FINANCING AND STRUCTURING OF BEE DEALS FOR FOREIGN INVESTORS London, 20 November Farouk Abrahams Chief Executive: Batsalani Investments

Transcription

1 FINANCING AND STRUCTURING OF BEE DEALS FOR FOREIGN INVESTORS London, 20 November 2007 Farouk Abrahams Chief Executive: Batsalani Investments

2 OUTLINE INTRODUCTION: South African Mining Industry review Batsalani Junior Mining FINANCING AND STRUCTURING OF BEE DEALS FOR FOREIGN INVESTORS: Understanding the context of effective equity deals with BEE partners BEE participation at various stages of Mine Development BEE Value-add Selection criteria of BEE partner/s Potential Financing Risks of BEE Transactions and mitigations/solutions Direct and Indirect Costs of engaging in BEE Transactions A well structured deal between BEE partners & an international mining company

3 SOUTH AFRICAN MINING INDUSTRY REVIEW An abundant economic mineral endowment and the commodity boom created an investment opportunity in the South African Mining industry

4 Market Opportunity Factors such as structurally higher demand in terms of Chindia effect, the weakening US$ and consolidation in supply, remain positive factors South Africa is the world s richest and most diverse repository of mineral commodities. Globally, largest producer of gold, vermiculite, platinum and chromium. Mineral and Petroleum Resources Development Act (MPRDA) 2002 Requirement of 15% equity ownership by historically disadvantaged South Africans within 5yrs (2009), increasing to 26% within 10 years (2014) ± applications pending at the Department of Minerals and Energy (6229 of which are for prospecting rights) In recent months around new prospecting permits have been approved with 350 mining rights granted which attracts an ever-increasing investor base The natural consequence of the MPRDA and related legislation over the last 3 years resulted in conclusion of over US$ 10 billion BEE deals Creation of black owned mining companies Anooraq, BSC Resources Creation of Partnership/JV s PLA, GVM Metals, Homeland Corp Major deposits of antimony, coal, iron ore, manganese, nickel, phosphates, tin, uranium, diamonds, copper and vanadium Source: Chief Executive Chamber of Mines of South Africa

5 South Africa s Exploration Expenditure US$ US$ Million 200 US$ US$ US$ US$ Source: Metals Economic Group Dominant targets for recent exploration activity in South Africa: PGM s, Diamonds, Gold, Uranium and Coal

6 Wonderful Platinum Wave More than 20 juniors searching for platinum in South Africa s Bushveld The number of juniors exploring for PGM s has increased to more than 20 during the last few years thanks to South Africa s new mineral s law (MPRDA) The Bushveld Complex is the source of 80% of the world s platinum The 20 junior explorers are involved in as many as 40 projects In former years, the majors were dominant in South African exploration, but over the last ten years, a whole lot of junior have been able to get access to ground The platinum industry is also seeing a rise of new players that are coming into the industry without previous exposure to platinum Juniors have started listing on the JSE and other markets and are getting involved in large local companies to finance their exploration projects Platinum Australia (Australian company), Anooraq (BEE owned SA company), Lesego Platinum (SA company)

7 Why Junior/Mid Tier Mining Isn t What It Used To Be? Growth in Junior Listed Sector The junior mining space in South Africa has increased massively in value Market capitalisation - Billion Feb-06 1-Jul-06 1-Feb-07 1-Jun-07 Source: Data from NedSec Junior Mining and Exploration Index and I-Net Bridge

8 BATSALANI JUNIOR MINING

9 Black owned and managed investment firm Strong and experienced financial and technical team Has established key relationships with all stakeholders in the industry Several prospecting rights applications pending Strong pipe line in commodities such as PGM, coal, iron ore and energy, for example Project Area Commodity PLA s Smokey Hills PGM project Limpopo PGM Prospecting right Northwest PGM Two prospecting rights Free State Coal Prospecting right Indicative Offer made and in Advanced Negotiations with BEE company Northern Cape Northern Cape Iron Ore and Manganese Iron Ore and Manganese

10 FINANCING AND STRUCTURING OF BEE DEALS FOR FOREIGN INVESTORS

11 Understanding context of effective Equity Deals with BEE Partners Three C s Counterparty, Country and Commodity Regulatory environment - key elements of Mining charters, scorecards, and COGP (2009) Have a sound business & transaction model to attract capital The BEE value-add should exceed the costs/risks/admin Sharing of risk-returns relative to the funding capacities, technical expertise & objectives of the parties involved are equitable Alignment of interests of the parties recorded in clear agreements And most importantly - a good cultural fit, co-operative, and collaborative relationship between the parties

