Miner share plan offers no guarantees
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.