Issuing shares no panacea

The recently gazetted Mining Charter, which makes provision for mining companies to issue 8% of their shares to employees, will no doubt be warmly welcomed by the industry’s more than 300,000 beneficiaries of employee share ownership plans (Esops).

It is a significant improvement on the current levels of employee shareholding ranging from 1% to 3%, but it will not necessarily translate into better payouts than the disappointing average of below R5,000 received by beneficiaries when their shares matured.

It matters how the schemes are put together. Will it be free shares or loan shares? Or, as is predominantly the case, will 60% of the shares constitute a loan payable at a prime interest rate and 40% a free component? Or, as with the Gold Fields and Sibanye trusts, would employees be entitled to shares only after 15 years?

Unless the values of the schemes are protected from the vagaries of the market, the charter’s provision to allocate 8% of mining company shares to employees won’t make much difference.

In 2008, the platinum price spiked at more than $2,000/oz, while the Anglo-Platinum volume-weighted average price of its ordinary share was at its highest levels of R1,162 — the price at which the employee trust subscribed to the shares.

When the beneficiaries became entitled to the shares seven years later, 70% of their value had been lost and they traded at R350 per share.

An Esop scheme such as Kumba Iron Ore’s paid a windfall of R576,000 to each beneficiary. Riding on 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.

The Woolworths scheme covering 17,000 beneficiaries is a good Esop. It has the potential to earn beneficiaries about R250,000, including dividends estimated at R50,000, should the company grow by at least 20% a year. However, the company guarantees each beneficiary R20,000 when the shares mature after five years.

Esops represent the only means by which employees can accumulate assets.

The size of shareholding on its own will not lead to better payouts.

Jeff Magida

Midrand