Johannesburg - Indebted platinum miner Lonmin, which this week announced plans to raise R5.4bn, faces a huge black economic empowerment (BEE) dilemma.
Its equally indebted BEE partners will probably be unable to follow its rights issue, leaving the company with the prospect of falling below the 26% black shareholding it has taken years to achieve.
Lonmin’s BEE deal with Deputy President Cyril Ramaphosa’s Shanduka Group, which was struck in 2010, is already in jeopardy, as Shanduka failed to meet the five-year deadline to repay its loan.
In fact, it has not repaid any of the £200m (R2.3bn at the time) loan, despite receiving, in addition to that loan, ordinary dividends, advanced dividends and a preference share subscription, together totalling about R1.25bn during the five years.
At the September 2014 year-end, Shanduka owed Lonmin $417m (R4.58bn at the exchange rate at the time, but R5.6bn now due to the rand’s devaluation).
Lonmin is worth just R3.4bn in total, as the share price has collapsed by 80% this year. It announced this week it would raise $400m next month and agreed to new debt facilities totalling $370m, which mature in 2020.
The Public Investment Corporation, which owns about 7% of Lonmin, has indicated its support for the rights issue, and may take up more than its entitlement, subject to approvals, said Lonmin.
The mining firm, which announced 7 000 possible job cuts in July, said this process would go ahead at a cost of R800m.
The newly announced equity-raising process is Lonmin’s third in six years. It raised $817m from investors in December 2012 after the massacre at its Marikana mine.
The company was also forced to raise $457m in equity from investors and the refinancing of $575m in debt in 2009, when it announced 7 000 job cuts.
It will be unlikely that former MTN CEO Phuthuma Nhleko’s Pembani Group – which now holds Shanduka’s stake in Lonmin after Ramaphosa became deputy president and offloaded most of his investments via a merger with Pembani – will be able to participate in the capital raising; it faces a huge dilemma after inheriting Shanduka’s massive Lonmin debt.
Shanduka’s debt arises from a deal in mid-2010, when Shanduka acquired 50.03% of Incwala Resources, which owns 18% of Western Platinum, 18% of Eastern Platinum and 26% of Akanani, giving Shanduka an effective 9% stake in Lonmin.
Shanduka’s investment was facilitated by the £200m loan raised by Lonmin – and a R300m equity injection by Shanduka.
Since then, Lonmin has made several dividend payments, and advanced dividend payments and loans, both to Shanduka and Incwala. Shanduka has not repaid any of its loan to date, while Lonmin has recorded an $80m impairment on the loan so far.
Lonmin spokesperson Sue Vey confirmed that no other shareholder apart from Incwala had been given advanced dividends.
The loans to Shanduka to date include the £200m original loan in 2010 and a R175.5m preference share subscription by Lonmin in Lexshell 806 Investments in 2011. Shanduka’s loans, dividends and advanced dividends total R3.525bn against its original loan of £200m.
The amount it owes Lonmin, however, is much more when taking into account exchange rate fluctuations (the loan is in pounds), interest and other factors.
The original loan had an interest rate of 4.4% a year, compounded quarterly, bringing it to £248 million by the end of the loan period, or just over R5bn at current exchange rates.
Charlene Nyembe, business executive in the office of the CEO at Pembani, said in an emailed response to questions: “Please note the Pembani Group is a private and unlisted investment holding group and has a policy not to comment on market speculation.”
Vey would not be drawn on the options Lonmin was exploring, other than to say that “this is currently under discussion given the Shanduka/Pembani merger”.
But as the payback period has expired, it may have to renegotiate the loan or ditch its BEE deal.
It may be forced to impair more of the loan or write it off. Pembani/Shanduka may want to sell its stake – a difficult option given the state of the platinum industry. Lonmin may ultimately find itself looking for new BEE partners, and not for the first time.
It only recently managed to bring its BEE shareholding from 18% up to the required 26%. Last year, it concluded a BEE deal with Bapo ba Mogale, an employee-share-ownership scheme and a community-share-ownership trust. A committee of disgruntled community members has since gone to court to ask for a review of the transaction.
Lonmin’s major BEE shareholder remains Incwala, whose other investors include the Industrial Development Corporation (23.56%), the Bapo ba Mogale community (2.85%) and a Lonmin subsidiary (23.56%).
But Incwala itself has been in difficulty before. Shanduka’s May 2010 investment was aimed at bailing out a number of parties, including Thelo Consortium and Vantage Consortium. Of Shanduka’s loan, £96m was used to buy their interests.
Pembani would not answer questions on the status of the deal and the loan, whether it knew of the debt before the merger, why no part of the loan had been repaid or why it would conclude the merger considering that just one of the assets had such huge debt.
This is a shortened version of an article published in the latest edition of Finweek