6'.-1/ 5176* #(4+%# 6'#%*+0) 016'

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1 6'.-1/ 5176* #(4+%# 6'#%*+0) 016' OUTCOME OF THE BID In March 1997 the South African government selected Thintana as the future owner of a 30% stake in Telkom. After a few months of negotiations and legal discussions, Thintana transferred 5.5 billion Rand ($1.125 billion in U.S. dollars at the current exchange rate of 4.44 Rand/US$) in a single payment to the South African government on May 14, Of the 5.5 billion Rand paid to South Africa, 4.4 billion was immediately released to Telkom for its infrastructure expansion program 1, intended to bring telecommunications services to millions of South Africans without access. Thintana s purchase of Telkom was the single largest foreign direct investment in Sub-Saharan Africa at the time the deal was closed. The deal signalled the acceleration of the South African government s privatization program and was a strong positive sign to other foreign investors considering placements in South Africa. The biggest obstacle to the sale of Telkom and what eventually scared off several potential bidders was the strict requirements laid out by the South African government. The new partial-owner of Telkom would have to adhere to numerous contractual obligations and deliverables in its stateenforced monopoly period. 2 These requirements could be grouped into two main categories: infrastructure upgrade/expansion and black empowerment. 3 POST-PRIVATIZATION PROGRESS Telkom s financial and operational performance has improved at alarming rates since the privatization in early The table below highlights Telkom s performance to date. Table 1 : Financial Performance (in millions of Rand) 4-year annual compound growth (%) Revenue ,160 16,347 13,327 10,850 9,150 Operating profit ,578 4,437 3,040 2,636 2,474 Profit before tax ,543 3,125 1,630 1,328 1,146 Attributable profit ,427 1,950 1, Debt-equity ratio Interest coverage ratio Revenue per employee , , , , ,370 Profit per employee ,192 77,177 52,862 44,007 40,396 1 Chairman s Review: Telkom 1998 Annual Report. 2 Monopoly began on May 7, 1997 and ends in 2003 if all requirements are met. 3 See page 3 of the case, Telkom South Africa ( Deal Requirements ), for more detail. This teaching note was prepared by Fuqua MBA students James Barber 99, Angela Fung 99, Sandeep Toshniwal 99, and Becky Voorheis 99 under the supervision of Professor Campbell Harvey.

2 In particular, senior management from SBC and Telekom Malaysia who were seconded to Telkom made a significant impact on the transformation from a state-run behemoth to a competitive commercial enterprise. Infrastructure Upgrade/Expansion In the first year of Thintana s ownership, Telkom spent 2.2 billion Rand on improving and expanding its cable infrastructure and upgrading the overall network. Telkom laid 71,000 km of optical fiber in order to improve bandwidth and quality of service. The company also replaced more than 228,000 analog lines with digital technology. This was 72% more replacements than in , putting the target of a totally digital network by December 1999 well within reach. In 1998, Telkom met the new-line targets and, in fact, comfortably exceeded those for total newline growth, payphone growth and new lines installed in under-serviced areas. As well as achieving the ambitious targets for rolling out new lines, Telkom was able to improve the level of service, with number of fault reports per 1,000 lines declining substantially. Table 2 illustrates Telkom s progress in comparison with the targets. Table 2: Target vs. Actual Description Target Actual Replacement of analog lines 18, ,353 Installment of new lines 306, ,426 New lines installed in under serviced 238, ,218 areas New public pay phones installed 18,027 32,335 First time service 18, villages Faults per 1,000 lines (business) Faults per 1,000 lines (residential) Faults cleared within 48 hours 87% 72% Services activated within 28 days 68% 66% Services activated within 90 days 92% 91% 4 Appears to be a typographical error, as printed in Telkom s 1998 Annual Report. 2

