Lionel Shawe: M&A or rescue and rehab on the horizon for SA mining?

Alec Hogg was joined at the Mining Indaba in Cape Town by Lionel Shawe, Banking and Finance partner for South Africa from Allen and Overy to expand on the mining industry from a banking and business activity viewpoint as the Indaba commences. 

Allen and Overy is a global firm.

Yes, it’s a global firm.  One that is classified of the ‘global elite’, so there are about seven firms that are classified as ‘global elite’, which are made up of international law firms plus firms, traditionally known as the ‘magic circle’ from London.

You only came to South Africa in October, but you have a very distinctly South African accent. 

That’s correct.  I’ve been in practice for 17 years, I was previously with Bowman Gilfillan and before that, with Deneys Reitz.  I was the head of banking at both firms.  During the course of last year, I was asked by Allen and Overy, to head up their new Johannesburg office, which is, as I said, the second office for Allen and Overy in Africa, after the office in Morocco.

Now it’s an interesting time for bankers at a mining conference, because it is almost like being a house buyer at a time that everybody wants to sell. 

Yes, I guess that’s correct, in the sense that it is very much a seller’s market at the moment, but there are always opportunities for bankers and lawyers, particularly when times are tough.   In fact, some would say that it’s the best time for lawyers (when times are tough) and I think, from our point of view, it may seem like an odd time to enter the market (when times are tough) from a mining point of view, but there are definitely other opportunities that we have been looking at in Sub-Saharan Africa. Particularly around the inter-sectors, like oil and gas, which is historically, perhaps has not been a sector in which South African firms have played but obviously with our neighbours, Mozambique, Angola, etcetera, and even locally looking at the sector.  There is room for growth.

Of course, that’s also the most controversial little bit of legislation that we saw recently but the MPRDA has been sent back to Parliament.  I’m sure you would see that as a positive move. 

I think that is generally seen as a positive move, although one must bear in mind that there are a whole bunch of competing interests that have to be juggled by the Government.  There’s obviously the ANC’s own manifesto and the ‘freedom charter’ that may have taken against the legislation and the draft legislation was intended to meet those requirements.  I think, overall, it would be seen to be positive, from an investor point of view that it has been sent back because it is recognition that there was perhaps a bit of over-reaching in the powers concerned.

President Jacob Zuma said the reason it was sent back was that they were worried that it was unconstitutional.  Was there anything that would have concerned you constitutionality? 

I think there were some provisions relating to making codes of conduct and other pieces of subordinate documents, sort of legislation, through the Act, which I think would have not passed constitutional muster.  Also broad powers granted to the Minister, in relation to decision making, under the legislation, which perhaps would have not passed constitutional muster on the rationality grounds.  There were some good reasons for sending it back to Parliament because I think Parliament needs to reconsider some of those issues.  It’s a bit of a balancing act now because it is not entirely clear to what extent Parliament could revisit the entire piece of legislation.  There are some potential avenues for doing that.  In theory, they can only look at the provisions that the President has specifically referred back but for example, the oil and gas piece of it.  There’s a view that one of the reasons the Minister has sent it back or requested Jacob Zuma (the President) to send it back to Parliament, was because there’s an intention to create separate legislation for the oil and gas sector.

It’s an interesting time in a young democracies history, I guess from the lawyers perspective, given that the constitution is all about law, isn’t it?  We’re finding our way still, in many respects, including this one.

I think that’s right.  The constitution is there obviously to create a check and balance on the Government and provide for rights of the population, of course, but I guess it also has to be read in line with the Government’s aims and the socio-political aim.  Unfortunately, I guess for many Governments, when you have a constitution, you can’t simply write the law, as you necessarily want to write it because it is popular to do so.  Constitutions are there to protect everyone and not just the majority.

Fascinating story, but getting back to the Mining Indaba itself.  Your clients, the bankers and the mining operators, are they seeing an uptake in M&A this year?

I think not in the immediate future but certainly, in the next 12 to 18 months, my sense is that our clients see some form of consolidation happening, so there would be an uptake in M&A confidence, over the next 12 to 18 months.  I think plans are very much being drawn by mining businesses, to look at the next commodity upswing, and that is definitely going to come.  There are a number of businesses out there that are perhaps struggling a little bit because of the commodity downturn and to take advantage of the upswing, there would probably need to be consolidation and that will drive M&A activity.

Very polite terms that you’ve been using but they are… 

I’m diplomatic, as a lawyer.

There are a lot of businesses in distress at the moment?

Yes, I think there are a number of businesses finding themselves with cash flow issues, problems with raising capital to keep their businesses going.  A lot of mines that are on care and maintenance or that are marginal, and that has required their bankers to come to the table to a large degree, with plans to keep them afloat in this time, knowing that the commodity cycle will turn up.

Are we close to some plugs being pulled?

Not as far as I can see, there’s been a couple of incidences.  There was a mine, South Gold that went into business rescue about two years ago, but that was ultimately resolved.  I can’t see, and I’m not aware of any particular instances of plugs being pulled.  I think it is one of those old stories.  If you owe the bank a million Rand – it’s your problem.  If you owe the bank a billion Rand – it’s their problem, so I guess the issue here is that it is a bit expensive for plugs to be pulled and, generally, people get around the table to find solutions.

I guess the banks as well, after the global financial crisis, have got quite a lot of resources at the moment, so they can rescue or nurse along some of these problem children that they have inherited from the past.

Indeed, and I think there is more of a resolve to do that.  I think, historically, you would have a liquidation culture.  If you had financial distress, the consequence was liquidation.  Now, there’s more of a culture of rescue and rehabilitate, which requires a joint effort from all the stakeholders, which includes the banks, the funders and the funders of businesses these days, don’t just include banks.  They include capital markets, which is hedge funds, institutions, pension funds, etcetera, so there’s generally a broader, socioeconomic interest in rescuing a business these days, we find.  It is not simply related to getting ten-cents in the Rand.

Lionel Shawe, Banking and Finance partner for South Africa from Allen and Overy.

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