Alexkor 2018/19 Annual Report & Administrator progress report

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Public Enterprises

27 November 2019
Chairperson: Mr K Magaxa (ANC)
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Meeting Summary

Annual Reports 2018/2019

Alexkor had received a disclaimer opinion for 2018/19 due to reckless trading and going concern challenges. The Pooling and Sharing Joint Venture (PSJV) is technically insolvent. Its liabilities are more than its assets. Alexkor is experiencing short and long-term liquidity challenges. They have cash flow which will last until the end of March 2020. In September 2019, an administrator was put in place and he  and the Alexkor CEO and CFO provided the 2018/19 Annual Report.

Members noted that it appeared government was unable to bail out the state owned company so there are three options: sell Alexkor, close it down or put it into business rescue. They asked for Alexkor management’s view on this. Some Members believed that state owned company must be saved. The Committee would meet on Alexkor  again in the new year.

The Department of Public Enterprises representative said that when it realised that the Alexkor board was not doing its job, legal advice was given to the Minister to remove the board. Once the administrator was put in place, the board fell away. The reason the administrator was appointed was to look at all the challenges and provide possible solutions for the viability of the state owned company.

Meeting report

Mr Lloyd McPatie, the administrator for Alexkor, stated that the auditor gave a disclaimer opinion. This was due to reckless trading and the going concern issue. For 2018/19 there was no irregular expenditure. The PSJV (Pooling and Sharing Joint Venture), which is the entity that does the mining, is technically insolvent. Its liabilities are more than its assets. Alexkor is also experiencing short and long-term liquidity challenges. At the moment they have cash flow which will last until the end of March 2020. The governance and compliance challenges stem from the fact that the PSJV does not comply with the PMFA and currently both entities are trading without an audit committee. The outstanding Deed of Settlement for the transfer of the properties they are hoping will happen by 1 July 2020. The loss for the year was R149 million and this was due to the impairment of a R200 million loan with the PSJV. The joint venture is between Alexkor and the Richtersveld Mining Community (RMC). Alexkor owns 51% and Richtersveld owns 49%. It is an unincorporated joint venture that is governed by the deed of settlement and unanimous resolution. It is managed by an executive team comprising of eight individuals led by the CEO. At the moment, however, this is not the case as many of the individuals in the executive team have resigned. This is due to the financial challenges at the PSJV. The executive team oversight is provided by the PSJV, which at the moment consists of the administrator and three independent board members.

Mr Lemogang Pitsoe, CEO of Alexkor, presented the business model and strategy. The core business of Alexkor is the mining of diamonds on land, along rivers, on beaches and in the sea along the north west coast of South Africa. Alexkor applies extensive mining expertise and innovation to maximise value creation at its existing mining operations and to explore new mining opportunities. Alexkor focuses on unlocking shareholder value while delivering sustainable socio-economic upliftment for the Richtersveld community. It only shares in profits or losses that may arise in the joint venture operations but has no outright control of the joint venture. Alexkor and the PSJV are two separate entities but operate interdependently. The main business of the PSJV is the economic exploitation of diamonds from the pooled marine and land mining rights in the Alexander Bay area. The current mining operations comprise low-scale land operations and shallow and deep-water marine mining that are performed by mining contractors and appointed by the PSJV. During November 2018, a company strategy session was conducted. The primary outcomes identified were to increase carat production both land and marine, explore an alternative diamond marketing strategy and diamond beneficiation as a business unit.

Ms Adila Chowan, the CFO of Alexkor, said that 2018/19 has been the most challenging for PSJV operations, with the year ending with retrenchment consultations with affected employees. The revenue increased marginally from R409 million to R412 million. The loss for the year amounted to R64 million. Carat production increased significantly from 41 941 to 67 724. R26 million was spent on land exploration and R4 million on CSI, Social and Labour Plan (SLP) and education. The Alexkor Corporate Office had no irregular expenditure. Phase 1A of the Legacy rehabilitation, being the demolition of old buildings, was successfully completed. The litigation matter with Nabera mining was resolved. Ms H Matseke resigned as a chairperson of the Board during October 2018 and Mr T Matona was then appointed as the chairperson. The year ended with Alexkor not being a going concern.

Ms Chowan reported on Alexkor performance indicators. Alexkor head office has only one investment and hence the sustainability of Alexkor depends on the performance of the PSJV. Alexkor achieved 65% operational cash buffer of R39 million against a target of R60 million. Rental income was 70% of the target. The establishment of Alexcoal was declined by the Department and the feasibility study on diamond beneficiation was put on hold. Phase 1A of the Rehab project (demolition of old buildings) was successfully completed before year end. Black Owned and Black Women Owned procurement targets were achieved. PSJV performance indicators were negatively impacted by financial constraints. There was a total production of 48 127 carats against a target of 57 000 (this excludes deep marine concessions). The target EBITDA margin was not achieved. Exploration was suspended due to financial constraints. There were no fatalities. The targets for artisan and technical trainees were achieved. The training and CSI spend was curbed due to limited financial resources. Procurement targets were negatively impacted by cost-saving initiatives and cash constraints.

