Powering Empowerment

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A deal that will result in the creation the country's largest black-owned mine has focused debate in South Africa this week on the government's Black Economic Empowerment (BEE) policy.

On October 10, Anglo American and Kumba Resources announced a much-anticipated R9.2bn transaction that will see a partial separation of iron-ore assets from Kumba's non-iron-ore assets. This will also see the creation of two new firms, both of which could be listed on the Johannesburg Stock Exchange (JSE).

One component of the spin-off, Kumba Iron Ore, will hold the iron-ore assets centred on the Shishen mine in the Northern Cape Province. The new black-owned company, provisionally called Newco, will have an enterprise value of R16bn.

Newco will be a diversified mining company, holding Kumba's coal, heavy-minerals and zinc assets.

Once the deal is finalised, Newco will also be the world's second largest producer of Titanium slag and the third largest supplier of titanium feedstock and zircon. Newco will also acquire the entire listed share capital of Eyesizwire Mining and a 20% holding in Sishen Iron Ore.

Sipho Nkosi, CEO of Eyesizwire, is widely tipped to head Newco.

Anglo American, which currently holds a 66% stake in Kumba, will maintain control of the iron-ore assets through Kumba's 74% stake in the Shishen operations. This will enable Anglo-American to honour obligations to reduce its effective interest in iron-ore to the 49% agreed with the government in 2002. Another 3.4% of effective interest will be contained in Anglo's 17% share of Newco.

A restructured Kumba Resources, focused on iron-ore assets, would provide a good base for Anglo to build its iron-ore assets further, says Kumba's CE, Con Fauconnier.

There can be little doubt that the deal has been driven in part by the South African government's drive to force increased black participation in the economy. South Africa's government requires that the mining industry should be at least 27% black-owned by 2012.

However, Anglo executive Philip Baum told reporters in mid-October that his company was not seeking to create an empowerment company that would simply comply with legislation. The group has described the deal as a fully funded BEE transaction with the potential to unlock value for all Kumba's shareholders.

In a sign that markets have yet to warm to BEE, Anglo's shares initially shed R5.5 to R184.50, while Kumba's shed R2.20 to R93 upon news of the deal.

Meanwhile, Lazarus Zim, Anglo's South African CE, has dismissed criticism that the deal unduly favoured Anglo American, as some market watchers have suggested.

Anglo will net R2.2bn from the proceeds of the sale. At the same time, BEE has been drawing flak from various quarters in recent weeks.

Democratic Alliance leader Tony Leon has called for the government to simplify the policy, warning that failure to do so could put beyond reach the government's target of 6% growth by 2012.

In a speech to the French, German and Italian South African Chambers of Commerce and Industry in Cape Town, Leon argued that it was the poor black population that was bearing the burden of BEE and not, as the government liked to claim, the white business community. According to Leon, BEE is slowing economic growth and dimming prospects for further foreign direct investment (FDI) to fuel higher growth.

A similar view was expressed by the Dutch Foreign Minister Bernard Bot during his recent visit to the country. The way in which empowerment was implemented was scaring away potential investors who did not wish to give up stakes in their companies, Bot said in an interview quoted by the Johannesburg publication Business Day.

"If I'm obliged to sell equity at a price that is not the one I had in mind, interest in investment will go down, and what Africa needs at this moment is exactly the opposite," Bot said. "I am in favour of empowerment, but I think the South African authorities should also reflect on the reverse side of it."

Foreign companies doing business in South Africa are generally required to sell an equity stake to meet the government's empowerment criteria, although they can claim exemption from doing so and gain empowerment points in other ways.

Earlier this year, Deutsche Bank became the first foreign bank in South Africa to sell a stake in its local operations when it sold 25% to an empowerment consortium led by Altron director Dali Mpofu and black staff members at the bank.

Some observers have argued that the government should focus on education as a vehicle for black economic and social empowerment. As if to emphasise the point, the Netherlands pledged R213m last week for new school infrastructure in South Africa.
BEE legislation is crafted so that no one is forced to contribute. However, section 10 of the broad-based BEE Act states that every organ of state and public entity must take into account - and as far as is reasonably possible apply - any relevant code of good practice issued.

The latest codes of good practice, designed to paper over gaps in the BEE framework, are due to be published by the government this week. Many empowerment transactions and charters have been put on hold while the codes are finalised.

Meanwhile, debate also continues over the efficacy of the policy. While few would question its motives, for many businesses it seems the jury is still out on just how much it is really helping.

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