press about this matter, but a danger for him is that even if Randgold & Exploration’s financial figures are submitted next week as expected, and the firm resumes trading on the JSE Securities Exchange (JSE), he will have erred enough to be charged with fresh allegations of corporate malfeasance.

This, in turn, raises the prospect that his position at Western Areas, where he is also CEO, becomes compromised; untenable even. Assuming this turn of events, it’s possible Western Areas could “come into play’, although as Steve Shepherd, an analyst for JP Morgan, observed: “there aren’t any natural buyers’.

Western Areas’ market attractiveness is profoundly constrained by a gold hedge account having pre-sold a large share of South Deep’s gold production until 2014, a 350,000 oz/year gold mine on South Africa’s West Rand that Western Areas shares in a 50:50 joint venture with Placer Dome.

In a report written last month, the “toxic’ hedge book was estimated by RBC Capital Markets analyst, Georges Lequime, to have a liability of about $230m. “That sounds close to our estimate of the liability,’ Shepherd said.

“That’s a quantifiable liability that can be dealt with,’ said another analyst who declined to be named. Were Kebble forced to resign from Western Areas, it’s entirely possible Allan Gray would settle the hedge book with a R2bn rights offer that would also serve to dilute JCI’s 39% stake in Western Areas.

But it’s a complicated matter. Placer Dome has pre-emptive rights over Western Areas’ 50% stake in South Deep. Though it must be doubted the Canadian miner has the appetite to absorb the whole of South Deep, it would certainly use its pre-emptive stake to take a lead position in developing a new, more co-operative partner.

In this light, Placer might conceivably frame a deal with an empowerment angle whilst simultaneously avoiding diluting its own 50% holding.

And what of Anglo American? It was hoping to disinvest of its 15% stake in Western Areas via an empowerment deal with Inkwenkwezi, a company established by Kebble using his long-standing contacts.

If Kebble’s mining empire is sinking beneath a pile of debt, Anglo will surely remain a shareholder in Western Areas. Perhaps it would still want to sell its shares? This is not to properly mention the potential role of Gold Fields, a firm that has long been associated with the deeper reaches of the South Deep deposit.

There are more angles to the future of Western Areas than a treatise on Pythagoras.

In the meantime, Mildenhall said his company would be examining the accounts of Randgold & Exploration next week. “We will see what the adjustment is,’ he said of Randgold’s own disclosure that the value of the 9.9 million shares in Randgold Resources would be listed in investments and not equity accounted.

“Randgold had an extension to submit these financial figures. To miss that is inexcusable,’ Mildenhall said.

Most of Allan Gray’s R900m investment in the Kebble companies is in Western Areas (about R80m is in JCI and Randgold & Exploration). But Mildenhall is adamant there’s value yet in Randgold.

Allan Gray has also recognised the long-term value in Western Areas, and has a track-record of shareholder activism. Its resources investment officer, Sandy McGregor, is a non-executive director of Western Areas. “Any number of people could run Western Areas,’ Mildenhall said.

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