Tax deal enables Anglo to sell its Kumba stake
• SARS penalty much smaller than anticipated • Anglo in the throes of a major portfolio restructuring
Anglo American’s disposal of its stake in SA’s largest iron ore producer became easier on Friday, when Kumba Iron Ore agreed to a R2.5bn settlement with the South African Revenue Service (SARS) — a penalty much smaller than feared.
Anglo is in the throes of a major portfolio restructuring as it sells off assets in bulk commodities to repay billions of dollars in debt and to focus the business on platinum, copper and diamonds. Among the assets up for sale are its 69.7% stake in the JSE-listed Kumba and its thermal coal mines that supply power utility Eskom.
Kumba said on Friday that the last major issues were resolved with the taxman, with an agreement to make a full and final settlement payment to SARS by end-March 2017 for tax audits dating back to 2006.
Analysts at JP Morgan said they estimated that Kumba had R4.8bn in cash on its books by December 2016 and that Anglo’s net debt was about $9.4bn at that time, so the “balance sheet implications are modest”.
“While we recognise the modestly negative balance sheet implications of the settlement, we believe outstanding tax disputes could act as a material impediment to Anglo American’s ability to execute on its South African restructuring plans, which explicitly include a commitment to divesting its stake in Kumba. Thus, moving to extinguish the liability is a positive development,” the analysts said in a note on Friday.
Kumba agreed that the settlement had resolved one of the difficulties in Anglo’s disposal of its Kumba subsidiary. “In our view, it was not an obstacle, but the settlement of the SARS dispute removes a material
uncertainty and valuation uncertainty,” its CEO Themba Mkhwanazi said on Friday.
“The regulatory issues have been resolved and my focus will now be on improving the performance of the business.”
The disposal of Kumba could be as part of a group of assets including the coal mines — as a single entity or an unbundling.
The government is keen that the sales process satisfies its desire for a South African “mining champion”, adding a complex political element to Anglo’s exit from the assets.
Under Mkhwanazi’s leadership, which began in September 2016, two major issues dogging the company have been resolved. “The residual ownership and tax matter were priorities. These sorts of matters do take time to resolve and the Kumba team have been working hard on them for a number of years. I was fortunate to be able to build on the good work Norman did.” Mkhwanazi’s predecessor Norman Mbazima is heading Anglo’s disposal programme in SA.
Last year, the Department of Mineral Resources awarded Kumba a disputed 21.4% stake in its flagship Sishen mine, which had been grabbed by an unknown shelf company, which Kumba alleged had improperly benefited from information in the department.
The Constitutional Court ruled in Kumba’s favour before the right was granted.
The tax dispute came to investors’ attention in February 2016 when Kumba said that after an audit, its 76.3%-owned Sishen Iron Ore Company subsidiary had received a tax assessment for 2006 to 2010 of R5.5bn, including R3.7bn in interest and penalties and that it had appealed the findings.
In September, Kumba said an audit of the company for 2011 resulted in a tax liability of R1bn, excluding interest and penalties.
“All the tax issues relating to this matter from 2006 to 2015 have been settled,” Mkhwanazi said. Kumba said it had provided for R1.5bn for the tax years up to 2015 and a further R1bn in 2016’s annual financial statements towards the settlement.