The annual financial statements for both Alexkor SOC and PSJV have been prepared on a going concern basis. The auditors issued a disclaimer of opinion based on the going concern uncertainty and reckless trading of Alexkor and PSJV. The following were highlighted in the audit report: Alexkor did not receive a response from the Shareholder on correspondence informing the Minister and seeking approval to file for business rescue due to company’s financial distress as required by s129(7) of the Companies Act. This has been reported as a reportable irregularity to the IRBA. The loan to the PSJV amounting to R189 million was impaired as the loan was assessed as irrecoverable. The presentation of comparative figures was changed from disclosing the group and the company to only showing the group consolidated figures. The predetermined objectives did not meet SMART criteria. Certain predetermined objectives were not achieved as a result of the financial constraints.

In 2019, the revenue marginally increased due to production from International Mining and Dredging South Africa (IMDSA). The net finance income is significantly lower in the current year. In 2018, Alexkor released historic earned interest on restricted funds for operational use after fulfilling the conditions attached to it. The cost of sales is driven by the revenue split. The revenue for 2019 was not great and as such, the cost of sales matched that with being poor as well. Alexkor reported a loss of R149 million, due to the impairment of the inter-company loan. Cash has reduced to additional contribution to the Rehabilitation Trust Fund. From 2007 – 2020, Alexkor has produced 193 355 carats and from 2013 – 2018 the PSJV produced 407 941 carats. 67 724 carats were produced in 2019. There was no irregular expenditure in 2018/19. The money for Township establishment has been ring-fenced, which at the end of the year was R4.2 million. There is R7.3 million that has been ring-fenced for costs related to the Deed of Settlement. The company does not have any borrowings and no dividends were declared.

On the future outlook, Mr McPatie said there is a lack of working capital. They need to execute the remaining Deed of Settlement obligation and hand over the residential properties and Alexander Bay Township. There needs to be an increase in the confidence levels of the current geological information. There needs to be a review of mining contracts and the operating model for Alexkor and the PSJV. The going concern issue needs to be resolved.

Discussion
Mr G Cachalia (DA) says that Alexkor is in a poor state of affairs. They have three options: sell Alexkor, close it down or put it into business rescue and he would like to know what management’s view is on this.

Ms J Mkhwanazi (ANC) commended the lack of fruitless and wasteful expenditure on page 25 of the report. She asked for the time frame and processes for executing the Deed of Settlement obligation. She was interested in what is happening to the Muisvlak mining plant. What are Alexkor and the Department doing to address community concerns about a new business direction?

Inkosi E Buthelezi (IFP) asked how they will address the PFMA non compliance and for not having an audit committee. How are they addressing the fact that the joint venture is unincorporated? Alexkor attributed their loss to the revenue split, but he did not understand what that means.

Ms O Maotwe (EFF) asked how many executives resigned and what was the impact on the business. What are the plans about replacing them? The strategy was not well detailed and she requested information on where they need to be and where they currently are and how they are going to bridge that gap.

Ms D Dlamini (ANC) asked what the strategy is for fruitless and wasteful expenditure. She asked what Alexkor has done about addressing the community on the new business direction. She asked if the Richtersveld Mining Company (RMC) has been constituted and how much has been paid to them as part of their 49% stake in the joint venture. She would also like the presenters to explain the loss of R64 million.

Ms J Shabalala (ANC) asked what progress has been made since the appointment of the administrator in September 2019 and if a new strategy has been tabled yet. She asked what support the administrator has received since his arrival and if he has had any interaction with the executives. The financial statements reflected revenue of R412 million from R409 million the previous year but reported a loss of R64 million. She asked the reasons for this. What is balance sheet looking like? She asked at what stage will retrenchments at the PSJV be done if they plan to do so. She asked if Alexkor has considered moving the Joburg head office closer to their constituency as discussed in the previous meeting. Has there been any stakeholder engagement on finding solutions for Alexkor?

Mr E Marais (DA) asked about the final obligation that Alexkor has for Alexander Bay. He asked that they highlight the contractor deals. He gets the sense that a lot of the blame for the poor performance of Alexkor is being shifted towards the contractor deals. He asked what the final decision is for Alexkor if they do not get working capital from government as it cannot operate without working capital. He asked if the company should be closed down.

