SUMMARY AND ANALYSIS OF ALEXKOR'S ANNUAL REPORT 2003
Alexkor: Current Information
Area of Business
The core business of Alexkor Ltd is the economic exploitation of diamonds and associated support elements. Its business includes diversified agricultural operations and commercial services to the local and surrounding communities. These operations are split into two divisions, namely Alexander Bay Mining and Alexander Bay Trading.
In the 1990s Alexkor also commenced a venture in non-core business as part of its endeavours to create alternative employment opportunities on an economically sustainable basis. Non-core business includes dairy, ostriches, mariculture, lucern, grain and citrus products. Non-core business also composes support structures of a hospital, the region's airport, recreation clubs, schooling, a museum and external transport services.
Vision and Mission
Alexkor's vision is as follows:
To transform Alexkor into a competitive and sustainable organisation that will contribute positively towards the needs of all stakeholders"1.
Its mission is:
"To optimise revenues from mining and trading activities thereby ensuring satisfactory returns to the shareholders. To implement socio-economic upliftment for the region, an environmental responsibility programme and to ensure a healthy and safe environment".
Alexkor Annual Report 2003
Objectives
The following objectives are reported in the 2003 Annual Report.
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To increase turnover and reduce costs in order to achieve profitability.
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To establish and maintain a healthy and safe environment for all and rehabilitate the mined out areas.
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To consolidate Alexkor's business horizon and ensure its long-term sustainability.
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To expand the revenue base.
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To support and further the government's policies on Employment Equity and Black Empowerment strategies.
To invest in human capital and retain the required skills.
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To increase stakeholder value.
Important information for the 2003/04 financial year
The following important highlights can be noted for the 2003/04 financial period.
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Operations profit increases by 269% to R58.8 million.
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Headline earnings per share increase by 163% to 90.7 cents.
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On-mine costs contained, with net operating expenses down by 14% from the previous year
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Net asset value per share up by 79.8% to 9.1 cents.
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Diamond sales up by 1%.
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Average US$ price per carat up 44%.
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Diamond production of 79 269 carats.
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Revenue up 2% to R 292 million.
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Net profit before tax up 189% to R6.3 million.
The company has made a profit between 1928 up until 1995. Between 1996 and 2001 the company made a loss recovering between 2002 and 2004. The company was corporatised in 1992 with the objective of ensuring profit maximization and efficiency. The management of the mine was contracted to Nabera between 1999 and 2001 and then to Mintek. The minister of Public Enterprises has appointed a CEO to manage the company.
The depreciation of the rand against the dollar has affected the balance sheet of Alexkor. However Alexkor has benefited from previous years of exchange rate depreciation: a loan to the BOE was paid in full.
Government's proposed partial privatization would ensure that a strategic equity partner would control 51%, community 10% and government 39%. The
Sourced from the Alexkor Annual Report 2003
privatization of Alexkor has been stalled pending the Constitutional Court case relating to land claims made against the company.
Key Challenges
Litigation against the company: Richtersveld Community vs Alexkor and the Government of the RSA
The Richtersveld community in Namaqualand have laid claims to the land on which the Alexkor mine is situated (the mine stretches from Port Nolloth to Alexander Bay). The Richtersveld community had occupied this land on the west coast near the Namibian border for many years and had been forcibly removed from the land during the apartheid era following the discovery of diamonds in the 1920s. In October 2003, the constitutional court ruled that community had a valid claim to the land on which the mine was located. Ownership of the land and mineral ownership of the Alexkor diamond mine was awarded to the community on the basis of its ancestral claims. The court further ruled that the land claims court (which had previously rejected the community's bid to recover its land) should decide on the issue of compensation. The land claims court will hear the case in August 2004. Government and Alexkor had argued in court that the community should focus their claim for restoration on either the land and mineral rights or for compensation for the value lost in respect of diamonds mined, but not for both. The court has, however, ruled that both claims are legitimate. It was further ruled that the community's claim for compensation for environmental damage falls within the jurisdiction of the land claims court.
In December 2003, the community tabled proposals with a view to the state being compelled to accept liability for the ensuing environmental damage wrought by 75 years of mining. The cumulative cost of this damage is estimated to be in the range of between R 15 million and R300 million. This includes compensation for the decline in the value of the diamond reserves, for 90% of the land, with the rest of the land offered to a community trust. Government is currently in the process of engaging with the Richtersveld community in order to finalise a restitution package. It is envisaged that the community will meet with the Minister of Public Enterprises and that a settlement will be reached out of court. The government has proposed 3 options to resolve this matter. These are summarised as follows:
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20% of Alexkor's shares are held by government. At a later stage, these will be disposed of at market value. The Richtersveld community will hold 65% initially and these shares will be diluted to 14% once a strategic equity partner comes on board. The partner will be appointed by government. Alexkor will pay royalties to the community and the community will obtain the land and mineral rights.
The community appoints a strategic equity partner. Alexkor's business activities are split into land mining, marine mining and Alexkor Bay trading.
