nkp independent due diligence

Only just read my mates contents and as promised would post what he wrote. There is no inside information and all other posters have to do their own research. These are just points that convey what my friend thinks of the NKP situation.

So here it is ... hot off the press
-----------------------------------------

Hi all,

As you all know I have been in South Africa for the past 3 weeks and just got back late last week. Richards Bay for about 10 days and then Johannesburg for 7 days.

When I got to Johannesburg I did get into contact with some corporate lawyers that I have used for business in the past years and enquired on the matter of Nkwe Platinum. I also spoke to some mining people that are in the coal, iron ore, copper and gold to get more understanding on the laws and avenues in this country. Most importantly I wanted to get a neutral insight rather than one that is going to be biased with sweets and sprinkles on top.

The 2 main law firms that I do most business with are Webber Wentzel and Bowman Gilfillan. I know 2 lawyer friends who since moved to Edward Nathan Sonnenbergs and Norton Rose. I am told that Norton Rose is the main law firm that Anglo American South Africa works with. My friend at Norton Rose could not offer any conversation as indeed his firm is advising Angloplats. Therefore you can say that the first three I mentioned are my main sources.

Here are the main questions and responses that I believe are most crucial and relevant:

1) Under what pretext can Angloplatinum and African Rainbow do to “challenge” the Department of Mineral Rights South Africa (DMR) decision to grant the mining license? Also shouldn’t they have challenged the decision of mineral rights awarding to Genorah back in 2008. Why would you wait till now? Isn’t there a timeline for an appeal?


Essentially what the lawyers of Angloplats and African Rainbow are going to challenge is the process on the awarding of the mining rights hence the constitutional procedure. It’s more about that DMR not following the correct constitutional procedures. They may even challenge that the awarding of the prospecting rights as well. Angloplats and African Rainbow will not be challenging Nkwe/Genorah directly but affects them as a consequence.
The most likely topic that would be brought up if a court case is pursued is Angloplats and African Rainbow legal team must show concrete evidence (beyond reasonable doubt) that the constitution was not abided.

When you challenge the “constitutional” process there is essentially no timeframe as you are challenging the process forming the decision not the “final decision”.

The most likely case that they have to prove is going to be along the lines of either:

- DMR was corrupt or did something illegal (this you must need undeniable evidence and this is going to be huge if this is in the public arena). Don’t think this would be the case. If you go here and unsuccessful be prepared for a counter case for massive compensation.

- DMR did not properly check all the studies of impact concerning environmental, water, social impacts, infrastructure needs etc. This should be rectified in the independent study in the Bankable Feasibility Study. Don’t think Angloplats/ARM will go here.

- DMR did not fully consult all the local people that live on the land. This is probably the point that Angloplats and African Rainbow lawyers are going to exploit. Reasoning is that local tribes do move around or are often nomadic. This is especially so when you are talking from 1900-1985 (till the end of Apatite). This is most likely the most disputed factor that is going to be the hardest to prove/or disprove. If this route is taken then Angloplats/ARM must be working with this “neglected community”. If ARM claims that they are the “neglected” community then they must show “beyond doubt” that they are in this position today.

Showing you once “lived on the land” herding cattle, or our chief’s sister married another chief’s cousin is not going to be enough. They must show that they have an important standing in terms of economics, social, cultural, political decision making and direct influence in forming decisions for the broader based community.

It’s most likely that Angloplats/ARM will not go to court because the chance of winning the court case is also minimal. The main reason is that the High/Supreme Court judges will be members of the African National Congress (ANC) and the DMR leaders are also members of the ANC.

Also Angloplats/ARM winning and hence striping NKP/Genorah of their tenements will also throw every given Mining License/Prospecting License in doubt.

The other thing that also has a large consequence of Angloplats/ARM winning in a court of law is that challenging the “constitutional process” can of worms for other cases will be open.

Norton Rose (any law firm) makes money by billing the hours they work for their client. The more hours they work the more money they will make. However the law firm will also not want to destroy its reputation by engaging in a case where chances of winning are minimal (unless the client insists). Therefore the best way is to constantly seek an “out-of-court” resolution but also to take your time doing it. The first offer should always be rejected even though it may be an agreeable one. This also depends on how much time that each party is having up their sleeve. Sometimes just delaying settlement will result in one side to “yield a little more” which long term could be worth tens of millions or even hundreds of millions. While on the side the lawyers can keep the case open and keep billing the client.

2) I know that the prospecting rights belonged to Angloplats prior to it being awarded to Genorah. Is there a way that Angloplats/ARM could use this as an excuse to reclaim the tenements?


When the DMR issued the prospecting rights to Genorah but did not renew for Angloplats it’s done most likely on the “use it or lose it” policy. This would have meant that Angloplats did not show enough evidence that there was “minimal” expenditure for development over a certain period to keep the farms. Also most likely when the farms were given to Genorah, Angloplats did not give a detailed enough expenditure and planning outline that suggested that the tenements will be developed.

The DMR through this would then award the farms to another party that would demonstrate that more focus would be put into the farms towards the path o eventual development.
The decision process making here is not all black and white. The DMR probably did not renew the farms to Angloplats basing on their lack of future development planning rather than on the back of Genorah financial ability to develop immediately.

