Alexkor SOC Ltd: 2019/20 annual report; briefing by National Union of Mineworkers; with Deputy Minister

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Public Enterprises

26 May 2021
Chairperson: Mr K Magaxa (ANC)
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Meeting Summary

Video: Portfolio Committee on Justice and Correctional Services, 26 May 2021 

Officials from Alexkor briefed the Committee by on the Alexkor SOC Limited annual report for 2019/20. The National Union of Mineworkers and the Department of Public Enterprises were also represented in the meeting.

Members were informed that due to poor governance and concerns with financial sustainability, the Minister of Public Enterprises decided, on 3 September 2019, to dissolve the Alexkor Board. He subsequently appointed an administrator who acted for a six month period. Officials from Alexkor reported on the difficult financial situation. Alexkor reported a financial loss of R109 million in 2019/20 financial year, although this was an improvement from the previous year’s loss of R149.6 million. Alexkor received a disclaimer audit opinion and the auditors also reported a material irregularity.

Whilst Members were not pleased with the overall performance of the entity, they did take note that there had been some progress within Alexkor. Members said that with the appointment of a new Board and the support of the Department, Alexkor would manage a turnaround and would become a viable business.

The National Union of Mineworkers highlighted its concern about the retrenchment of the more than 200 workers at Alexkor and problems with the Pooling and Sharing Joint Venture as this has left many of the families in the community destitute.

Members asked the Department to provide timeframes on the appointment of the Board, the Chief Financial Officer, the audit committee, and the risk committee – as well as its intervention in Alexkor. Why were the contractors for the deep sea mining unable to produce? Had Alexkor opened cases against former employees accused of corruption and theft?

Members asked what steps had been taken to address the relations between the labour unions and management at Alexkor, which had deteriorated. The Committee recommended that a mediation session between management at Alexkor and the workers should be organised, to resolve the poor working relationship between them. Members requested that in the next sitting, Alexkor should inform the Committee on their progress regarding this proposal.

Meeting report

The Chairperson said that the Committee would be briefed on Alexkor’s 2019/20 annual report. In addition, it would be briefed by organised labour groups on their concerns regarding governance at the entity.

The Deputy Minister (DM) of Public Enterprises, Mr Phumulo Masualle, indicated that the Select Committee was at that time also sitting with a delegation from the Department of Public Enterprises (DPE), which included the Director-General and the Minister; as such, the Minister could not attend the Portfolio Committee meeting.

Alexkor Integrated Report 2019/20

The Chief Executive Officer (CEO) of Alexkor, Mr Lemogang Pitsoe, briefed the Committee on Alexkor’s integrated report for the 2019/20 financial year. [See the presentation slides for the full content.] On 3 September 2019, the Minister decided to dissolve the Alexkor Board and subsequently appointed an administrator, Mr Lloyd McPatie. The intention was to restore governance, bring financial sustainability in the longer term and to contribute towards the region’s socio-economic conditions.

Performance

Revenue declined by 19% to R170 million, from R209 million in the previous year. This was largely due to the significant decline in carat production by International Mining and Dredging SA Pty Ltd, (IMDSA) – the deep sea mining contractor - and the subsequent decline in carat sales. The cost of sales also saw a decline as a result of this, with sales dropping from R161.6 million in 2019 to R104.5 million during 2020.

Alexkor saw a decrease in employee costs, from R65 million in 2019, to R61 million. This was largely due to the retrenchment of 150 staff at the end of June 2019.

Alexkor reported a financial loss of R109 million in 2019/20 financial year, which was an improvement from the previous year’s loss of R149.6 million. One of the driving factors of this was the significant decrease in operating expenses.

Alexkor received a disclaimer Audit Opinion and the auditors also noted a reportable [material] irregularity. A plan was being implemented to correct issues raised by external auditors

Recommendations

During his tenure, the administrator found that Alexkor’s organisational structure was not fit for purpose. He also found that the entity faced challenges with its working capital management. After completing his assessment, he provided recommendations on how to turnaround the situation at the entity, such as:

  • A new corporatized and recapitalised entity to own and manage the Alexander Bay mine
  • A staggered plant operation, which would assist with optimising operations, allowing them to hibernate during the difficult mining months of June and July
  • Alexkor should seek out partners with technical and commercial capabilities that can sustain the entity
  • Restructuring to establish a finance, marketing of diamonds, sale of diamonds and legal and enterprise-wide risk management hub.

Presentation by NUM regarding its concerns regarding Alexkor

The National Union of Mineworkers (NUM) Western Cape Regional Secretary, Mr Soso Fisa, indicated that NUM hoped that through its presentation that it would gain support from the Committee.

