I want to point out a very important bit about BEE (Black...

I want to point out a very important bit about BEE (Black Economic Empowerment) partnership requirement in the South African mining industry. I do not want to raise any issues on socio-economic-political implications of this
requirement. I only want to point out the havoc it creates in consolidation (mergers and acquisitions) and firmly believe that this is the most important reason for uneconomic fragmentation in the industry. Emphasis again on coal sector and remember these are just my recent random thoughts. I am no expert on these matters and just trying to push logic.

The BEE partnership requirement needs that at least 26 percent of a miner should be owned by black interest groups. If so, the miner will have preferential treatment in government contracts; otherwise no preference and delays. Transnet and Eskom are state owned monopolies in the railways and power utility sector respectively and rail allocations
and domestic coal supply contracts to Eskom will be affected if you are not BEE compliant. You cannot do without Transnet and Eskom contracts if you are in the coal mining business in South Africa. Richards Bay Coal Terminal (RBCT) port allocations are theoretically not required to be BEE compliant as RBCT is really a private cooperative (owned jointly by players like Xtrata, Anglo Coal, Exarro ad other large miners). However since haulage into RBCT is controlled largely by Transnet, your RBCT allocations will be useless if do not get Transnet contracts. So essentially, you have to BEE compliant if you are a miner in South Africa.

To see the consolidation complications, let us perform some mental exercises.
Imagine management thought processes when Conti Coal was trying to buy Mashala
Resources which was fully Black owned and hence BEE compliant. Shall they keep Mashala as the BEE partner by buying only upto 74 percent of Mashala? It was tried but the Mashala proved a weak partner who cannot pay their share of the costs - a very serious baggage. Having such a weak partner means you cannot buy other new assets nor do capital investments without constantly loaning money to Mashala for Mashala's cost share. Effectively, you get only 74 percent of the benefits with close to 100 percent of the costs. So you have to buy out Mashala - and funnily this buying need gives Mashala bargaining power in raising the price of their holding.

Now imagine what happens after Conti buys Mashala fully. Now they have to bring in a new BEE partner who is financially solid. Firstly, it maybe hard to find strong BEE partners in the landscape and this gives the few strong potential partners extra bargaining power. They go for Sishen who are strong but can bargain their way through asking for some of their payment to be made as vendor finance.

Now, assume that Sishen has been brought in, and now let us imagine that Conti wants to sell their assets off to a new buyer - let us say miner A. If miner A goes for just Conti's stake, Sishen may object and say that they don't want to partner A - hence the need for the deal to be sweetened somehow; may be A offering good money for the whole project which neither Conti nor Sishen can refuse. If the underlying assets are good, this can sometimes lead to better prices for Conti and Sishen's assets - otherwise it is a dampener. Moreover, buyer A also has to think about what happens if they buy all the assets - who will be their new BEE partner? Are there good quality new BEE partners available? If in doubt, this can also be a dampener to the purchase. You can see why this can be such a mess and prevent efficiency enhancing consolidation in the industry.

The industry has found a way to handle these complications. Glencore does it by using their BEE compliant consortium with Cyril Rapmaphosa. All Glencore mining purchases in South Africa are handled through this consortium - since the consortium is BEE compliant and the buying is by the consortium, no new BEE partner is required. See the following link to see how Optimum Mining was bought by the consortium. http://www.4-traders.com/GLENCORE-INTERNATIONAL-PL-8017494/news/Glencore-International-Consortium-Buys-Further-36-56-Of-Optimum-Coal-14239717/

Others firms like Exxaro are anyway majority black owned - so there is no problem if they want to buy something. But it is true that foreign buyers of South African mining assets will find the process a little intimidating. I don't think that Botswana has similar requirements but I have to check.


Moral of the story for us - Conti management has to invite in at least two such bidders like the Glencore-Rapmaphosa consortium or Exxaro who have no BEE compliance problems.