This could mean that Angloplats probably just detailed a $2m drilling program for the next 3 years while Genorah could detail a $10m drilling program and feasibility study. This is probably the stage where NKP was still in Pre-IPO stage.

3) If NKP/Genorah are so confident that Angloplats/ARM have no case then why not just give them the “middle finger” and then move on?


I believe that there is more than meets the eye here. If Angloplats/ARM does not have something on the bargaining table except for “we may take you to court” then Genorah/NKP would have given the middle finger to Anglo/ARM a long time ago.

I also believe that there is an economic reason to why the talks have stalled and yet NKP/Genorah is still at the negotiating table.

I believe that the new updated pre BFS numbers that was announced in the October 2011 NKP presentation showed that the CAPEX has been almost halved and the OPEX to be around $400-500 per ounce. Most likely the reason is some sort of infrastructure sharing of downstream processing.

The rumours in the newspapers were that NKP/Genorah was giving away the Hoepakrantz farm for the legal settlement to disappear. I think if this is true then there could have been for legal settlement plus some kind of operational Joint Venture for the downstream processing. I don’t think the Joint Venture would be on the mining part since Angloplats/ARM already is already mining.

Genorah/NKP gives away the Hoepakrantz farm since Angloplats/ARM will need to extend the Modikwa Depths platinum operations. However if NKP/Genorah can get a Joint Venture on the downstream processing then the initial CAPEX would be greatly reduced. Also the OPEX would be lowered away as well. This would also explain why the BFS keeps getting delayed. This is because there is a reliance on some infrastructure sharing that needs to take place for the “optimised figures” to be realistic. Genorah/NKP and its potential JV also benefits. You can see that both sides have benefits from this sort o transaction. In business you never get a ‘one side’ takes all. I believe that hanging on to ‘I may take you to court’ alone eventually will wear thin and there is no benefit in doing this. The court case ‘threats’ may be a shopfront as one side (most likely Angloplats/ARM) wanting a better deal. Maybe Angloplats/ARM wants the Hoepakrantz farm and maybe an equity stake in NKP as well to ‘make things’ happen. This can explain why the ‘deals’ keep getting rejected.

The most important expenses are the CAPEX and OPEX. OPEX tends to be more optimised as mining becomes more efficient. With a project that potentially can give high profit margins then there is flexibility in the OPEX. Therefore the CAPEX becomes the main issue. If Genorah/NKP and its development funding partner see that a $1.5billion initial development is too risky since payback period is like 8-10 years to recover the CAPEX. Possibly a smaller operation where CAPEX is just $500million even on lower operational margins but payback is just 4-5 years is a better way to go. Also if you are lowering the CAPEX but mine earlier, then you can do “everything yourself” when the project is optimised clearly making money. It’s a basically a lower start-up operation that allows you time to go through the possible inefficiencies then you always have the choice to expand. This is especially so if both NKP/Genorah and its possible funding partner have not mined platinum in its history and want a lower risk version of the project. Mining is always tough, and new miners tend to find it even tougher. If you look at Platinum Australia (PLA) you can see that their numbers look terrific in a desktop theoretical study but once they start to mine there are problems everywhere and the company is on the verge of bankruptcy now.

4) One of the requirements for a mining license to be issued in South Africa is the applicant’s ability to show that they can develop the project. NKP/Genorah is living on a loan so how can they prove this?


Most likely there is a front running development partner behind the scene has expressed sufficient evidence that they would back the project into development.
There are most likely conditional demands that this “front running JV partner” has placed as conditions to move forward. One obvious one is the granting of the mining license. Another obvious one is that is the “optimised BFS” is dependent on some kind of infrastructure sharing with Anglo/ARM to reduce CAPEX and OPEX. If you look at the Sundance Resources by Hanlong Mining there are so many conditions that were placed before the takeover goes through.

I would not be surprised that there is some sort of confidential Memorandum that is not yet fully binding has been signed in the background but due to “obstacles’ that needs to be resolved there is no telling when the timeframe of when everything will fall into place.

Another point to look at is that the mining license also has more than once stage. Genorah/NKP most likely got the preliminary stage mining license which means the impact studies and financial proofs (although releasing funds are still pending many conditions to be overcome) are satisfied. Once the physical mining is ready to start you will see that NKP/Genorah and its development partner will have to get more permits. The ‘Mining License’ is a big step but the whole procedure will still have other smaller steps to see completion.

My overall view is that there is more to the whole thing than just “oh ARM or Anglo just want to play it hard’. I try to seek reasons that make business sense to explain the multiple situations. It’s the reasons “why” that I try to seek out. Above is the general consensus on the NKP/Genorah situation that I gathered.

For me I do feel that there is a “Limbo” period but not total despair. Timeframes ... well I wish I have the crystal ball but I don’t have it. I just hope that a resolution will come ASAP. I will try my best to keep updated ... either by rumours or media or whatever source that can be credible.

I do feel that a ‘court case’ where NKP/Genorah could lose everything is very minimal. Guess there is some comfort ... although the crappy share price, which is the most important thing, is the most frustrating part.

-----------------------------------------------

I hope that management can release some sort of clarification on the ASX to help all the shareholders.