The bombshell that almost torpedoed Sibanye’s US deal
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.