3 The chart below illustrates the growth in main-line telephone services operated by Telkom. Main Telephone Services operated by Telkom 5,000 4,500 ('000) 4,000 3,500 3,000 2, Since so much capital and time have been invested in the impressive rollout of Telkom s new infrastructure, service quality has not reached target levels. Management has acknowledged this problem and is refocusing its energy on service level improvement. Dikgang Moseneke, chairman of Telkom, explained; A mood of constructive anxiety is being created within the Company, particularly among managers. The message has gone out, from the highest level and in no uncertain terms, that customer service is Telkom s single biggest priority and that substantial improvements are a matter of urgency. 5 Black Empowerment Progress in the black empowerment area, a key part of the privatization agreement, is evidenced by the change in Telkom s workforce demographics. By March 1998, over 21% of all managers were non-white 6 compared to 0% in In addition, purchases from black suppliers soared to 240 million Rand, almost five times higher than in Telkom s leadership profile has undergone dramatic change in terms of the diversity of its composition. Women now comprise a quarter of the 12 South African members of Telkom s Executive Management Committee. Of the nine male members, five are non-white South Africans. The weight which South Africa s government and Telkom s ownership places on black empowerment is further evidenced by the appointment of two directors to the board representing organized labor. Perhaps most importantly, Telkom appointed the Company s first black Chief Executive Officer, Sizwe Nxasana, on April 1, Other Progress Telkom is actively spearheading the role of developing telecommunications in southern Africa, through the South Africa Far East (SAFE) project and the West African Submarine Cable (SAT- 3/WASC) project (costing US$540 million). In addition to these innovations, Telkom is 5 Chairman s Review: Telkom 1998 Annual Report. 6 Includes black African, Colored, and Indian. 3

4 spearheading a project to roll out a regional African VSAT 7 network spreading over six countries in Southern Africa. Vodacom 8, half-owned by Telkom, had an exceptional year in The number of subscribers increased 76.1% to 974,377 9 by March 31, Revenue rose 76% in the same time period from 2.5 billion Rand to 4.4 billion Rand, and attributable profits increased over 78% to 460 million Rand. Capital expenditure for the year amounted to 1,035 billion Rand, bringing the cumulative investment in Vodacom's infrastructure to 3.6 billion Rand. As mentioned in the case, SBC was forced to sell its stake in Vodacom s competitor MTN as a condition of the Telkom deal. It s stake was sold in the third quarter of Future Plans On January 28, 1998, South African senior government officials announced that South Africa is seeking foreign partners for a second telephone operator to compete with Telkom when the monopoly expires in In January 1999, the South African government announced plans to reduce its stake in Telkom by another 30%. 11 Telkom needs to raise more capital to invest $10 billion until At least 50% will be funded through the issuance of market debt. The other 50% is expected to be funded through internal sources. VALUATION MODELS We performed a detailed discounted cash flow (DCF) valuation on Telkom. The DCF model was our favored approach to valuing 30% ownership in Telkom. However, we also performed valuations based on the average price/earnings multiple and the price/cash flow multiple of comparable telecommunications companies in both developed and emerging markets. The results of the all three valuation methods are summarized in the table below. Table 3: Comparison of Valuation Methods (in millions) DCF Price/Earnings Price/Cash Flow Exchange rate assumed different each year Telkom Value (US$) 4,160 8,784 11,342 Telkom Value (Rand) 18,471 39,000 50, % Telkom Value (US$) 1,248 2,635 3,402 30% Telkom Value (Rand) 5,541 11,700 15,108 7 VSAT stands for very small aperture terminal and allows for inexpensive and wide-area usage of a shared satellite. 8 One of two licensed cellular service providers in South Africa. See the case, Telkom South Africa, for more details. 9 60% of the cellular subscribers in South Africa. 10 S. Africa to seek foreign telecom partners. Reuters (January ). 11 Denny Kurien, Govt. To Sell More Shares of Telkom South Africa Minister. Dow Jones Newswires (January 1, 1999). 4

