The bomb­shell that al­most tor­pe­doed Sibanye’s US deal

The Star Early Edition - - COMPANIES - Kevin Crow­ley and Paul Burkhardt

EX­EC­U­TIVES from Sibanye Gold, South Africa’s big­gest gold miner, were in Los An­ge­les in the fi­nal stages of a road­show with US bond fund man­agers last month when a bomb­shell hit from back home.

The gov­ern­ment had in­tro­duced shock new rules re­quir­ing lo­cal mines to be 30 per­cent black-owned in per­pe­tu­ity, tough­en­ing ex­ist­ing re­quire­ments and im­ply­ing hefty di­lu­tion for share­hold­ers. South African stocks tum­bled and bond yields rose that day.

The mea­sures, called Min­ing Char­ter 3, put at risk fund­ing for Sibanye’s $2.2 bil­lion (R29.42bn) ac­qui­si­tion of Still­wa­ter Min­ing of the US, the big­gest for­eign takeover by a South African min­ing com­pany in 16 years.

“We had to hold back the fi­nanc­ing, find out what the char­ter meant, and re­brief all our po­ten­tial in­vestors,” chief ex­ec­u­tive Neal Frone­man said.

“A num­ber of in­sti­tu­tional in­vestors pulled out of the bond process, say­ing the risks in South Africa were just too high and it’s be­com­ing un­in­vestable.”

Com­pa­nies and in­vestors say the new rules and un­cer­tainty will starve the in­dus­try of much-needed cap­i­tal, short­en­ing mine lives, re­duc­ing prof­its and adding to ex­ist­ing chal­lenges of de­clin­ing re­serves and in­creas­ing costs.

Most min­ing com­pa­nies al­ready off­loaded 26 per­cent stakes and even en­tire mines to black in­vestors at pref­er­en­tial rates in the 2000s to com­ply with pre­vi­ous rules, be­liev­ing it was a one-time deal.

Pres­i­dent Ja­cob Zuma backed the char­ter in par­lia­ment last month as part of his “rad­i­cal eco­nomic trans­for­ma­tion” agenda, in­tended to boost black par­tic­i­pa­tion in an econ­omy that’s still one of the most un­equal in the world, 23 years after Nel­son Man­dela helped end apartheid.

But mem­bers of the ANC, in­clud­ing Deputy Pres­i­dent Cyril Ramaphosa, have sig­nalled their doubts, say­ing the gov­ern­ment and in­dus­try should go back to the draw­ing board and reach a ne­go­ti­ated set­tle­ment.

Min­ing com­pa­nies have al­ready be­gun fight­ing the char­ter through the courts and say the un­cer­tainty will scare off in­vestors in a coun­try once seen as model of democ­racy, rec­on­cil­i­a­tion and open mar­kets in Africa. The first law­suit, to block the char­ter while it winds through the le­gal process, has an ini­tial hear­ing on July 18.

“We’re not go­ing to ac­cept it,” Frone­man said. “It’s un­con­sti­tu­tional to abuse share­hold­ers ret­ro­spec­tively.”

The le­gal cases “could po­ten­tially take three years to con­clude,” said Vic­tor von Re­iche, an an­a­lyst at Citadel Wealth Man­age­ment in Cape Town. “In the mean­time, the min­ing in­dus­try in South Africa will suf­fer most, as in­vestors will take a wait-and-see ap­proach.”

The char­ter im­poses nu­mer­ous ex­tra levies on min­ing, the coun­try’s big­gest ex­port in­dus­try, at a time when the econ­omy is in re­ces­sion and suf­fer­ing from 28 per­cent un­em­ploy­ment.

It also di­rects pay­ments that the in­dus­try es­ti­mates could amount to R3.5bn into a gov­ern­ment-con­trolled fund that will man­age com­mu­ni­ties’ stakes in mines.

Sibanye man­aged to com­plete the bond sale, but at a cost. It’s pay­ing coupons of 6.125 per­cent and 7.125 per­cent on two bonds worth $1.05bn, 50 ba­sis points higher than if the gov­ern­ment had not pub­lished the char­ter, ac­cord­ing to Frone­man.

The ex­tra in­ter­est is worth $5.3 mil­lion a year.

“This is bad news for min­ing, which was al­ready shrink­ing due to the com­modi­ties cy­cle,” said Dave Mohr, who helps over­see R110bn as chief strate­gist at Cape Town-based Old Mu­tual Multi-Man­agers.

“It’s go­ing to scare off in­vest­ment while they go through the courts.”

The Cham­ber of Mines, which rep­re­sents min­ing com­pa­nies, has taken the gov­ern­ment to court to block the char­ter and ar­gues that it’s in breach of com­pany law, in­ter­na­tional agree­ments and the coun­try’s Con­sti­tu­tion.

The most con­tro­ver­sial of the new rules is around own­er­ship. The char­ter says min­ing com­pa­nies must “top up” to 30 per­cent within the next 12 months. But to firms it’s un­clear whether they must in­crease from 26 per­cent or the cur­rent di­rect black own­er­ship level.

A rule re­quir­ing 1 per­cent of rev­enue to be paid to black in­vestors be­fore other share­hold­ers would have con­sumed 95 per­cent of the R6bn paid in to­tal div­i­dends if ap­plied last year, ac­cord­ing to the cham­ber.

“We are strug­gling as every­body else to try and make sense of this char­ter,” said Andile Sangqu, speak­ing in his po­si­tion as vice pres­i­dent of the Cham­ber of Mines. “That’s why we’ve opted to go to court.” Sangqu is also ex­ec­u­tive head of An­glo Amer­i­can’s South African op­er­a­tions.

Min­ing Min­is­ter Mosebenzi Zwane de­fends the new rules, say­ing they are nec­es­sary to re­solve the in­equities of apartheid. As the world’s big­gest gold pro­ducer for a cen­tury to 2007, South Africa’s min­ing in­dus­try was a key ben­e­fi­ciary of white mi­nor­ity rule, which en­sured cheap labour and few en­vi­ron­men­tal reg­u­la­tions.

More than two decades after that ended, av­er­age earn­ings for black house­holds are a sixth of those of their white coun­ter­parts, ac­cord­ing to the na­tion’s sta­tis­tics agency.

“Any­body who does not want to see black peo­ple em­pow­ered, any­body who still wants to see black peo­ple treated like slaves, raise up their hands and say they are not part of the pro­gres­sive South Africa,” Zwane told re­porters last month, re­fer­ring to the char­ter’s crit­ics.

The reg­u­la­tions’ tim­ing couldn’t be worse. The econ­omy un­ex­pect­edly tipped into a re­ces­sion in the first quar­ter, and busi­ness con­fi­dence reached a more than three-decade low in Septem­ber, amid po­lit­i­cal un­cer­tainty. Though the June read­ing im­proved, the new mine rules pared its gain.

While South Africa’s min­ing in­dus­try is a shadow of its former self – it peaked in the 1970s – it still rep­re­sents 21 per­cent of ex­ports and em­ploys 457 000 peo­ple, about 7 per­cent of to­tal em­ploy­ment.

About $3bn was wiped off Jo­han­nes­burg-listed min­ing com­pa­nies’ mar­ket value on June 15, when the char­ter was an­nounced.

PHOTO: REUTERS

Mine work­ers walk past the pit head at Sibanye Gold’s Masimthembe shaft in We­stonaria. The min­ing gi­ant’s ne­go­ti­a­tions were hit hard by the pro­mul­ga­tion of the hew min­ing char­ter.

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