The Chairperson asked for more clarity on the effect of the joint venture being incorporated. Diamond mining is said to be the largest employer in the Northern Cape and there are about 57 independent diving contractors. What is the relationship like between Alexkor and these contractors, particularly the entity called MAMC? He asked for the details of the non-compliance. He asked why Alexkor is continuing to spend recklessly since they have acknowledged this. The Zama-Zamas are exploiting the Alexkor challenges. He asked how they deal with this problem because it is a serious problem.

Mr S Gumede (ANC) says that the weather can affect production and asked what strategies are in place to overcome bad weather. When will the vacant board positions be filled. Have the challenges between the companies and the community been resolved and if not, how they will ensure that they are resolved?

Responses
Mr McPatie replied about De Beers does not mine anywhere before conducting an extensive land exploration programme. In the case of Alexkor, no exploration has been done to a point where you can identify clearly that there is a resource. Exploration is done on an ad hoc basis as money becomes available and that is not how to run a mine. That is when the contractors step in and take the risk of putting their resources in to try and find the diamonds which leads to a situation where the contractors take 85% of the revenue and Alexkor gets 15% or the contractor takes 70% of the revenue and they take 30%. The revenue splits were never scientifically calculated. The technical skills are missing as there is only one senior geologist whereas companies like De Beers and other mining companies have hundreds of geologists.

The joint venture being unincorporated does comply with company law. The company needs to conduct land exploration as it cannot function without doing so. He has not addressed the community as yet as he first needs to talk to the contractors about changing the current relationship they have with the company. They need to change the revenue split as it cannot continue the way it is. The RMC has not been constituted and that they will be meeting in January where they will elect a CPA and the necessary people to be on the committees. On the relationship with MAMC, he had a meeting with a few gentlemen who were representatives and their approach was that they should close the Joburg office. They want to conduct the whole process from the mining to marketing of diamonds and they will take 85% of the revenue and the PSJV can have 15%. The RMC would take 5% which would come from the PSJV portion. The MAMC is further not BEE complaint. He told them to come with a different proposal on how the community will have a share in the revenue.

Mr McPatie wrote a report to the Minister in October outlining what he has found so far and what should be the way forward. He is still waiting to hear back from the Department. He still has to deal with the governance issues which contributed to where Alexkor is at the moment.

Mr Pitsoe said that when resignations take place in the PSJV, Alexkor should have been notified and they were not until the appointment of the administrator. The first executive to resign was the human resources executive, followed by the engineer and the security at the same time. The position of the engineer has been filled as it is a critical position. The finance manager has also resigned. It will be difficult to attract people to fill these positions due to the state of the balance sheet. The Muisvlak mine is a loss that they will just have to live with. The R60 million spent on it has gone down the drain. The problem is that they started backwards by building the plant first before doing a feasibility test. The business model has to change especially the relationship between stakeholders. The community is not benefiting at the moment. The people benefiting are from outside the Northern Cape, and that needs to change.

Mr Pitsoe said they are trying to come up with a weather solution. The only solution is to work with people who have the necessary technology to do it. They have a memorandum of agreement signed with Armscor Institute of Maritime Technology. On the township obligations, mining accounting is not the same as municipal accounting. For example a road is an asset to municipalities and they maintain it and so they put value to it. Mining does not do that.

Mr McPatie replied that he is looking into the closing of the Johannesburg office. He needs to conduct a cost-benefit analysis. There is still quite some time left on the rental of the property. All the staff are on contract and some of them of them have quite a bit of time left on those employment contracts.

Ms Chowan replied that the compliance challenges specifically related to PAYE. What had transpired was that the PSJV was unable to service its debt and they were incurring interest. This poses a problem in that at 31 March 2020, if they submit their tax return, there will be a mismatch. The PSJV owes R4.1 million in pension fund money and this is non-compliance with the pension fund rules which she has reported to the Financial Services Conduct Authority. The PSJV has R126 million debt as at 30 September 2019 and in her opinion, they are unlikely to trade themselves out of that debt. They will need to either get a cash injection or considering closing operations. They have already gone through a process of retrenching staff in June and they have not yet paid all the retrenchment costs. This is where all the reckless trading is coming in. The R64 million was explained and it basically come down to the revenue split. As of March 2020, they will have no cash so either there is an injection of capital or there a decision taken to shut down.

Follow up questions
Mr Marais asked how many contractors are outside of Namaqualand. He asked if the CEO is aware that diamond divers get 48%. He asked what revenue split is given to the coffer dam miners. He asked what the main cause of the visibility problem is.