5 Comparables-Based Valuation Telkom comparables are included in the Telkom South Africa case (Exhibit 12) to provide the basis for a price/earnings and price/cash flow analysis. If the student conducted a comparables-based analysis, he or she would be struck by the differences in values generated by each methodology. As explained on page 14 of the Telkom South Africa case, the South African government was overt about its desire to list Telkom s shares on the Johannesburg Stock Exchange (JSE) at the time the monopoly expires. Therefore, a comparables-based analysis is a feasible alternative to a DCF model. The four biggest downsides to a comparables-based analysis are: 1) The uncertainty surrounding the JSE; 2) Thintana does not intend to exit its investment in the short term; 3) The ambiguous relationship between the comparable companies and Telkom; and 4) The fact that earnings, but not cash flows, can be easily manipulated to reflect a more favorable financial status. In our comparables-based analyses, we made the following assumptions: Price/Earnings Method The average P/E ratio for the comparable companies was 29. However, this seemed overly high. Therefore, we omitted the outliers and arrived at an average P/E of 20. This seemed more reasonable given the risks involved. The earnings used were for the year ended February 28, Price/Cash Flow Method The average of the comparable companies, 12.2, was used to calculate Telkom s value. Cash flow is defined as income after taxes minus preferred dividends and general partner distributions plus depreciation, depletion, and amortization. Discounted Cash Flow Analysis We prepared three different versions of our DCF model, which are as follows: 5 year monopoly with no terminal value (Exhibit 1) 6 year monopoly with no terminal value (Exhibit 2) 6 year monopoly with terminal value (Exhibit 3) Three different scenarios were considered since long-term cash flows are unknown and highly variable. Exhibit 1, the 5-year model, is the most conservative since it implicitly assumes Telkom will harvest no cash flows after the monopoly expires in This scenario would result from immediate and aggressive competition in the post-monopoly period. Exhibit 1 generates a value of 2.7 billion Rand for 30% of Telkom, compared to the actual investment of 5.6 billion Rand. Similar to Exhibit 1, the 6-year model (Exhibit 2) also assumes no terminal value. This model guarantees that Thintana will have met all necessary requirements for the extra year of monopoly 5

6 status. Both SBC and Telekom Malaysia have demonstrated success in past telecommunications projects. Thus, it is reasonable to assume that they will achieve the South African government s targets. The NPV of 30% of Telkom is 2.4 billion Rand (see Exhibit 2). The difference between this value and the actual amount paid by Thintana could be attributed to the real option value of controlling the future hub of telecommunications on the entire continent of Africa. However, we believe the most appropriate methodology for valuing Telkom is included in Exhibit 3 the 6-year monopoly with a terminal value calculation. Our model generated a value extremely close to the amount actually paid by Thintana. Exhibit 3 estimates that the value of a 30% stake in Telkom is 5.5 billion Rand. The difference of 100,000 Rand could represent a premium paid for the opportunity to control telecommunications traffic throughout Africa as well as estimation differences. Our assumptions used in creating the three different DCF models are listed below. Assumptions 50% interest in Vodacom Actual cash flows in 1996 were used as the basis of determining cash flows in subsequent years. Thus, Telkom s 50% ownership of Vodacom is implicitly included in the cash flows. However, we did not separate this investment from Telkom s overall operations. Therefore, Vodacom s cash flows weren t valued discretely from Telkom s cash flows. We assumed that any Vodacom proceeds would be reverted back into Vodacom for capital expenditures. Growth Rate The company's historical sales-per-line and cost-per-line growth rates are 16% and 13.9%, respectively. Therefore, we used these rates for Telkom s monopoly years. Post-monopoly, we assumed that sales and costs will grow at 10%. We arrived at 10% assuming a post-monopoly decrease in price due to competition, but increase in the volume of customers. Tax In 1997, the South African corporate tax rate was 35%. Therefore, this is the rate that was plugged into our DCF model. Although Telkom had an effective tax rate of only 23% in 1996, this was due to a one-time deduction and other exemptions. Depreciation The rate of depreciation is constant at 12% of face value, annually. The company does have the option of accelerated depreciation, thereby using a depreciation rate of 4 years. To be conservative, we used the 12% annual rate. 6 th Year Monopoly We believe is very likely that Telkom will earn a sixth year of monopoly status. Telkom has been extremely aggressive in meeting the South African government s infrastructure and black empowerment targets even ahead of schedule. 6

