Anglo’s SA mine sales: This is no slam dunk, even for State-assisted buyers

(Bloomberg) — As Anglo American Plc scales back its operations in South Africa, the government is coaxing black investors to fill the void in mining left by a conglomerate that once dominated industries from coal mining to paper, banking and sugar.

Mines Minister Mosebenzi Zwanesaid Anglo American’s announcement on Tuesday that it may exit its 69.7 percent stake in Kumba Iron Ore Ltd. could encourage the emergence of “new black economic empowerment champions.” The minister and his predecessor Ngoako Ramatlhodihave both called for the creation of a leading black-owned mining company.

The push for black citizens to increase their ownership of the mining industry, which once formed the bedrock of the economy, comes as South Africa grapples with addressing racial disparities that have persisted since the end of white minority rule in 1994. While the Chamber of Mines, an industry body, says black control in mining averaged 38 percent by the end of 2014, the government said just 20 percent of companies had complied with a requirement that they be 26 percent black-owned.

“There is a lot of emphasis on radical economic transformation and everyone is scrambling to find something to showcase,” Mzukisi Qobo, an associate professor at the University of Johannesburg, said by phone on Wednesday. “If it doesn’t do anything about it, it will be used by populists to show that the economy is still in white hands.”

Black Management

Of the seven largest mining companies that trade on the Johannesburg Stock Exchange, only Exxaro Resources Ltd. is controlled by black management. The Economic Freedom Fighters, South Africa’s second largest opposition party, has been pushing for the nationalization of mines, an option the government has ruled out.

Formed in 1917 to exploit South Africa’s vast gold reserves, Anglo American branched out from mining to make investments in companies ranging from pulp and paper maker Mondi Ltd. to sugar producer Tongaat Hulett Ltd. Now it’s selling coal and iron-ore assets as it focuses on producing platinum, diamonds and copper. It plans to shrink its South African asset base to the 77 percent stake it holds in Anglo American Platinum Ltd., some of diamond producer De Beers’s operations and the Vergelegen wine farm in the Western Cape province.

“They’re in trouble because they bought some stuff at the top of the market,” Peter Major, a mining analyst at Cadiz Specialized Asset Management in Cape Town, said by phone. “They got arrogant, they swaggered, they borrowed a whole bunch of money they didn’t need.”

Striking deals with black investors would make sound business sense for Anglo because it would help the company maintain cordial relations with the government and help retain its mining licenses for its remaining operations, said Keith Levenstein, the chief executive officer of EconoServe SA, which advises clients on black empowerment.

‘White Hands’

“There is still a huge amount of wealth in white hands and not so much in black hands,” he said by phone from Johannesburg. “The government is saying to Anglo ‘if you want to sell your businesses, why not sell them to black investors?’”

Only one of the wealthiest 20 South Africans, based on the value of listed shares they own, is black, a study published in December by the Johannesburg-based Sunday Times found. All the best-paid 20 executives who work for companies listed on the Johannesburg Stock Exchange are white, the newspaper said.

Read also: Commodity rout pushes Anglo American to the brink of FTSE 100 eviction

Any deals would depend on black investors securing funding and the right price, according to Simon Venables, corporate finance leader at accounting firm PriceWaterhouseCoopers LLP.

“If there was going to be localization of some of these assets with state support, I guess now would be a good time as opposed to the top of the commodity cycle,” he said by phone from Johannesburg.

Distressed Companies

Peter Vundla, chairman of financial services group AMB Capital Ltd., doubts the operations being shed by Anglo will be a good deal for black investors.

“I don’t know if it’s a good idea to be buying distressed companies and handing them to black people,” he said by phone from Johannesburg. “The assets that Anglo is hanging on to are the ones that are viable and profitable. Shouldn’t blacks be buying those?”

Anglo’s attempts to foster black ownership in the industry went wrong before. In 1996 it sold control of gold miner JCI Ltd. to black investors for $629 million. A year later the share price had more than halved as the gold price fell, its black chairman Mzi Khumalo resigned and its two biggest gold mines were sold back to Anglo.

The creation of a large black-owned mining company may not be realistic while commodity prices remain in a trough, according to the University of Johannesburg’s Qobo.

“I don’t think there are players with deep pockets who will play a Santa Claus role when they know profits are in decline,” he said.