Having successfully won the claim for land and mineral rights, the Richtersveld community was ruled by the court to operate the mine within a shared equity with Alexkor. A deed of settlement was agreed between the government, Alexkor and the community. It stated that there should be a pooling of services in a joint venture (JV) for the land restoration and exploration rights. It further stated that the suspensive conditions were for the benefit of both parties and can only be waived by a written agreement between them. The Pooling and Sharing Joint Venture (PSJV) was to operate independently, without interference from Alexkor, and in line with National Treasury regulations.

There has been a significant level of instability at Alexkor, noticeably after the dissolution of the Board. To correct this instability, the Department appointed an administrator, who would serve as a caretaker until a new Board was appointed. An interim Board was appointed, with the CEO acting as the interim Chairperson. However, the Board is still incompetent and the governance structures in the agency are still compromised.

The Richtersveld community is completely dependent on the mining within the area. With the major retrenchments that have occurred in all the mining companies in area, including at Alexkor, many families have been left destitute. In May 2019, 193 workers were issued Section 189 notices of retrenchment by the PSJV. Alexkor then issued its own Section 189 notices of retrenchment to 45 workers on 30 May 2019. According to the deed of settlement, the Alexkor CEO could not enact retrenchments on behalf of the PSJV. Furthermore, as the PSJV board did not quorate, all of its decisions were null and void. A declaratory order was launched in the labour court, in defence of employment agreements as they are still in force and effect. Not only did the retrenchments contribute to unemployment in the country, but they also undermined the transformational goals of the land claim that was won by the community.

There had been a lack of monitoring and support provided by the Department to Alexkor. Furthermore, Parliament has failed to conduct its oversight duties over Alexkor, and it has not held either the Minister or the Board to account.

The relationship between the workers, the community and Alexkor had deteriorated, and the Union has done all that it can to assist workers. It requires the assistance of the Committee.

He requested that the Committee assist the agency in ensuring that individuals responsible for maladministration be charged.  

The Chairperson opened the floor for discussion.

Discussion

Mr N Dlamini (ANC) said that it appeared that Alexkor had not kept its social partners informed on the developments at the mine. There has to be greater management of the relationship between the executive at the mine and the workers. He asked whether the mine had managed to reskill former employees, as is usually done when they are served notices of retrenchment. The Committee’s intervention should ensure that there is a turnaround at the mine.  

Mr G Cachalia (DA) said that the report presented was damning, and it showed how the mine was being run like a spaza shop. The annual report glossed over the gross mismanagement and the dereliction of duty found at the entity. This is in contrast to the CEO’s statements that the entity is on the path to financial sustainability and recovery. He asked what the Department planned to do in the face of this untenable situation. A competent operational company that engages contractors to deliver on objectives that benefit the community and state – via royalties and taxes – should be appointed. Furthermore, all the issues highlighted by the independent auditors should be attended to.

Ms O Maotwe (EFF) said that the document presented did not inform the Committee on what was being done to improve the situation. There seemed to be no improvement in the entity. She asked why it had taken this long to appoint a new Board. It was mentioned in the presentation that there is no audit committee in the entity, which made it impossible for actual governance to take place. It was said that Alexkor has been awarded a licence for the sales and marketing of finished products. Negotiations between Alexkor and the Department are said to be taking place and she asked what the discussions entailed. Alexkor should consider utilising a government building for its sales and marketing division, instead of renting office space. The report indicated several challenges faced by Alexkor, such as, weakness in financial controls and the non-compliance with the laws and regulations. What methods had been put in place to correct these issues? She asked about the process in appointing the Chief Financial Officer (CFO) and what the Department thought about the position still being vacant?

Mr S Gumede (ANC) said that he was concerned that Members were quick to criticise the entity instead of providing solutions. Eight non-executive directors (four from the PSJV and four from Alexkor) were appointed to form an interim Board, and this Board was presided over by the CEO. It was a well-informed decision to appoint the CEO as the interim chairperson of the Board. However, as the Board was not quorate, none of the decisions taken by it are legitimate. In the presentation it was reported that there was stability at the entity after the retrenchments, which signalled a contestation between the interests of workers and management at the entity. Records showed that the Community Property Association (CPA) was not functioning, and this served as one of the reasons for the intervention made by the Minister at Alexkor. He requested that the Department provide timeframes on the appointment of the Board, the audit committee, and the risk committee – as well as its intervention in Alexkor. The restructuring of the entity should be finalised, to bring about stability. There should be a finalisation of licenses and permits. In addition, Alexkor should capitalise on the diamond beneficiation and diamond dealer licenses that are currently operational. It was surprising that no irregular expenditure or borrowing costs were recorded in the report. He asked what the state of mining at Richtersveld was.