7 Currency Our model assumed a constant Rand/US$ depreciation rate of 10% per year. This has been the historical average depreciation rate since For conservative purposes, the rate appears reasonable. Economic theory suggests that exchange rates are based on purchasing power parity (PPP). The results of this comparison since 1992 are reflected below. Actual R/S exchange rate vs implied purchasing power parity rate R/$ Exchange rate Expected Ex rate Feb-90Jun-90Oct-90Feb-91Jun-91Oct-91Feb-92Jun-92Oct-92Feb-93Jun-93Oct-93Feb-94Jun-94Oct-94Feb-95Jun-95Oct-95Feb-96Jun-96Oct-96Feb-97Jun-97Oct-97Feb-98Jun-98Oct-98 Thintana raised funds to purchase 30% of Telkom in US dollars. As mentioned in the case, SBC International borrowed funds from its parent company, SBC Communications Inc., to finance its investment in Telkom. SBC Communications can borrow at a market interest rate for a AA rated company (approximately 50 basis points over LIBOR). This amount was converted into Rand at the 1997 rate of 4.44 Rand/US$ and paid in one lump-sum to the South African government. However, Thintana is still exposed to exchange rate volatility. For example, if SBC decides to repatriate funds back to its headquarters in the United States, the exchange rate will probably be unfavorable assuming the Rand continues depreciating at current rates. Moreover, SBC is not using any derivative instruments to protect against currency fluctuations. Our DCF models used very conservative annual exchange rates, assuming a constant devaluation in the Rand against the US dollar. Depending on the actual exchange rate, the value of Telkom will vary significantly. Weighted average cost of capital We used a discount rate of 20.11%, calculated using WACC. See Exhibit 4 for a detailed breakdown of this calculation. The South African risk-free rate of return of 15.39% was the 5-year South African bond rate in December The beta of 1.2 was the average beta of the comparable telecommunications firms. The market premium of 7% was standard for South Africa. The return on equity was calculated as follows: 7

8 Return on Equity = Risk free rate + Beta * (Market Premium) = 15.39% * (7%) = 23.79% The return on debt was calculated by dividing Telkom s 1996 interest expense by total debt outstanding. The average interest rate was 16.73%, which is expected for Telkom s credit rating of Baa3. The after-tax return on debt is reduced to 10.87%, given South Africa s corporate tax rate of 35%. The average debt-to-equity ratio was 46% in 1996, but with the infusion of capital from Thintana in 1997, the debt ratio would drop to 29% in Thus, the WACC was calculated based on 1997 s 29% debt and 71% equity ratio. The breakdown follows: Portion Return WACC Debt 29% 10.87% 3.10% Equity 71% 23.79% 17.01% 20.11% 8

