Iron-ore workers awash with cash as Kumba’s employee ownership scheme shoots the lights out

9th December 2011 By: Martin Creamer - Creamer Media Editor

It was December 2005. I had driven to the old Iscor building in Pretoria to interview the team that had successfully unbundled two new companies out of the former State-owned integrated steelmaking corporation, Iscor.

Even at that early stage, the combined market capitalisations of the then newly unbundled Kumba Resources and Mittal had octupled to R60-billion in four years.

Dr Con Fauconnier, who had been an architect of that highly accretive unbundling, expressed high confidence that he could pull off a repeat performance by unbundling Kumba Iron Ore and Exxaro out of Kumba Resources – and how right he has proved to be.

Kumba Iron Ore was merged into Anglo American and the remaining assets of the deactivated Kumba Resources – together with Namakwa Sands and a crucial 20% of Kumba Iron Ore – went into Exxaro, made up of Sipho Nkosi’s black-controlled Eyesizwe coal business, Tiso, Eyabantu, Basadi Bakopane and the State-owned Industrial Development Corporation to create South Africa’s largest 55% black-held company.

Five years later, Exxaro is South Africa’s top coal producer and Kumba Iron Ore – under CEO Chris Griffith – has shot the lights out on every measure imaginable.

In order to earn its black economic- empowerment (BEE) spurs, Kumba Iron Ore gave 20% of its shares to Exxaro, 3% to near-mine Northern Cape communities and 3% to its employees below management level in an employee share ownership plan (Esop).

“This is the most successful Esop in South Africa’s history,” says Solidarity labour union national organiser Louis Pretorius.

Kumba Iron Ore complied with the mandatory 26% black ownership ten years ahead of the statutory deadline.

This week, the company in which Anglo American holds 74% of the shares, turned that 3% employee allocation into R2.7-billion cash and turned 6 209 of their iron-ore worker shareholders into pretax half- millionaires overnight – and this is only the first phase.

The second five-year phase has the potential to turn those worker shareholders who stick with it into full millionaires.

But not all South African Esops have such a proud track record.

Solidarity’s Reint Dykema provided Mining Weekly with some sobering analysis, which shows that many Esops are under water.

The shares dished out in Esops come in the form of free shares or loan shares, or a mixture of the two. There can also be profit shares or community schemes.

Solidarity’s analysis, for instance, of the 1% of the Anglo American Platinum shares that have been allocated to the Kotula Trust show that they will need a strong recovery at the maturation periods in 2013, 2014 and 2015 (see diagrams).

National Union of Mineworkers spokesperson Lesiba Seshoka, who initially said he was unimpressed, given that Kumba Iron Ore is part of a multitrillion-dollar global industry, eventually came around to describing the payout as a “wonderful gesture”, and lamented the bad old days when many a miner went away with nothing more than “a watch or a pair of boots”.

Kumba Iron Ore’s share price has appre-ciated from R120 a share upon listing on the stock exchange in 2006 to R516 a share on maturation of the first five-year phase of the scheme.

In the last five years, R290-million was paid out in dividends, an average of R55 000 per employee, half of which was used to pay off the loan given to workers to buy the shares.

The overwhelming majority of the employees opted to sell the 3 365 shares they each hold for R576 045 per employee, which equates to an after-tax payout of R345 627, based on a marginal tax rate of 40%.

There are still shares from the first phase, which can now be used to give workers their second tranche of equity at a price well below the ruling share price.

If dividends continue to flow and the share price continues to rise, the employee share-holders stand to benefit significantly again at the next maturation point on November 10, 2016.

Although the share price is now four times higher than when the scheme was launched in 2006, the expectation is that the share appreciation may not be as high when the next payout date arises in 2016.

But the company is sweetening the second phase by introducing into the mix a good number of unallocated shares from the first phase.

These unallocated shares will be sold to the employees at a discount to make the scheme’s second phase more attractive.

It gives the second phase more chance of being “in the money” and is expected to encourage staff retention beyond the first phase.

“What we don’t want is for half our workforce to take three-month and six-month holidays,” Griffith tells Mining Weekly in a video interview.

The majority of Envision’s employee members have elected to receive the cash sum and can look forward to their Envision payout in December, instead of the equivalent in Kumba shares, which is the alternative option.

This value was calculated based on a five-day weighted average of the Kumba share price prior to the official close of the first maturity on November 17.

Envision is only one part of Kumba’s three-part empowerment programme, the second is the Sishen Iron Ore Company Development Trust, which targets community growth and poverty alleviation through the investment and support of local projects for health, education, enterprise development and more.

The trust’s work also ties up with Kumba’s own statutory social and labour plans and the company’s partnership with the JSE-listed Exxaro, one of South Africa’s most significant black-controlled companies, also working to deliver real empowerment, particularly in skills development and equity participation.

Kumba, an Anglo American group company, has been running financial fitness programmes to help staff to use the money wisely by focusing on home ownership and the servicing of personal debt.

Many of the beneficiaries will be buying and renovating homes for themselves and their families (see Cover).