Exxaro boss castigates rigid BEE
Mxolisi Mgojo argues that ‘more flexible and less geared’ structures are needed
RESTRICTIVE lock-up periods in black economic empowerment (BEE) transactions have frustrated black shareholders and destroyed value, Exxaro chief executive Mxolisi Mgojo told delegates at the Mining Indaba in Cape Town yesterday.
Mgojo spoke at length about the shortcomings of BEE transactions, arguing that “more flexible and less geared” BEE structures were needed.
He said there was “something shaky” about South Africa’s first wave of BEE, which produced entities such as New Africa Investment Limited.
“One of the key challenges of the first wave of empowerment was that on the surface these entrepreneurs had built impressive-looking black-owned and controlled conglomerates.
“However, many turned out to be unsustainable, controlled by the whims of financial markets and the understandable profit motives of the funders. Many of them collapsed under the suspect chemistry of their financial alchemy. Unfortunately, we do not seem to have learnt the painful lesson of these collapses,” said Mgojo.
He said capital accumulated by allocating it to productive assets that provided a rate of return higher than the cost of that capital.
“The challenge, of course, is that most black entrepreneurs had no capital and therefore most empowerment structures were designed to provide an equity where there was no actual equity ownership. It was a recipe for tears and frustration and that is precisely the experience of BEE,” he said.
Exxaro last year announced a new BEE transaction after the 10-year lock-up period of its previous BEE partner, Main Street 333 Proprietary, came to an end.
The new deal has resulted in the reduction of black ownership in the diversified miner from 50.19 percent to 30 percent. Mgojo said given the cyclical nature of mining, timing was key.
He said black shareholders who struck transactions at the so-called bottom of the cycle when commodity prices were low, reaped financial rewards compared to those who concluded empowerment deals just before the 2008 financial crises.
“Restrictive lock-up periods have frustrated black investors from reducing debt at opportune moments. Poor investment strategies, unintended legislative consequences and highly encumbered deal structures have disenfranchised empowerment shareholders and destroyed value,” he said.
In the eight years to January 2016, the JSE Resources 20 index lost more than 70 percent of its value before it recovered, resulting in numerous casualties of poor mining BEE structures. or 40 percent black ownership regardless of the size of the company? Surely we can be more sophisticated than believing that an initial 26 percent black ownership of a R6 billion company must remain 26 percent black shareholding of the same company that has grown to R100bn in value?”
He said the focus should be on increasing the net asset value of black companies in the economy and the conversion of black equity in white firms into independent black-managed and controlled companies.
“At the core of these issues are conversations that are deeply emotional and political on matters that are technically, economically and financially complex. Yes, by all means let us talk about the evolution of BEE, but let the conversation be less emotional and reactive and more measured, informed and constructive,’’ said Mgojo.