9 Exhibit 1: 5-Year Monopoly with No Terminal Value Telkom South Africa Valuation using Discounted Cash Flows Data Growth in Sales per line 16.00% till 02/03 Growth in Operating Costs 13.90% till 02/03 Depreciation (% of Fixed Assets) 12.00% Effective Rate of Tax 35.00% from Balance Sheet 2,775,000 Discount Rate 20.11% Exchange Rate Depreciation 10.00% Perpetual Growth Rate 2.00% Change in Working Capital Growth 13.90% Assumed to be growing at the same rate as Operating Costs not used in NPV Monopoly period begins 5 year monopoly period ends 95/96 96/97 97/98 98/99 99/00 00/01 01/02 No. of current lines 3,775,355 3,919,084 4,244,084 4,704,084 5,304,084 6,004,084 6,694,084 New Lines added per year - 143, , , , , ,000 Sales per line 2,799 3,247 3,766 4,369 5,068 5,879 6,819 Operating Costs per Line - 2,443 2,783 3,169 3,610 4,112 4,683 Fixed Assets 15,514,872,000 17,753,087,360 22,522,716,877 29,569,990,852 37,011,591,949 43,520,200,915 49,347,776,806 Per line costs 28,526 21,231 21,196 18,317 15,643 16,014 Cash Flows 95/96 96/97 97/98 98/99 99/00 00/01 01/02 Sales 10,567,288,000 12,724,638,695 15,984,639,566 20,551,897,932 26,880,989,342 35,297,147,047 45,650,127,157 Less: Operating Costs - 9,574,322,212 11,809,490,524 14,908,913,101 19,147,189,367 24,686,818,432 31,349,689,598 Less: Depreciation - 2,130,370,483 2,702,726,025 3,548,398,902 4,441,391,034 5,222,424,110 5,921,733,217 Profit Before Tax (after Dep) - 1,019,945,999 1,472,423,016 2,094,585,929 3,292,408,941 5,387,904,505 8,378,704,342 Less: Taxes - 356,981, ,348, ,105,075 1,152,343,129 1,885,766,577 2,932,546,520 Profit After Tax - 662,964, ,074,960 1,361,480,854 2,140,065,812 3,502,137,928 5,446,157,822 Add: Depreciation - 2,130,370,483 2,702,726,025 3,548,398,902 4,441,391,034 5,222,424,110 5,921,733,217 Less: Capital Expenses - 4,100,000,000 6,900,000,000 9,750,000,000 10,990,000,000 10,950,000,000 11,050,000,000 Less: Change in Working Capital 365, , , , , ,997 Free Cash Flows (1,307,030,294) (3,240,615,520) (4,840,594,644) (4,409,083,497) (2,226,053,412) 317,190,041 Exchange Rate (Rand / 1$) (April ending) Free Cash Flows in Dollars $ (294,376,192) $ (641,706,044) $ (804,085,489) $ (665,823,542) $ (305,600,260) $ 39,586,308 Net Present Value in Rands (9,032,094,839) SBC's & Malaysia's stake (30%) in Rands $ (2,709,628,452) Net Present Value in Dollars $ (2,024,246,340) SBC's & Malaysia's stake (30%) in dollars $ (607,273,902) Amount actually paid by SBC at current exchange rates Rands) 1,261,000, ,598,840,000 9

