South African major Implats has struck a deal with Zimbabwe that assures the JSE-listed company of fair cash compensation, the prospect of continued unfettered expansion and the potential freedom of the ‘once-empowered, always- empowered’ advantage, which has yet to become a South African reality.
Zimbabwe’s 51% indigenisation requirement, first mooted in 2006, was gazetted only in 2010.
Apart from the sale of 20% of the Zimplats shares to the near-mine community and Zimplats’ own employees – which Implats has been keen to do all along and which is a regular occurrence in South Africa – Implats is assured of hard cash at a value determined by independent professionals for the remaining 31% of Zimbabwe’s 51% indigenisation aspiration.
The deal also ensures that the new indigenous shareholders will have to chip in more money if they want to maintain their percentage shareholdings when Zimplats spends more capital on expansion, which is already at an advanced stage of planning.
If they do not take up their rights as shareholders, their percentage shareholdings will fall below the 51% control position and allow Implats to move back into a majority shareholding position.
That is still not part of the South African black economic-empowerment (BEE) formula, which continues to eschew BEE dilution.
The billion-dollar question in the case of Zimbabwe, however, is where the country’s indigenisation board will find between $500-million and $1-billion in cash to pay for its 31% of Zimplats.
Implats will provide a funding mechanism for the community trust and the worker trust each to buy a 10% shareholding.
Implats, which currently owns 87% of Zimplats, will vendor finance an interest-free loan to the community trust, which will repay the loan from the dividends that it receives from Zimplats.
It will also provide a $10-million interest-bearing loan to the employee trust, which will again be repaid from dividends over three years.
But given the parlous state of Zimbabwe’s national finances, the big unknown is how Zimbabwe’s National Indigenisation Economic and Empowerment Board (NIEEB) intends to fund its 31% aspiration.
Interestingly, Zimbabwe is assuring Implats that it will come up with the cash, at a fair compensation level that has to be independently determined in order to comply with the treaty protection under the South Africa-Zimbabwe bilateral agreement.
A crucial part of the in-principle agreement that Implats has reached with Zimbabwe is that the shares that the country’s NIEEB buys must be “fully contributory for cash at an independently determined fair value to be agreed”.
Moreover, the shares will only become available to the NIEEB after Implats has been fairly compensated for the platinum-bearing ground worth $153-million that it voluntarily returned to the Zimbabwe government in 2006 in the expectation that it would be awarded empowerment credits (see also cartoon).
But these credits were never forthcoming and the latest in-principle agreement demands that the $153-million in compensation be settled in cash or kind before any further negotiations can begin for the 31%.
“We are prepared to forego credits provided we receive adequate cash compensation in the equation and that the overall package is fair from a value perspective.
“If 31% is sold at value and Implats gets $153-million, that would be an attractive outcome,” Implats CEO David Brown said during a media and analyst conference call.
Brown reiterated that there was treaty protection under the South Africa-Zimbabwe bilateral agreement, which committed the Zimbabwe government to paying fair com-pensation for shares that Implats is being forced to sell in Zimplats.
“We have been having conversations with the South African government on this because, obviously, they have a keen interest in what is happening.
“The treaty covers fair compensation and, obviously, if there was not fair compensation, then we would have alternative processes that we could explore,” he added.
Asked bluntly by a foreign investor calling in from American whether the South African government had been sufficiently involved in the process, Brown replied that there had been sufficient involvement.
“I have to say that the South African government has been supportive,” he said.
As there were many South African businesses invested in Zimbabwe, the South African government wanted to make sure that South African businesses in Zimbabwe were treated fairly, Brown added.
In arriving at fair value, Implats would take into account the net present value of Zimplats’ Phase 2 expansion that was in the process of ramp-up, as well as planned future investment and the value of the platinum that is still in the ground.
While Brown refused to disclose the value, he was prepared to divulge that the value submitted took into account the proposed $1-billion Phase 2 expansion of Zimplats as well as the undeveloped ounces at $1/oz in determining Zimplats’ overall value.
Laurium Capital fund manager Gavin Vorwerg made the point that any independent expert would value 31% of Zimplats at “a significantly higher figure” than the $350-million value that current market capital- isation indicated.
Adding the $153-million for the 2006 land holding that Implats had handed back to the government brought the total to $500-million, which any independent professional would regard as being well below fair value.