12 Three C s: Selection criteria of BEE counterparty

13 Three C s: Selection criteria of BEE counterparty Management expertise

14 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership

15 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership Broad based shareholding

16 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership Broad based shareholding Ability to add value

17 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership Broad based shareholding Ability to add value Long term commitment

18 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership Broad based shareholding Ability to add value Long term commitment Degree of exclusivity

19 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership Broad based shareholding Ability to add value Long term commitment Degree of exclusivity Knowledge of the market place

20 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership Broad based shareholding Ability to add value Long term commitment Degree of exclusivity Opportunity for employee involvement (employee alignment) Knowledge of the market place

21 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership Broad based shareholding Ability to add value Long term commitment Degree of exclusivity Opportunity for employee involvement (employee alignment) Knowledge of the market place Requisite capital or persona asset base

22 Three C s: Selection criteria of BEE counterparty Management expertise Leadership structure / transparent ownership Broad based shareholding Ability to add value Long term commitment Degree of exclusivity Opportunity for employee involvement (employee alignment) Knowledge of the market place Knowledge of the local communities and relevant unions Requisite capital or persona asset base

23 BEE Participation PROJECT at Various INVESTMENT Stages of FOCUS Mine Development Productivity Increasing Project Value Pre- Feasibility BFS Value Added Curve Discovery BJM FOCUS

24 BEE Participation at Various Stages of Mine Development DISCOVERY/ PROSPECTING PRE- FEASIBILITY BFS BREAK-EVEN GROWTH MINE FUNDING Seed/Angels/ Venture & sweat equity Venture & Alliances & JV s Project finance Asset-based & leases Working & expansion capital Re-financing & optimisation of cost of capital VALUE Option values Ore based estimates DCF DCF based on LOM & actual yields Mine, Share value of business CASH-FLOW High-risk; Stretch capital High-risk in proving Commerciality Medium-risk, cashabsorptive & can be controlled Medium-Low risk - neutral cash-flow Low-risk cash generative phase BEE EQUITY PARTICIPATION Many permutations: Free carry until BFS, Angel and/or VC funds, Listings (Fasken presentation), Similar to prospecting, but easier to raise capital Conventional subscriptions by preferred BEE parties. Institutional Funds sourced. Provision of sureties for ST debt. Sponsors sell down to BEE investors Dividends / share deals & Asset-level deals; M&A Corporate activity

25 Bee Value-add Local & community knowledge, goodwill & relationships buy in Access to angel & flexible development capital Strongly positioned for corporate activity e.g. M&A s Strongly positioned for new prospecting and mining rights, as well as conversions Assist with BEE transformation per Scorecards/COGP (2009) Skills transfer empowers management & staff Sustainability for the industry & SA economy through broader inclusiveness

26 Potential Financing Risks of BEE Transactions Potential risks Weak BEE balance sheets & inability to follow rights issues or using 3 rd party funding cause BEE dilution Vendor financing capacity limitations Short term liquidity to service BEE financiers Potential mitigations & solutions Agree funding obligations for each stage to Peak funding. Maximise project level funding; Vendor support for the BEE party Project/Transaction funding needs should be agreed & matched upfront relative to capacity of each party Secure more medium to longer term funding for projects/ transactions that are cash absorptive Exit strategies could disrupt BEE rating Layer of complexity for investors Pre-emptive rights should apply. Re-financing from other BEE parties is an option; Careful BEE Party/Deal selection, and where possible engaging professional advisers against clear criteria and professional processes should facilitate BEE Risks can be mitigated with creative aligning deal structure

27 A well structured deal between a BEE partner & an international mining company Have a sound business & transaction model to attract capital The BEE value-add should exceed the costs/risks/admin Sharing of risk-returns relative to the funding capacities, technical expertise & objectives of the parties involved are equitable Alignment of interests of the parties recorded in clear agreements And most importantly - a good cultural fit, co-operative, and collaborative relationship between the parties HIGHER RETURNS COMPENSATE FOR THE PERCEIVED RISKS AND CHALLENGES OF BEE