10 Exhibit 2: 6-Year Monopoly with No Terminal Value Telkom, South Africa Valuation using Discounted Cash Flows Data Growth in Sales per line 16.00% till 02/03 Growth in Operating Costs 13.90% till 02/03 Depreciation (% of Fixed Assets) 12.00% Effective Rate of Tax 35.00% from Balance Sheet 2,775,000 Discount Rate 20.11% Exchange Rate Depreciation 10.00% Perpetual Growth Rate 2.00% Change in Working Capital Growth 13.90% Assumed to be growing at the same rate as Operating Costs not used in NPV Monopoly period starts 6 year monopoly period ends 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 No. of current lines 3,775,355 3,919,084 4,244,084 4,704,084 5,304,084 6,004,084 6,694,084 7,394,084 New Lines added per year - 143, , , , , , ,000 Sales per line 2,799 3,247 3,766 4,369 5,068 5,879 6,819 7,911 Operating Costs per Line - 2,443 2,783 3,169 3,610 4,112 4,683 5,334 Fixed Assets 15,514,872,000 17,753,087,360 22,522,716,877 29,569,990,852 37,011,591,949 43,520,200,915 49,347,776,806 54,476,043,589 Per line costs 28,526 21,231 21,196 18,317 15,643 16,014 15,786 Cash Flows 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 Sales 10,567,288,000 12,724,638,695 15,984,639,566 20,551,897,932 26,880,989,342 35,297,147,047 45,650,127,157 58,491,559,827 Less: Operating Costs - 9,574,322,212 11,809,490,524 14,908,913,101 19,147,189,367 24,686,818,432 31,349,689,598 39,441,206,502 Less: Depreciation - 2,130,370,483 2,702,726,025 3,548,398,902 4,441,391,034 5,222,424,110 5,921,733,217 6,537,125,231 Profit Before Tax (after Dep) - 1,019,945,999 1,472,423,016 2,094,585,929 3,292,408,941 5,387,904,505 8,378,704,342 12,513,228,095 Less: Taxes - 356,981, ,348, ,105,075 1,152,343,129 1,885,766,577 2,932,546,520 4,379,629,833 Profit After Tax - 662,964, ,074,960 1,361,480,854 2,140,065,812 3,502,137,928 5,446,157,822 8,133,598,262 Add: Depreciation - 2,130,370,483 2,702,726,025 3,548,398,902 4,441,391,034 5,222,424,110 5,921,733,217 6,537,125,231 Less: Capital Expenses - 4,100,000,000 6,900,000,000 9,750,000,000 10,990,000,000 10,950,000,000 11,050,000,000 11,050,000,000 Less: Change in Working Capital 365, , , , , , ,436 Free Cash Flows (1,307,030,294) (3,240,615,520) (4,840,594,644) (4,409,083,497) (2,226,053,412) 317,190,041 3,619,925,057 Exchange Rate (Rand / 1$) (April ending) Free Cash Flows in Dollars $ (294,376,192) $ (641,706,044) $ (804,085,489) $ (665,823,542) $ (305,600,260) $ 39,586,308 $ 410,707,229 Net Present Value in Rands (8,028,130,632) SBC's & Malaysia's stake (30%) in Rands $ (2,408,439,190) Net Present Value in Dollars $ (1,813,488,591) SBC's & Malaysia's stake (30%) in dollars $ (544,046,577) Amount actually paid by SBC at current exchange rates Rands) 1,261,000, ,598,840,000 10

11 Exhibit 3: 6 Year Monopoly with Terminal Value Telkom, South Africa Valuation using Discounted Cash Flows Data Growth in Sales per line 16.00% till 02/03 Growth in Operating Costs 13.90% till 02/03 Depreciation (% of Fixed Assets) 12.00% Effective Rate of Tax 35.00% from Balance Sheet Discount Rate 20.11% Exchange Rate Depreciation 10.00% Perpetual Growth Rate 2.00% Change in Working Capital Growth 13.90% Assumed to be growing at the same rate as Operating Costs not used in NPV Monopoly period begins 95/96 96/97 97/98 98/99 99/00 00/01 No. of current lines 3,775,355 3,919,084 4,244,084 4,704,084 5,304,084 6,004,084 New Lines added per year - 143, , , , ,000 Sales per line 2,799 3,247 3,766 4,369 5,068 5,879 Operating Costs per Line - 2,443 2,783 3,169 3,610 4,112 Fixed Assets 15,514,872,000 17,753,087,360 22,522,716,877 29,569,990,852 37,011,591,949 43,520,200,915 Per line costs 28,526 21,231 21,196 18,317 15,643 Cash Flows 95/96 96/97 97/98 98/99 99/00 00/01 Sales 10,567,288,000 12,724,638,695 15,984,639,566 20,551,897,932 26,880,989,342 35,297,147,047 Less: Operating Costs - 9,574,322,212 11,809,490,524 14,908,913,101 19,147,189,367 24,686,818,432 Less: Depreciation - 2,130,370,483 2,702,726,025 3,548,398,902 4,441,391,034 5,222,424,110 Profit Before Tax (after Dep) - 1,019,945,999 1,472,423,016 2,094,585,929 3,292,408,941 5,387,904,505 Less: Taxes - 356,981, ,348, ,105,075 1,152,343,129 1,885,766,577 Profit After Tax - 662,964, ,074,960 1,361,480,854 2,140,065,812 3,502,137,928 Add: Depreciation - 2,130,370,483 2,702,726,025 3,548,398,902 4,441,391,034 5,222,424,110 Less: Capital Expenses - 4,100,000,000 6,900,000,000 9,750,000,000 10,990,000,000 10,950,000,000 Less: Change in Working Capital 365, , , , ,450 Free Cash Flows - (1,307,030,294) (3,240,615,520) (4,840,594,644) (4,409,083,497) (2,226,053,412) Exchange Rate (Rand / 1$) (April ending) Free Cash Flows in Dollars $ (294,376,192) $ (641,706,044) $ (804,085,489) $ (665,823,542) $ (305,600,260) $ Net Profits in dollars $ 149,316,419 $ 189,519,794 $ 226,159,610 $ 323,175,145 $ 480,785,526 $ Net Present Value in Rands 18,470,964,005 SBC's & Malaysia's stake (30%) in Rands $ 5,541,289, ,248,038,108 Net Present Value in Dollars $ 776,745,906 SBC's & Malaysia's stake (30%) in dollars $ 233,023,772 NPV of Net Profits 2,919,028,182 SBC's & Malaysia's stake (30%) in dollars $ 875,708,455 Actual Valuation Amount actually paid by SBC at current exchange rates Rands) 1,261,000, ,598,840,000 11