Ms M Clark (DA) said that the report presented was devastating and if the current malaise at Alexkor was allowed to continue, it would end up in the same position that Denel is currently in. She asked why IMDSA was unable to produce. Had the agency added individuals from the community as shareholders, as ruled by the court? Who were the administrators and what was the cost of their work to Alexkor? Why had the PSJV not conformed to the Public Finance Management Act (PFMA) and why had Alexkor not ensured that it did conform to the PFMA? When did Alexkor anticipate that the PSJV would conform to the PFMA? How many suppliers had not been paid within the 30-day period? For those that have not been paid within that period, what was the cause of delay? What remedial plans have been put in place and what would be the outcome once they have been put in place? What plans had the entity put in place to ensure it is restructured, so as to make it a viable going concern? How many fraud and corruption cases have been opened by the agency against former or current employees? What is the status of the cases and what did each case amount to?  

Ms J Tshabalala (ANC) said the Committee should consider whether Alexkor was a viable business that could be saved: in her perspective it is. She asked what the agency expected to pay for the relocation of the market sale office to Kimberley. Was there was a budget in place for this and when would the current lease in Johannesburg lapse? Was Alexkor still spending R160 000 on the rental of the office in Johannesburg? The Committee should assist the Department in providing solutions for the issues faced by the entity. She asked whether there was a process to appoint internal auditors, so that there is greater oversight. What was being done to correct the issues of poor internal controls, cashflow management systems and financial statements? In addition what plans were in place to ensure that auditing firms conduct audits as required by the PFMA? When would the business model be ready to be implemented? Its implementation would be the first step in the restructuring of the entity. Did the restructuring plans include information on the beneficiation for both the community and black people? Had the court matter between the previous CFO and the entity been resolved? Had the entity gotten value for money on the work performed by the Administrator? Had an interim solution on how to deal with illegal mining been implemented? What was the progress of the application for the exemption to allow for artisanal mining? Had the agency opened cases against former employees accused of corruption and theft? How far was Alexkor in reducing its historical environmental rehabilitation [liabilities], which had amounted to R54 million. Had the PSJV, at any point, managed to either pay returns on investment timeously or submit VAT? If it had been audited during the 2019/20 financial year, the PSJV would have reported an audited net profit of R23.4 million and a R190 million loss. She asked whether it has been able to pay its creditors in full and has it been able to pay within the 30-day timeframe?

Ms Tshabalala said that during the current CEO’s tenure, the entity has managed to reduce its debt from R105 million to R55 million and it has recorded an audited net profit. With this improvement, the Committee should appreciate the work done by the CEO. He has been able to keep the entity afloat during a crisis and he should not be blamed for the actions of the previous administration. Given the right processes and restructuring plans, the entity will achieve a turnaround. She said she appreciated the input provided by NUM and mentioned that it would be included in the Committee’s final report on the matter.

The Chairperson said that Members had a responsibility to conduct their oversight work. In addition, Members should not be surprised by the information provided in the report, as some of the matters, such as the qualified audit outcomes, emanated from 2017. Members should accept the reality that there is instability within the Board. A mediation session between management at Alexkor and the workers should be organised, to resolve the poor working relationship between them. During this session, the labour unions should be updated on the developments in Alexkor. This would be in line with the Labour Charter which states that there must recognition of labour, which is important, particularly in a state-owned entity. He requested that in the next sitting, Alexkor inform the Committee on their progress on this proposal. The Committee should call for the fast-tracking of the restructuring process at the entity.

DM Masualle proposed that the Committee compile a final report which would include its oversight visits in Richtersveld and all of the interactions between labour and Alexkor. Once adopted, this report should contain the Committee’s findings and recommendations on the matter. Such a report would satisfy all stakeholders, and it would also strengthen oversight and accountability.

It was true that the mining rights in Richtersveld were restored to the community; however, the marine rights belong to Alexkor and not the community.

Whilst the Department recognised that the Board should have been appointed already, it noted that the process of appointing the Board is nearly complete.

With the work of the administrator coming to an end, the Department has deliberated on what steps it should take to bring about a turnaround at Alexkor. Due to the constricted fiscal situation, the Department decided to engage the Department of Mineral Resources on consolidating the various mineral rights into one right, through cross subsidisation. These discussions are ongoing between the Ministers.

Mr Pitsoe mentioned that the retrenchments referred to by NUM occurred prior to his appointment as CEO. Workers were retrenched without prior consultation with the unions, and they were not offered severance packages. These actions affected the relationship between the entity and labour. To correct these issues, Alexkor has since paid former workers who were retrenched in 2018 and 2019 and it has also paid their medical aid bills. All the money that has been recovered by the entity has been utilised to pay the salaries of workers who were no longer working at the entity. Since his appointment, Alexkor has never missed a month of paying salaries to its workers and it has consulted unions on week-by-week basis on the developments at the agency. As a result, the relationship between the agency and the unions has improved.  