The community will form a special purpose vehicle (SPV) for land mining and the SPV receives market-related rental payments and takes responsibility for investment in the land mining.
No land is transferred to the community. Alexkor holds the land, it does not pay royalties to the community and the ownership mix remains the same.
The community's legal adviser has reported in the media that the community is not content with the government's counter-offer for a settlement of the land claim. The main reason for this is that the counter proposal does not address the issues of environmental rehabilitation and compensation for diamonds that have been extracted from the mine over the last 75 years. The community prefers that the matter is resolved outside of court. However, several issues are in dispute. One of these is the fact that the community wants to appoint its own strategic equity partner and has already signed a memorandum of agreement with Cyril Ramaphosa's company, Millenium Consolidated Investments (MCI). MCI has served as the advising company on the restitution process. The Star reported that MCI has been offered 20% of the restitution package if it achieves certain milestones such as assisting the community to finalise a deal.
Millions has been spend to date by government and Alexkor on litigation costs.
Final settlement costs could reach an amount of R 10 billion.3 Plans to privatise Alexkor came to a halt when government lost the court case against the Richtersveld Community.
Litigation against the company: Nabera Mining (PTY) Ltd vs Alexkor
In 1999 the government contracted Nabera, a private sector black empowerment consultancy with management expertise, to resolve some of Alexkor's management-related problems and to yield profits for the mine. Alexkor had suffered significant losses in the past as a consequence of management problems, theft and under-capitalisation. In the 1997/98 financial year, Alexkor had reported a loss of R 65 million. Nabera was established as vehicle to work on the Alexkor contract with Salene, Union Alliance Holdings, New Diamond Corporation, Gariep Khoi and the Disabled Employees Consortium as share holders. Alexkor's financial statements report that the mine lost R 32 million in the year ending June 2001, a period covering the time that Nabera's services had been engaged.
The Nabera contract expired in May 2001 and was subsequenty not renewed. The Department of Public Enterprises (DPE) then appointed state-owned Mintek as management consultants. Alexkor's audited financial statements show that a turn-around in terms of yielding profits began in the period that Mintek was appointed. In the year ending June 2002, Alexkor posted a P16 million profit. By 2003, its profit was reported to be R63.9 million.
Financial Mail 23 April 2004
Nebera is currently in the process of suing Alexkor for more than R120 million. R119 million is demanded for value added and about R4 million for management fees and costs. Nabera has claimed that Alexkor is "alive" today because of its contributions and the implementation of certain measures that saved the mine.4
At the time that Nabera commenced its contract, Alexkor was valued at R 971 million. By the time that its contract had expired, Alexkor was reputedly valued at R1.3 billion. In terms of an addendum to an agreement between Nabera and the DPE, Nabera was entitled to just over 33% of the difference, which Nabera claims amounts to R 119 million. The problem, however, is that the DPE and Alexkor do not agree with the valuation conducted by United Kingdom consultants, Snowden Mining Industry Consultants which had been jointly chosen by Alexkor and Nabera to conduct the valuation. The department and Alexkor claim that Snowden did not follow a mandate to base its calculations on a model for valuation that is appropriate to the South African context and that its accounting methodologies were therefore flawed. The Snowden report has consequently been rejected.
Sustainability of Alexkor
In the recent past, Alexkor had for various reasons become a drain on state resources. This can be attributed to the fact that it was under-capitalised and suffered damage as a consequence of uneconomic mining methods.5 Although the past two years has seen a substantive turn-around in terms of the mine's ability to generate profit, it is in need of a significant cash injection to ensure its sustainability. According to government estimates, current capital funding needs are between R40 million and R 150 million.6 A total of R 500 million is required to ensure sustainability. A government task team from the departments of public enterprises, agriculture, land affairs, minerals and energy and finance is currently working on problems in this regard.
Questions
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Why is Alexkor important to Government's socio economic strategy?
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Attraction of capital via a strategic equity partner?
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Details of decision to partially privatize Alexkor?
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Alexkor's plant and equipment is mostly old and in prior years no provision was made for the replacement of equipment?
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Relationship with the National Union of Mineworkers? Levels of cooperation and allegations of racism.
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Employment equity levels? Demographics and skills training.
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Downstream activities of Alexkor?
4 FinancIal Mail, 23 April 2004
5 Financial Mail, 15 April 2004
6 Based on unadjusted 2002 figues
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Broad Based Socio-Economic activities of Alexkor.
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Beneficiation of Alexkor products? Are Alexkor products exported without being processed locally? Local value adding.
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Contribution of Alexkor to Black Economic Empowerment?
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Employment contribution: direct and indirect?
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Meeting of Public Finance Management Act requirements?
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Impact of the Mineral and Petroleum Royalty Bill on Alexkor?
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Support provided to staff with HIV/AIDS?
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Mine community and the town management community?
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Combating conflict diamonds?
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European Commission, Diamdel and competition issues i.e. sales and distribution of diamonds?
Social Plan and social investments of Alexkor?