12 Exhibit 3 (continued): 6 Year Monopoly with Terminal Value 6 year monopoly peoriod ends 02/03 03/04 04/05 05/06 No. of current lines 7,394,084 8,642,577 8,642,577 8,642,577 New Lines added per year 700, Sales per line 7,911 8, ,572 10, Operating Costs per Line 5,334 5, ,454 7, Fixed Assets 54,476,043,589 47,938,918,358 42,186,248,155 37,123,898,377 Per line costs 15,786 Cash Flows 02/03 03/04 04/05 05/06 Terminal Value Sales 58,491,559,827 75,204,662,352 82,725,128,587 90,997,641,446 Less: Operating Costs 39,441,206,502 50,710,950,887 55,782,045,976 61,360,250,573 Less: Depreciation 6,537,125,231 5,752,670,203 5,062,349,779 4,454,867,805 Profit Before Tax (after Dep) 12,513,228,095 18,741,041,262 21,880,732,833 25,182,523,068 Less: Taxes 4,379,629,833 6,559,364,442 7,658,256,492 8,813,883,074 Profit After Tax 8,133,598,262 12,181,676,820 14,222,476,341 16,368,639,994 90,384,538,895 Add: Depreciation 6,537,125,231 5,752,670,203 5,062,349,779 4,454,867,805 Less: Capital Expenses 11,050,000, Less: Change in Working Capital 798, , , ,062, Free Cash Flows 3,619,925,057 17,933,468,744 19,283,860,013 20,822,445, ,977,609,503 Exchange Rate (Rand / 1$) (April ending) Free Cash Flows in Dollars $ 410,707,229 $ 1,849,713,146 $ 1,808,178,779 $ 1,774,951,285 $ 8,909,950,730 Net Profits in dollars $ 922,816,786 $ 1,256,455,629 $ 1,333,590,883 $ 1,395,299,086 $ 7,004,161,869 12

13 Exhibit 4: WACC Calculation Beta 1.2 Risk Free Rate of Return 15.39% Market Premium 7% Return on Equity 23.79% Return on Debt (before tax) 16.73% Tax Rate 35.00% Return on Debt (after tax) 10.87% Debt to Equity Ratio / / /98 Share Capital 3,899,223 3,899,223 8,293,000 Reserves 2,467,333 4,227,000 5,867,000 Shareholders Interest 6,366,556 8,126,223 14,160,000 Net interest bearing debt 8,739,037 6,906,000 5,653,000 Total 15,105,593 15,032,223 19,813,000 Debt 58% 46% 29% Equity 42% 54% 71% WACC 16.32% 17.86% 20.11% 13