But even that under-par amount was likely to be well out of Zimbabwe’s financial reach.
“It’s fairly clear to us that Zimbabwe does not have $500-million in cash now and won’t have it even in a number of years’ time,” Vorwerg added.
But even at that level, Implats had achieved a far better outcome compared with the situation it was in in Zimbabwe only a couple of months ago.
The billion-dollar question that continued to linger was where the NIEEB would source the cash to pay for 31% of Zimplats.
In reality, negotiations were set to take a long time to fully unfold.
But if Zimbabwe were to pay the $500- million current value, some shareholders believe they would be quite handsomely rewarded.
The fair value agreed, however, was well in advance of current value and was based on a discounted cash flow (DCF) value that included Phase 2 as well as the value of so-called “excess ounces”.
So, in terms of the much-vaunted in- principle agreement, payment would have to be well in excess of the market capitalisation of $350-million plus $153-million.
Some fund managers indicated that they would gladly accept the DCF value immediately if they could get it.
However, Implats investor Pine Pienaar wanted to know whether the NIEEB would have the power to lean on Zimplats for vendor finance, in the same way as the community and worker trusts were doing.
Brown’s answer was that payment for the 31% needed to be at fair value for cash and if the NIEEB failed to come up with that cash, the shares would not be transferred.
Vendor financing from Implats was totally out of the question.
Moreover, the holding would be dilutive or contributory, which meant the proposed new Zimplats shareholders would either need to contribute their pro rata portion to equity calls for expansion capital, or allow their shareholdings to diminish.
Brown, who will leave Implats at the end of June, has been grappling with the indigenisation dilemma for the past six years, along with the JSE-listed Aquarius Platinum, which with Implats co-owns the Mimosa platinum mine in Zimbabwe.
He refused point blank to deal with Mimosa, which, with Aquarius, has been ordered to resubmit its indigenisation proposals.
The margin of profit at Mimosa, for instance, is 69%, higher than any other margin of profit in the Implats group, which averages 47%. While Zimplats’ margin is more modest, it is, at 53%, still above the group average.
Brown has for long held the view that platinum companies can play a “very instrumental” role in any economic reconstruction of Zimbabwe, where Implats touches the lives of 50 000 people and where it has invested billions of rands.
What will take place in the wake of the in-principle agreement is that a “joint technical team”, made up of Implats, Zimbabwe’s controversial Youth Development, Indigenisation and Empowerment Minister, Saviour Kasukuwere, and the NIEEB, will jointly detail how and when the transfer of the 51% shareholding in Zimplats must take place, after arriving at the “appropriate” value of the shareholding and determining the response of the Zimbabwe government to paying that valuation.
Some analysts, including Liberum Capital, of London, see what Implats is facing in Zimbabwe as being within a hair’s breadth of outright expropriation. Liberum describes its avoidance of outright expropriation as being only “a miniscule positive”.
Implats’ compliance, Liberum adds, also has a “read-across” for Aquarius.
Although Implats’ post-agreement media release was convoluted, much emerged from the conference call, even though questions were restricted to analysts alone, some of whom put Brown under strong questioning pressure.
JP Morgan mining analyst Steve Shepherd asked whether, after the postdeal, Implats would end up with an economic interest of 42.6% in Zimplats on the basis of 87% of 49%.
Brown said an end-up position could not be sketched owing to the potential for dilution if a call on additional equity capital were made to fund the Phase 3 expansion and possibly also a refinery.
The in-principle agreement made the new shareholdings contributory or dilutive, which entrenched the ‘once-empowered, always- empowered position’.
Shepherd wanted to know whether Implats had asked Zimbabwe for a tax stability agreement, given that the country had moved the taxation goal posts considerably in the last few years, with mine royalties rising to 10% and tax rising from 15% to 25%.
Brown responded that both the ground rental and the increased tax issues had been raised and that, as a shareholder, the NIEEB would not like to pay unsustainable ground rentals nor be excessively taxed.
Shepherd: But is it not correct that Implats is in court with the Zimbabwe government for not paying the new royalty from 2010 onwards?
Yes, and that’s part of this ongoing process.
Is Implats budgeting for the new 10% royalty in its accounts?
Brown: We are budgeting for those increases, yes, and that’s the prudent thing to do. But while we are providing for them, we are not anticipating paying them. We are working very hard through the court process to overturn those issues.
