nkp & bee sa platinum

Interesting implications that the current BEE requirements (note the possible loan capital implications, free carry of BEE 'partner' etc) would have on any potential capital raising or JV partner, especially other than Xstrata. There are also some good comparisons to other PGM stocks via the link.


http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=114039&sn=Detail&pid=92730

South African platinum goes pear shaped

Major report finds "a complete lack of commerciality from the South African government" with respect to BEE legislation with a particular impact on platinum.
Author: Barry Sergeant
Posted: Tuesday , 02 Nov 2010

It seems that investors are waking up to the seismic changes announced to South Africa's mining regime in mid-September. The changes, mainly found in the revised Mining Charter, seemingly escaped big headlines due to more sensational matters (such as talk of nationalising mines), or perhaps because the changes were unbelievable - certainly to some.

Focusing on platinum group metals (PGMs), where South Africa is the leading nation, a major report by RBC Capital Markets, authored by analysts Leon Esterhuizen, Arnold van Graan and Ben McEwen, describes the situation as "complicated". Perhaps the core finding of the report is that the country's BEE (black economic empowerment) platinum entities are dependent on the long established majors "just to stay in the game, let alone being able to become competitive".

The central reason for this dilemma, in RBCCM's opinion, "is the complete lack of commerciality from the South African government. In our opinion, the imperative of transformation is completely overshadowing the imperative to maintain a globally competitive mining industry with clear commercial incentives for investors and mining companies alike".

The RBCCM analysts find that this is "is ironic in the extreme. Think about it - the laws on BEE have as their central aim an objective to establish competitive BEE vehicles that would serve to dilute the domination of the large ?white' companies".

BEE has had an "overriding negative impact", which becomes all too clear, argues RBCCM, when considering the complicated shareholding structures of the industry: unraveling the ?spaghetti bowl' is made more difficult by the inability of most BEE companies to raise funding and having done deals at much higher share prices in the past (negative equity). Thus there is the "invariable problem of having to deal with BEE entities that are effectively bankrupt".

Significant uncertainty in the South African mining law "massively compounds the issue", say the analysts. "Without a new order mining right, it is impossible to know if a potential target company has an acceptable BEE structure or even if it has definitive title". For many months, if not years, RBCCM analysts have maintained that there is significant potential in the consolidation of South Africa's PGM sector, which has stalled time and again.

It seems that the headwinds just continue growing. The general structure of BEE deals, says RBCCM, usually sees the BEE party incapable of funding any growth prospect (without being diluted). In such an environment, any company looking to bid for assets will more often than not "face the reality of having to free carry the BEE party - paying 100% of the development cost for only 74% of the economic benefit".

Under normal circumstances, a shareholder without available funding for rights issues (typically to fund capital projects) would simply be diluted down, but, here, since the company's mining license (new order mining right) now depends on being able to demonstrate the 26% BEE equity holding (amongst many other demands that all simply add to the ultimate cost), dilution of any such BEE stake is not an option.

The analysts argue that another obstacle is in the fact that the government refuses to acknowledge the ?Once empowered - Always empowered principle', which points to the actual granting of a new order mining right as the only reasonable security a possible buyer can have that there should be no more diluting demands.

The situation is compounded by the recent "Codes of Good Practice", which now lists the requirement that the BEE shareholder's stake in any mining operation must be "unencumbered" by the final date (May 2014) for compliance. By this date, the

BEE stakes should have no debt against them in order to be counted towards the 26% BEE equity ownership requirement.

With virtually every BEE stake ever created holding significant amounts of debt against it, say RBCCM, "achieving this in any meaningful way seems essentially impossible bar simply handing over these stakes for ?free' or writing off the debt".

Compounding this, government refuses to issue any paper or letter that would be seen to approve a particular BEE structure, or even BEE equity ownership level. "In fact", argue the analysts, "recent trends in BEE deals have seen the BEE vehicle drawing cash flows from the asset from day one - regardless of the outstanding debt".

A risk, argues RBCCM, is that "Zimbabwe suddenly realizes the possibility of stealing a march on South Africa by attracting international investment in its PGM assets". As one example, Impala Platinum has recently an objective to invest a further USD 500m into Zimbabwe over the next four years.