Miner share plan of­fers no guar­an­tees

The Star Early Edition - - LETTERS - Jeff Magida

UN­LESS the val­ues of Em­ployee Stock Own­er­ship Plans (Esop) are pro­tected from the va­garies of the mar­ket, the new Min­ing Char­ter pro­vi­sion to al­lo­cate 8% of the min­ing com­pa­nies’ shares to em­ploy­ees won’t make much dif­fer­ence.

There is no doubt that the re­cently gazetted Min­ing Char­ter by the De­part­ment of Min­eral Re­sources will be warmly wel­comed by the more than 300 000 Esop ben­e­fi­cia­ries in the in­dus­try.

It is more than a decade since the schemes were launched, amid much pub­lic­ity and fan­fare, to her­ald a new era of trans­for­ma­tion of own­er­ship in the in­dus­try.

How­ever, em­ploy­ees have had lit­tle to show in terms of their ben­e­fits, de­spite the shares hav­ing been val­ued at bil­lions of rand.

The char­ter, par­tic­u­larly the pro­vi­sion on em­ployee and com­mu­nity share­hold­ing, is a step in the right di­rec­tion which, in the words of Min­is­ter of Min­eral Re­sources Mosebenzi Zwane will, hope­fully, “be an in­stru­ment of pos­i­tive change that will re­sult in gen­uine trans­for­ma­tion in the own­er­ship, em­ploy­ment and spend­ing pat­terns of the min­ing in­dus­try”.

How­ever, while the new pro­vi­sions rep­re­sent a sig­nif­i­cant im­prove­ment in the cur­rent lev­els of share­hold­ing, which range from 1% to 3%, they will not nec­es­sar­ily trans­late into bet­ter pay­outs com­pared to the dis­ap­point­ing av­er­age pay­outs of be­low R5 000 re­ceived by ben­e­fi­cia­ries in the in­dus­try when their shares ma­tured.

The rea­son for the dis­crep­ancy is that it mat­ters how the fi­nan­cial struc­ture has been put to­gether.

Will they be free shares or loan shares and what will the per­cent­age of free shares to loan shares be? Or, as was pre­dom­i­nantly the case with pre­vi­ous schemes, would 60% of the shares con­sti­tute a loan, payable at a prime in­ter­est rate, and 40% a free com­po­nent? Or, as in the case of Gold Fields and Sibanye Trust, would em­ploy­ees be en­ti­tled to their shares only af­ter 15 years?

The acid test will lie in how the schemes have been struc­tured.

And, un­less the value of the schemes are pro­tected from the va­garies of the mar­ket, al­lo­cat­ing 8% of the min­ing com­pany shares to em­ploy­ees won’t make much dif­fer­ence. The last decade has proved that when com­mod­ity mar­kets run out of steam, such fi­nan­cial struc­tures have been left vul­ner­a­ble and ex­posed.

For in­stance, in 2008 the platinum price had spiked at more than $2 000 an ounce while the An­glo-Platinum vol­ume weighted av­er­age price of its or­di­nary share was at its high­est lev­els at R1 162, which was the price at which the em­ployee trust sub­scribed to the shares. Seven years later when ben­e­fi­cia­ries be­came en­ti­tled to the shares, 70% of their value had been lost as the shares traded at R350 a share.

At the other end of the scale, an Esop scheme such as Kumba Iron Ore’s that paid a wind­fall of R576 000 to each ben­e­fi­ciary, also rep­re­sents all that is de­fec­tive with how the schemes have been struc­tured. Rid­ing on the back of a strong iron ore de­mand, the com­pany’s share price ap­pre­ci­ated by more than 355% from R120 to R547 – an aber­ra­tion that raises more ques­tions than an­swers.

Should it take such an im­prob­a­ble event – akin to win­ning the Lotto – for Esop to de­liver good pay­outs to ben­e­fi­cia­ries?

Chris Griffith, the then chief ex­ec­u­tive of Kumba Iron Ore, echoed the same sen­ti­ment when he said: “You need a sit­u­a­tion in which you don’t rely com­pletely on growth.”

Im­plicit in the state­ment is the fact that such schemes should pro­vide some pro­tec­tion from the mar­ket un­cer­tainty which might re­sult in er­ratic pay­outs.

The Woolworths scheme cov­er­ing 17 000 ben­e­fi­cia­ries in the re­tail sec­tor is a good ex­am­ple. The scheme was re­ported to have a po­ten­tial to earn ben­e­fi­cia­ries about R250 000, in­clud­ing div­i­dends es­ti­mated at R50 000, should the com­pany grow, at least, at 20% per an­num.

How­ever, in the worstcase sce­nario, the com­pany guar­an­tees each ben­e­fi­ciary R20 000 when the shares ma­ture af­ter a fiveyear term.

The point is, un­like man­agers who, in ad­di­tion to their share op­tions, hold large and di­ver­si­fied in­vest­ment port­fo­lios, Esop rep­re­sents the only means by which em­ploy­ees can ac­cu­mu­late as­sets. The size of share­hold­ing on its own will not lead to bet­ter pay­outs.

How­ever, if struc­tured well, Esop could make a dif­fer­ence to em­ploy­ees be­tween living in a shack or house, or be­ing cash-strapped or fi­nan­cially sound. In­de­pen­dent trustee for An­gloCoal, a for­mer in­de­pen­dent trustee for Gold­fields and An­glo-Platinum, where he was a chair­per­son. He writes in his per­sonal ca­pac­ity.

FLUC­TU­A­TIONS: A miner at a Boks­burg gold mine. While the new Min­ing Char­ter pro­vi­sions im­prove the lev­els of share­hold­ing, they won’t nec­es­sar­ily mean bet­ter pay­outs, says the writer.

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