MIKE MILLER: Rethinking BBBEE and balancing mining sector balance sheets in SA
The traditional rules of funding can be circumvented to create new wealth by opening new entry points to finance
SA is an extremely complex investment destination that needs a collaborative approach if new investment is to not only deliver a commercial return but also, crucially, tackle and alleviate inequality, unemployment and the liquidity crisis. Given that SA is a developing country, the priority should be on the creation of new wealth to reduce inequality and unemployment to boost liquidity.
SA’s liquidity crisis is driven by the fact that about 94% of the nation’s wealth is controlled by just 10 companies. Whether debt or equity, these companies primarily invest in the JSE’s Top 40. This makes sense to them as for the most part they have common stakeholders. To put this statement differently, everyone else who is not part of the JSE’s Top 40 “club” is left to fight for the 6% funding scraps.
SA introduced broad-based black economic empowerment (BBBEE) legislation as a mechanism to facilitate the easier movement of funding and opportunities to advance economic transformation and participation in the economy. Although the legislation has the best of intentions, the reality is that BEE transactions destroy shareholder value for companies and, in their current guise, are not sustainable over the long term.
There are two inherent flaws in BEE transactions: firstly, the challenge of securing funding without an existing balance sheet and track record, creating a self-defeating cycle for raising new capital to create new wealth and a tendency to fail over time. A second issue relates to the accounting recognition of BEE equity participation in transactions.
From a company accounting perspective, BEE participation is recognised as an asset, but in most transactions this is incorrect. Companies’ partner with empowerment parties to gain access to their networks, which are expected to facilitate future commercial value. However, to call this an asset companies must be able to control their partners to ensure future economic benefit is guaranteed. Given that companies cannot control people and cannot guarantee future economic benefit, this participation cannot be recognised as an asset and consequently rather meets the definition of an expense.
To correct these inherent flaws in BEE transactions companies would be better advised to partner with community structures such as trusts, communal property associations or tribal authorities, which, in turn bring access to and control of community resources. Commensurate equity is given to the community in return for the control and utilisation of their asset. The company can control and operate the resource, making the BEE partnership accretive to shareholder value creation, which results in tangible future economic benefit for all stakeholders.
In this scenario the communities pay for their equity participation by providing access to and relinquishing control of their resources. These further derisks the investment as investors can acquire assets through commensurate dilution, which avoids the funding of dead capital that results in funding being primarily used for working capital purposes. The challenge still reverts to the rules of funding as inevitably the community does not have recognised bankable balance sheet and a track record of its utilisation thereof, to raise new funding.
Mantengu Mining was born out of a desire to, among other things, prove that the traditional rules of funding can be circumvented to create new wealth by opening new entry points to finance. We strategically decided to create a new bottom-up project, which would need to be carefully structured and focused to meet all legislative, socioeconomic and society sensitive non-negotiables. This would give us the most flexibility when structuring the finance without any balance sheet or track record.
In terms of practical implementation, we developed a renewable energy project that was baseload-power and people-centric, underpinned by the best of breed operate and financial skill and experience. When progress in this project started to slow down we decided to buy our own chrome and PGM mine, Langpan, to prove that the financing and renewable energy model would work. We began the arduous process of installing the technical, financial, and corporate governance controls required to underpin the necessary funding requirements.
It was then that we had first-hand experience of SA’s liquidity issue. It was evident that regardless of our effective structuring we would not find the requisite capital given the unavailability of funding domestically, and in consequence we embarked on a series of international capital raising roadshows. It became clear that while there was appetite to invest in SA, there was a clear gap between first-world investment principles and third-world deployment.
Given the complexities of foreign investment into SA, debt investors demand collateral for funding, especially as SA faced increasing political and economic uncertainty. Traditional security models were deemed outdated, and the country's risk rating as “junk" further complicated matters. To overcome these challenges we needed to find a bridge to gain access to these pools of cash. The company successfully negotiated with underwriters and guarantors to provide guarantees underpinning the company’s performance. This effort resulted in the creation of a demand production guarantee, termed the special performance guarantee. This was designed to be backed by production metrics, ensuring that foreign investors had collateral without the need for them to physically reclaim assets in potentially unstable environments.
Finally, enter Mantengu. Though the JSE has become a less viable platform for raising direct capital, being listed requires adherence to the highest levels of governance. Given that the investment gap centres on the concern of the efficacy of deployment of funds, a listing strategy was presented to our foreign funding partners, which confirmed that the stringent listing requirements would go a long way to providing them with sufficient comfort for a positive investment decision. The JSE-listing process was completed in August 2022 and trading commenced in March 2023. To date Langpan, which started life as a shelf company, has raised about R200m and Mantengu, Langpan’s 100% shareholder, recently secured a R500m equity facility from an offshore lender.
We believe this is a funding model that can be replicated to correct the current deficiencies in how BEE is implemented. Mantengu is at the start of its journey to add value to rural and SME SA. As an investment platform that allows smaller companies to truly participate in the economy on an accretive basis, we have strategically decided to focus on the mining, mining services and energy sectors to be a catalyst for new wealth creation.
Our funding model is proof that listed companies can equitably add value to rural communities and no-one can say it cannot be done. The question to our industry peers across all sectors is: how will you participate?
• Miller is group CEO of Mantengu Mining.
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