Zimbabwe is already dipping its hand in Implats’ bank account for revenue royalties, to which Implats should not be due, isn’t it?
We were always going to pay some percentage royalty. We are paying it at 2.5%.
Can I ask a hypothetical question: if you had refused to cooperate with the Indigenous Minister, what do you think would have happened?
I think, hypothetically, I won’t answer that.
My guess is that this process could go on for an awfully long time because it is quite involved?
We recognise that there is obviously quite a lot of water to flow under this particular bridge and effectively what we tried to do now is to take some of the heat out of the angle that the government was coming from in terms of our noncompliance with the law and accusations that we were being disrespectful and we were not being good corporate citizens. In essence, the in-principle agreement has taken a lot of that sting out of the relationship and we can now start to look at some of the detail, but in a much more convivial atmosphere than previously.
The Zimbabwe government is a government of national unity. Was there any Opposition involvement and what is the position of the Movement for Democratic Change (MDC) in this?
One of the major issues of government is adherence to the laws of the land and certainly that was both from a South African government point of view and from the Zimbabwe government perspective. So we wanted to put forward something that met those objectives and allowed us the environment to continue some detailed discussions.
Did you engage with Prime Minister and MDC leader Morgan Tsvangirai on this matter?
Brown: I won’t comment on parties that I’ve engaged with . . . no.
In a recent meeting in Johannesburg, Tsvangirai publicly put distance between himself and Kasukuwere and decried the pressure he was exerting on Implats to cede controlling equity in Zimplats to Zimbabweans.
“Nowhere does the law say you should grab assets or nationalise,” Tsvangirai said, adding that there was neither a shared vision nor shared values within the coalition government of the MDC and President RobertMugabe’s Zanu-PF there.
Shepherd drew attention to Zimbabwe suffering from the twin infirmities of fiscal instability and insecurity of tenure, which went to the heart of any investment case.
Against that background, it would be hollow if Brown emerged from the negotiations without a legally binding document.
Brown said that a raft of agreements would have to flow from the in-principle agreement, without which there could be no finality.
Implats already had a mining agreement in hand, in which fiscal stability was enshrined, as well as an offtake agreement for the processing of the concentrate by Implats.
The bulk of the community board would be made up of local chiefs, the board of the employee trust would have employee repre-sentation and both boards would include independent professionals and government representation, the Implats CEO added.
New mining development, concentrators, smelters and a refinery for use by all Zim-babwe platinum producers would hinge on the satisfactory outcome of the upcoming discussions and an economic level of production volume.
“The impression created that we did not want to comply with Zimbabwe’s laws did put us in a difficult position with regard to our ongoing investment in Zimbabwe.
“I believe that we have found an element of common ground and that we have a workable solution as the government does understand that the recognition of appropriate value is essential.
“We will look to the discussion and, on execution, we believe that Zimplats will have met all the government’s indigenisation and empowerment requirements.
“That will leave us in the very positive position of having received value for the sale of stakes, but, at the same time, not prejudicing Zimplats’ medium- and long-term growth aspirations in Zimbabwe,” Brown con- cluded.
There was recognition of the difficulty that the ground rental issue was causing, but that ground rental was not a remit of the Indigenisation Minister.
Without government saying outright that it would reverse the ground rentals, there is a realisation that they, as shareholders, would also be disadvantaged by ground rentals.
In terms of the current cash generated by the business, most was still being consumed by Zimplats’ Phase 2 project.
Zimbabwean Alex Mhembere, who heads its Zimplats operations as CEO, is a key member of the negotiating team, together with Implats chairperson Dr Khotso Mokhele.
Brown, who has identified Terence Goodlace as a successor, has been CEO since September 2006, which put him at the epicentre of the decision to boost investments in Zimbabwe.
The announcement of his pending departure was accompanied by a share price fall of more than 3% for Implats, a 56 000- employee business that mines, processes, refines and markets platinum-group metals.
Implats employs close on 5 000 people in Zimbabwe and, with the multiplier effect of 10:1, some 50 000 people are dependent on its operations there.
Brown sees that as “quite a moral obligation to the people”, and he is hoping for a swift resolution to the current transition.
Hitting the million-ounce target on Zimbabwe’s Great Dyke would put production ten times more than its current output.