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Cape Town - South African government may have to consider bailing out black economic empowerment (BEE) assets as South Africa's mining industry struggles to navigate the global economic storm.
Speaking at the Mining Indaba, Absa Capital principal of investment banking Cliff Zephyrine warned that something will have to be done if BEE transactions are to remain in the hands of black investors.
BEE deals in South Africa's mining sector have been structured to give black investors direct access to cash flows or dividends, which are in turn used to service the debt used to acquire stakes of about 26% in mining companies.
But not only have mining stocks shed an average of a third of their value in the last six months, the commodity price crash following the bursting of the supercycle bubble has left many mining companies short of cash and putting dividends on hold.
Zephyrine says 2009 is a "do or die" year for mining empowerment where the downside risks have reached a point where wider coordinated intervention is necessary and time sensitive.
He said this is based on a meaningful number of transactions, particularly in the mining sector, that are now breaching agreements due to the surprising and substantial deterioration of earnings, cash flow and share prices.
This year is the time for committed collaboration for the sake of sustainable black ownership and wealth transfer, he said.
To avoid BEE bankruptcy, it is important to clarify the principles and assumptions on which mining empowerment transactions are based, and develop solutions.
"Input needs to come from three key areas. Firstly, a BEE-led solution where experienced players take on a leading position to enhance long-term viability of black business. Secondly, 'corporate life savers' could intervene where BEE entities depend on a level of financial support from their respective mining partners; and thirdly, government-led involvement where there is a revision on deadlines for borderline transactions or government bailout for risky BEE positions," suggested Zephyrine.
He cautioned over banks becoming the owners of the BEE stakes in the same way they did following the first wave of BEE, which was cut short by the market collapse of the late 1990s.
At the time banks were blamed for sabotaging BEE because of the way they had structured the deals. These deals used special purpose vehicles to facilitate the transfer of assets to black investors and were more often than not based on the seller's share price.
Now the mining and banking industries face a similar dilemma.
Zephyrine suggests some form of government bailout where at-risk BEE positions can be transferred to a state ministry, thereby replacing banks as the ultimate holder of the stakes in the case of default.
He warned that it was time sensitive, with South African banks already in a "delicate position" given the global economic environment.
Absence of black capital
Earlier this year, international researchers warned that BEE deals valued at more than R220bn were threatened by the collapse of metals prices and their effect on the South African mining industry.
Also at stake are thousands more jobs on top of those already announced after the end of a "commodities supercycle" that has caught mining houses and host governments "completely off guard", global strategic analysts Oxford Analytica said in research published in January.
"In the absence of black capital, deals have been financed almost exclusively by debt, and rested on the assumption that share prices, like house prices, could only go up.
"Now that financial reality has hit home, it is feared that around 50% of the estimated R446bn worth of all BEE deals executed hitherto may now have to be written off by the banks," the analysts warned.
- I-Net Bridge