Ms V Malinga (ANC) asked if the CFO has a chartered accountant qualification. The CEO tells them that they perpetuate this knowing very well that it will not yield any results and that they compare themselves to De Beers saying that De Beers would have done it for R6 million, and they did it for ten times more. She asked when did they know this or are they new to Alexkor? She is disturbed that there are people that they are taking resources while the community gets poorer everyday. They are seated here in their nice suits and nice English but she does not hear a plan on how they will assist the community. Transformation is not happening. She asked how they acquired the land in which they built the mining plant. She also asked what kind of company does not conduct a feasibility study before operating a mine. She asked how are they operating without a geologist. How will they know where the diamonds are?

Mr Gumede asked that in the leadership’s analysis of Alexkor, do they think that Alexkor can be rescued. He asked what kind of help they would need from the Portfolio Committee. They need to view themselves as a team and work together.

Inkosi Buthelezi said that his question on what is being done to address the lack of incorporation of the PSJV had not been answered.

Ms Moatwe said that in overseeing all the SOEs, what she has gathered is that they are not receiving the support they need. The shareholder must tell the Committee what exactly the plan is because every SOE that presents to them seems to present a situation where they need to shut down. This is not what they should want. She said that Alexkor needed to turn around. Alexkor needs to conduct site visits to mines that are being operated properly so that they can get tips.

Ms Dlamini asked when Alexkor paid the 49% owed to the community and what it is doing with its 51%.

Ms Tshabalala asked what is the Department doing and what kind of oversight mechanisms they have. The community is not being looked after, which frustrates them, which in turn frustrates the Portfolio Committee as they work for the people. She asked the administrator if he had met with the executive and what his plan is, and he replied that he has not met with the executive. This is troubling as he has been in position for over 60 days and asked what his job is when he goes to his office every day. She asked about the relationship between Alexkor and the Mining Charter. In the new year, the first thing they need to deal to is Alexkor.

Mr Cachalia asked, given the current snapshot and the history of the company, realistically, what in management’s view are the options available. He wants options based on what is happening and not on whether they receive money. It is clear that the government has folded its arms, Treasury has folded its arms and the banks have folded their arms.

Responses
Mr McPatie agreed that transformation is not happening and has not happened over all the years. One way in which he is trying to address this is that the contractors need to bring the community on as partners and not employees. In terms of the unincorporated joint venture, he said that they would have to apply to the court to set aside the Deed of Settlement which is a lengthy legal process. Since dividends have never been declared, the community has never received any payment for their 49% share in the joint venture. The only way to rescue this is by doing land exploration as that is the only way to mine and this costs a lot of money.

Mr Pitsoe believed that Alexkor can be saved and they just need the necessary support and resources to do so. The decision on the revenue split was before his time at Alexkor and that no one can actually explain the reasoning for the revenue split to him. The only split that is explainable is the IMDSA. Instead of putting a mining buoy, they put an exploration buoy and survey buoy and their total cost before they start mining is about $26 million. So they spend their own money before they start mining whereas the others just use they own data.

Ms Chowan confirmed that no dividends were declared at Alexkor and they have not received any financial gain from the joint venture. She said that she is a chartered accountant. She would like to draw attention to the fact that she reported to the Portfolio Committee last year that Alexkor was in financial trouble and that was within five months of her joining Alexkor. She also wrote to the Department for funding; as the CFO she has taken steps to mitigate against this. She had suggested to the board that they put the business in business rescue. As a chartered accountant she has complied with her requirements as per the Companies Act and in terms of PFMA.

Mr McPatie said he has addressed the staff at the Johannesburg office, informing them that it might close and the result of that he has to appear at the CCMA because of something to do with unfair labour practice. He said the closure of that office will come at a cost and right now he is not sure who is going to fund that cost. He is engaging with the Department on the cost of closure and he is waiting to see if DPE will fund that.

Mr Pitsoe replied that the cause of the visibility problems, as far as they know, is because the Atlantic is a very rough sea and the shallow waters are murky when the sea is rough. Those mining the shallow water say that because of contamination in the sea, there are visibility problems. Those mining with the bigger boats are causing problems for those mining with smaller boats. Muisvlak was built in 2014 and none of them were there in 2014. They are also asking the same question on why it was built before a feasibility study was conducted. To this day, no one knows why the money was spent.

DPE Director: Mining, Morongwa Mothengu, said that they recognise the challenges facing this particular SOC. When DPE realised that the board was not doing its job, the Minister had to remove them. Legal advice was given to the Minister to remove the board. Once they put in the administrator, the board fell away. The reason the administrator was appointed was to look at all these challenges and provide possible solutions for the viability of the SOC. They will take Mr Cachalia’s recommendations into their final report.

The Chairperson said that Alexkor is the first entity that they will have to deal with in the new year.

The Committee approved the Committee Report on Oversight Visit to Department of Public Enterprises and State-Owned Companies.

Meeting adjourned.

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