interesting read for aex holders

Kumba’s BEE delay indicative of SA mining malaise
By: Barry Sergeant
Posted: '06-SEP-06 17:00' GMT © Mineweb 1997-2006


JOHANNESBURG (Mineweb.com) --For nearly a year, Kumba, the South African iron ore digger, has been publishing a succession of monotonous announcements about a massive black economic empowerment (BEE) transaction. The latest announcement, issued on Wednesday, once again advised shareholders that “most of the legal agreements and funding arrangements required to implement the transaction have been finalised.” There is still no deal.

Nobody is prepared to be openly candid about the incessant delays. Private sector mining executives have, however, become increasingly vocal – but not in the public domain – about treatment meted out by the department of mines and energy (DME), not least on opaque rules around awarding “new order” mining licences. Some cynics even charge that the DME is on the verge of being fully dysfunctional, delaying billions of rands of investment in South Africa’s resources sector. Kumba may be the single biggest disappointment.

In its 2005 annual report, Kumba parent Anglo American noted that Kumba had “announced a major restructuring of its operations in October”. As part of this BEE transaction, Anglo American continued, Kumba’s iron ore assets would be partially unbundled to Kumba shareholders, and two separate listed entities – Kumba Iron Ore and Newco – would be established.

Following the transaction, Anglo American would own 66% of Kumba Iron Ore and 17% of Newco, of which 10% would be a long term holding. In its 2005 annual report, Kumba stated that more than R8bn (US$1.1bn) “will be raised at Newco, Kumba Iron Ore and BEE Holdco level”. Various banks had been invited to participate in the fundraising process which was “expected to be completed by March 2006.” On March 24, Kumba issued a statement to the effect that “good progress” had been made in finalising its BEE transaction.

Kumba’s BEE deal has always been marketed as a true giant. On 13 October 2005, Kumba, Anglo American and Eyesizwe Mining, along with the Industrial Development Corporation, Tiso Consortium, Eyabantu Consortium, “a Northern Cape community group”, and the South African Women in Mining Association, jointly announced “the largest empowerment transaction to be implemented to date in South Africa”.

It was envisaged that “the transaction will be implemented in the second quarter of 2006”. Well behind all the publicity, of course, stands the jarring reality that South Africa’s mineral rights have been nationalized. Like other mining companies, Kumba has to comply with opaque requirements in order to enhance the chances of success of its application for conversion of “old-order” to “new-order” mining rights.

Kumba put it solemnly in its 2005 annual report as such: “With the appropriate ownership structure soon to be in place, applications should be ratified once our empowerment transaction is finalised”. Delays of the kind experienced by Kumba have seen fixed investment in South African mining fall by 32% between 2003 and 2005. Over that period, private sector fixed investment has boomed by more than 20%.

While the world has been experiencing the biggest bull market in commodities and metals seen in decades, the South African mining sector has been forced into recession. This has emasculated job creation, hampered economic growth and crimped the formation of precious foreign exchange. By contrast, latest investment data from Australia, another resources-rich country, shows that mining investment rose by 80% year-over-year in the second quarter of this year, and has doubled its share of the Australian economy in the past few years.

In April this year, the-then minerals and energy deputy minister Lulama Xingwana said: “We now have learnt that we have to take all BEE deals with a ‘pinch of salt.’ We are going to microscopically evaluate all the deals.” On 22 May, after less than a year as minister of minerals and energy, Lindiwe Hendricks was “swapped” with minister of water affairs and forestry, Buyelwa Patience Sonjica, as part of a cabinet reshuffle.

In June 2005, Hendricks took on the difficult job of replacing Phumzile Mlambo-Ngcuka, who was promoted from mines and energy minister to deputy president, replacing Jacob Zuma. As another part of the recent cabinet reshuffle, Xingwana was moved, but promoted, from deputy minister of minerals and energy to minister of agriculture and land affairs.