Referring to the question on the lease agreement in the Johannesburg offices, he said that government has finalised a lease agreement with the agency for the rental of office space in Kimberley for a rental of R1 000 per month. This was a much lower amount than what it was currently paying for the rental of the Johannesburg office, which stood at R160 000 a month. Alexkor is currently in discussions with the company that it currently shares storage space with (for which it pays R3 000 per month) to share office space in Johannesburg. The lease at the current office in Johannesburg will end on August 31, 2021.

On the question of maintaining production, he said that the geology on the marine side is favourable and the agency is looking to explore and mine for the next 10-20 years, from the shallow to deep ends. Historically, they have failed to dig deeper (and explore) further than 5 metres on land. A meeting with the local police has been organised to formalise the process of utilising small-scale miners, also known as zama zamas, to mine in the area. These miners would be empowered through offtake agreements and other forms of security.

On Alexkor’s financial management, he indicated that the agency has managed to tighten up its finances and it has been able to settle most of its debts, with debt having been reduced from R150 million to R40 million. Presently, the agency cannot take up loans or dividends as the Bill of Settlements states that it must first pay the government the initial cost of capital (R200 million) it received. So far it has paid R19 million to government, leaving it with an outstanding amount of R181 million.

Alexkor is currently paying the electricity and water bill for the mine and the surrounding communities, such as Port Nolloth. In the last week, the Richtersveld Local Municipality, Eskom, and the National Energy Regulator of South Africa (NERSA) have accelerated the process of taking over the payment of electricity for the community. By the look of things, Alexkor will soon only pay for electricity and water at the mine, which will assist in the reduction of costs.

He confirmed that the CPA has been irregular, and it has not been able to pay for the land mining guarantees.

All the cases against former employees accused of corruption and theft have since been taken to the Hawks and they are currently awaiting word from them on the progress.

On illegal mining, he said that since December, the agency has increased security in key areas. This has assisted the agency, and seven workers have since been fired for wrongdoing at the diamond mine. A small-scale entrepreneur in the community runs the security agency that provides the security to Alexkor.

The annual report was not submitted on time because this was the first time that the PSJV was audited under the PFMA. He expressed hope that the audit results would be better this financial year.

Mr Dlamini said he was pleased that the process of appointing a Board is being finalised. He asked if the Department could provide a timeframe as to when this process is projected to be complete.  

Mr Fisa thanked the Committee for the opportunity it provided NUM to present its concerns. He expressed hope that this would begin the process of change within Alexkor and that workers and the community are considered priorities.

The Chairperson thanked NUM for their presentation and assured them that the Committee would do its part to assist it.

Mr Cachalia said that it was unfortunate that the evidence from either the Gobodo report or the Zondo Commission was not referred to by the officials. He asked why the officials had not acknowledged that the PSJV has attempted to defend the contract with the Scarlet Sky Investments (SSI). Why had the Administrator been paid R17 million as remuneration when he had only delivered 40% of the deliverables? He said that once the PSJV is brought in line with the PFMA, more issues will be brought to light.

Ms Tshabalala asked how the agency planned to improve on its recovery, particularly with the country heading into winter. In addition did it have a plan to maintain production during the third wave of the pandemic? Some of the remarks made by Members were unfortunate and did not focus on the matter at hand.

Mr Gumede agreed with the DM’s recommendation for the Committee to compile a full report. The challenges facing the entity can be corrected, through collective efforts by all relevant stakeholders. He requested that timeframes be provided.

DM Masualle said that the Department’s decision to cancel the contract with the SSI formed part of its interventions, in line with the Gobodo report, at Alexkor. The cancellation of the contract has allowed for Alexkor to sell diamonds directly. Furthermore, through its intervention, the Department has removed many of the poor-performing and tainted executive members. It was untrue that the administrator had been paid R17 million. He was appointed for six months and remunerated R800 000 for his services.

The CEO said that he was not at liberty to get into the details of the criminal cases.

The Chairperson thanked officials from the Department and Alexkor for their input.

He pleaded with officials from Alexkor to continually update the labour unions on developments at the entity and to resolve all outstanding issues.

The input provided by labour will assist the Committee to improve the quality of leadership at Alexkor and improve the relationship between workers and executive.

Mr Cachalia indicated that a Parliamentary Monitoring Group (PMG) summary mentioned that the administrator was paid R17 million for his services. [EDITOR’S NOTE: This refers to the PMG report on the PC Meeting of 27 May 2020. The PMG summary stated: “Members asked to be provided with … a clear report on the duties of the Administrator, what he was able to execute and how the R17 million is accounted for.” https://pmg.org.za/committee-meeting/30317/]

The Chairperson pleaded that Members should refrain from interrupting the proceedings of the Committee.

The meeting was adjourned.

 

 

 

 

 

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