Alexkor on its Annual Report 2012/13

Meeting report

Alexkor Briefing
Mr Rafique Bagus, Chairperson of the Alexkor Board, said many of the positions that had been in an acting capacity had now been filled. Alexkor had been fortunate to get the services of Mr Percy Khoza, who came with a wealth of mining experience having been at Transhex Diamonds in the Richtersveld, at AngloGold and at Optimum Coal Colliery which had recently been sold to Glencore. The executive team now totaled 100 years of experience and what they had done to date was phenomenal. Alexkor which had suffered losses and decreases in employment for 11 consecutive years had almost doubled production from 30 000 carats to more than 55 000 and were anticipating 70 000 carats for the full year and was anticipating even further increases in the years to come. Employment numbers which had dropped from 2 000 to 88, had now risen to 231 and was expected to grow to 400 by the next meeting of the annual report. The Board commended Mr Khosa and his team.

Mr Percy Khoza, Chief Executive Officer, said that the Chief Financial Officer, Mr Mxolisi Dludla, had been with the Industrial Development Corporation involved in the mining data field and mining company Rio Tinto. He said Ms Zarina Kellerman, the Chief Legal Officer, had experience in the mining and mining infrastructure issues and Ms Buhle Makwetla, Human Resources (HR) General Manager, had worked for Continental Coal as head of HR while Ms Tsu Mhlanga was the Group Finance Manager.

Ms Kellerman said the new team believed it had made inroads in attaining its predetermined objectives, With the appointment of a new Board, the Minister had given the new Board an opportunity to review the predetermined objectives and only two out of the revised list of 30 objectives had not been achieved, a 93% success rate. These were in ‘lost time injuries’ and in an ‘skills development’, however since then these issues had been addressed.

The year had started with a board of five members and an acting CEO. The Board had been rotated and the new Board comprised 10 directors of which eight were non executive. The Board had four sub committees on audit, social ethics and human resources, rehabilitation and tenders. The Pool Sharing Joint Venture (PSJV) included three non executive board members of Alexkor. This joint venture arose out of a court settlement with the Richtersveld community which allowed for the pooling of the community and Alexkor’s mining rights into a joint venture managed by the Board.

Mr Khoza said that the previous year had seen a slight decrease in production while this year there would be an increase of over 50% in production underpinned by a solid, planned, R50m exploration which had finished in December 2013 which showed that there were significant findings on land which would be bankable. There had also been an increase from 8 to 22 sea days of beach mining.

Ms Makwetla said the staff complement was 873, up from 775 the previous year, 84.4% of which were unionised and they were looking at a staff figure of 1 000 by the end of 2014. 83% of the people employed were Historically Disadvantaged South Africans. In 2013/14 R2.2m had been budgeted for the social and labour plan and R2.4m for 2014/15.

Ms Mhlanga then covered the PSJV results and said that as at 31 March 2013, the company had revenue of R184m from the PSJV. This was influenced by lower carats that were being found. Sea days of mining had increased but was still low. The challenges the company faced were contract mining management and the lack of exploration on land.

The company had yielded a small net profit of R4.7m from the PSJV. There was R109.5m cash sitting in the Rehabilitation Trust, a pension fund surplus of R16.3m and the retirement benefit obligation had been settled. The company had a share capital of R400m. It received revenue of R93.9m, which was its 51% share of the PSJV. There was a R10.7m provision for Rehabilitation Liability. It incurred an operating loss of R20.7m and income of R61m and profit of R29.7m.

Mr Dludla said that an external auditor for the PSJV had been appointed and a fraud hotline established.
A few control issues around Human Resources and Information Technology had been identified. These issues were resolved because the company now had a full executive team. The company had received an unqualified audit report for its audited financial statements but two matters of emphasis were raised in the audit report.

There was fruitless and wasteful expenditure arising from the deed of settlement. Alexkor had employed two auditors to be sure that they complied with the deed of settlement, that the deed was interpreted correctly and that the interpretation of the accounting standards were aligned with the PFMA with regard to VAT and VAT penalties to the SA Revenue Services.

The second matter was regarding procurement of contracts. Alexkor was the owner of mining rights but the deed of contract meant that all beach mining had to occur through the PSJV. The matter has been resolved and as contracts came up for renewal later in year, they would be corrected. A related matter was that of the absence of tax clearance certificates of the contractors. All contractors were given an opportunity to provide the tax clearance certificate.

Government had funded an obligation of R556m of which R139m were for operational expenses. The rest of the money was spent on projects. A township had been established and four phases has been completed, that of road infrastructure, water reticulation and sewage, electrification and recreational projects like parks.

There was no significant change in litigation matters which Nabera and Ruslyn mines had instituted in 1999 and 2002. The Nabera case was dormant since 2005 and Ruslyn case was expected to go to court later in the year. A third matter was a company instituting a claim against the government for the restitution of assets because in the PSJV, Alexkor had to transfer its assets into the PSJV. A land claim was instituted which went to mediation and settlement. The amount was for R200.2m.

Discussion
Ms N Michaels (DA) asked which VAT penalties had to be paid. Were the new people being employed ex –workers? How sure was Alexkor that the caratage yield would be increasing in future?

Dr G Koornhof (ANC) asked what the current foreign exchange rate were that they were budgeting on and what was the current diamond price that they were budgeting on. He said the land management was disappointing because the southern portion of the mine was closed. Why was this and was this resolved?
Give an update on the land rehabilitation matter. He asked the official from the Auditor General’s (AG) office whether the AG was satisfied that Alexkor was a going concern.

Mr A Mokoena (ANC) said previous the previous CEO was not based in Alexander Bay. Was the current CEO still commuting. Regarding the low number of sea days of mining, he asked what precluded Alexkor from doing land mining. Was it limited to marine mining only, yet it has 51% of the PSJV. Regarding the matter of two auditing firms, he said the AG’s opinion should take precedence.

Ms G Borman (ANC) asked about the housing developments in the area and whether the ownership of house title deeds had been handed over. If it was rental stock houses, then who owned the houses. Under the social plan and the provision of sewage, she asked if there were still the bucket system to remove sewage in operation. Regarding the pension post retirement fund defined benefit members, she asked how these beneficiaries benefited from moving to the pension scheme.

Where was funding going to come from to start the new opportunities? Were they going to approach the fiscus for more funds?

Mr Bagus said that there had been VAT challenges because the PSJV was not governed by the PFMA. The company had taken actions to ensure that it did not occur again. Management had no control over the PSJV and this was a dilemma for management.

He said all employment was drawn from the community and if skills were not present, the company trained people in the skill.

Mr Khoza said the optimism for an increase of carats mined was because of the land exploration of Muisvlak which indicated that they could mine 40 000 carats.

The 52 beach contractors’ sea days performance should increase. Currently when they were successful they went to Kimberley. If sea days production was not increased to more than 50% of possible days, the then contracts would be terminated. They were in the process of introducing new beach mining methods called channel mining at a concession 30 km from the coast and at a depth of 300m. A contract had been entered into with the only company that could do such mining. The company would start in June with breakeven at 10 000 carats and this was achievable.

The budgeted exchange rate was R8.50 and the diamond price was R658

Mr Bagus said that their diamond mining was the mining of a depleting resource therefore the better exchange rate advantage was offset by the decreasing size of stones.

Mr Khoza said the previous management had mined themselves into a corner mining the alluvial deposits. They never did exploration of the land mass. Now at Muisvlak, they had done proper, planned, geographic studies and aero mapping showing that the area had potential.

All backlogs for rehabilitation were fully funded. And Alexkor would have a five year rehabilitation plan. The state had made an allocation and the successful tenderer was very experienced in this type of work.

Mr Bagus said that both the auditors and the AG said that Alexkor was a going concern.

He said that in terms of the deed of settlement, Alexkor had no authority at the mine and this was a problem. The Shareholder and the Department of Land and Rural Development needed to relook at the deed of settlement to have it corrected because at the moment the company was contravening some laws.

Mr Mokoena said people would always be stealing if people were not present at the mining site.

Mr Bagus said the deed of settlement gave them 51% of the PSJV, but they could only be at the mine by invitation, not by design. Alexkor was a holding company and could only rely on management.

Ms Kellerman said they were transferring the properties to the community structure, the Community Property Association (CPA). The deed of sale was an intricate document and they were working with the community so that companies and trusts were correctly structured. They were empowering the CPA on co membership and trusteeship. Alexkor was careful that the CPA should not go into liquidation within a couple of years.

On 22/11/13 a new town, Alexander Bay town, was established. At the moment Alexkor owned the houses and had rental agreements with occupiers but some occupiers felt that it was a mining town and housing was free and so did not pay rentals. The houses were in the process of being transferred.

Mr Bagus said they had changed auditors. The previous auditors was of the view that the PSJV was not compelled to comply with the PFMA and that this mitigated Alexkor’s risk but the new auditors did not believe this to be the case. They had met with the AG and the auditors to resolve the matter. It had resolved that it was not necessary to comply although the good working relationship Alexkor had with the PSJV had ensured that there was some form of compliance. Even though Alexkor had the mining and land rights, the PSJV management team ran its operations completely. Alexkor was looking at other opportunities in mining as currently all operations were within the PSJV.

There was R200m in unpaid housing rent. People claimed that they had not paid for 60 years and would not pay now. It would hand over the town and the houses and Alexkor would then lease it back for R45m for a 10 year period.

There was no bucket system in Alexander Bay Town.

Mr Dludlu said that there was a post retirement fund surplus of R16m for employees.

Mr Bagus said the board was not going to the fiscus for funds to drive new opportunities.

Mr Khoza said Alexkor would focus on land exploration. The results to date had been phenomenal and Alexkor was focused on using it as an indicated resource and would then be able to approach bankers.

Mr Bagus said it needed assistance to get the R202m for the transfer of assets to the PSJV. The PFMA allowed the company to be reimbursed.

Mr Khoza said the operational loss was because of the poor performance of the land operations where the previous management had made assumptions rather than a planned exploration program.

Dr Koornhof said that Alexkor had to be put on the Committee’s list of oversight visits. He was concerned over the deed of settlement where the company had no control. Was the deed being reviewed and were there discussions to improve the deed of sale.

Mr Mokoena said the court injunction was a perverse nationalisation where the empowerment of the Richtersveld was at the expense of state control. One could not have the state being disempowered as it would make a mockery of empowerment. The court decision had to be overturned, if needs be it had to be taken to the Constitutional Court. The court’s decision contravened the Alexkor Act. Alexkor had 51% but no control. This would lead to the looting of the asset. Either the Alexkor Act had to be amended or the courts decision had to be overturned.

Mr Kgathatso Tlhakudi, Deputy Director General: Manufacturing (Defence, Mining and Forestry), Department of Public Enterprises, said the Department was concerned over the deed of settlement and they were in talks to review it. It would be a long process and it would be engaging with communities who also had issues with the DLRD over the deed.

He said the Department would start the process for getting the R202m in the next MTEF funding round. He said Alexkor was important because they were choosing other opportunities in the field of securing South Africa’s energy security.

The Chairperson said the deed of settlement would feature prominently in the legacy report.

The meeting was adjourned.