10 August 2010 23:11

Special report podcast: Nonkululeko Nyembezi-Heita - CEO, ArcelorMittal South Africa

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Alec Hogg is a writer and broadcaster. He founded Moneyweb

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    Explains why ArcelorMittal has done a deal with the people who seem to have high-jacked their mineral rights.

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    ALEC HOGG:  In this special podcast we speak with the chief executive of ArcelorMittal South Africa (JSE:ACL), Nonkululeko Nyembezi-Heita.  Nonku South Africa is a strange place to do business in.  This transaction that you did today with Imperial Crown Trading (ICT) - for the outsiders it looked like some prominent Kimberley citizens and one, Jagdish Parekh, had somehow high-jacked your mineral rights which had then led to all kinds of other knock-on effects.  Now you've dealt with them - you've gone and done a transaction with them.  Talk us through it.

    NONKULULEKO NYEMBEZI-HEITA:  I have to say that from our perspective we look at these things fairly dispassionately and the crisp facts are that ArcelorMittal lost its mineral rights over its portion of Sishen Mines when it didn't convert.  The question becomes what do you do post that event - and you go about searching for solutions.  You go and talk to people who typically could assist in moving you towards that point - it would be hard not to have at least looked at ICT - clearly they have the prospecting rights, we have to still have to assess whether this was lawfully given.  We believe at this time that it was and we did put out in our statement that we are still in the middle of a due diligence in that regard.  There are some legal hurdles that still have to be overcome, but essentially if - and I know there are a lot of ifs - but if we overcome all of those, then we could at the other end of this transaction, be sitting in a position where we've restored our 21.4% share of Sishen Mine as a mineral right, and that is why it makes very strong commercial sense for ArcelorMittal South Africa to at least attempt to acquire the rights.

    ALEC HOGG:  Before we go into how you valued it at R800m, how much money will you save if you do get those rights back?

    NONKULULEKO NYEMBEZI-HEITA:  It's quite a bundle and it's a very quick arithmetic to do - in fact it would get us to a place that is better than what we'd lost because what we lost, supposedly according to Kumba (JSE:KIO) and according to us clearly not, but what we lost was 6.25 million tonnes at cost plus three.  An acquisition of these rights, and assuming they get converted to the mining rights, gets us 21.4% of Sishen which is not actually 6.25 million tonnes, it's something to the north of that - somewhere around eight million tonnes.  So you do a quick calculation between that eight million tonnes at the commercial rate today of say $150/tonne versus costs - and Kumba put out a cost at their results announcement of something around $15/tonne.  OK, we were paying $30/tonne and the difference is massive - it's in the billions.

    ALEC HOGG:  Why then would ICT only sell for R800m - if it's worth billions to you?

    NONKULULEKO NYEMBEZI-HEITA:  Because of the risks attached - the price is a negotiated price reflecting the risk still attached to that mineral rights.  As I said before, the first hurdle will be to have this prospecting right transferred to ArcelorMittal South Africa by ministerial consent.  The second hurdle is to overcome the review process that has been launched by the Department of Mineral Resources (DMR) into their own processes of awarding the rights.  Thirdly there is a legal process in court that has been launched by Kumba, again challenging the way in which the prospecting right was awarded.  So there are quite a few hurdles to overcome and clearly therefore the value that ICT can derive from selling at this stage is to reflect that.

    ALEC HOGG:  So you've almost got a back door in a way, if those other three things don't go in the way that you would like them to, and then at least you end up owning these mineral rights for R800m.

    NONKULULEKO NYEMBEZI-HEITA:  Correct - and I have to say that we're still pursuing the arbitration.  The arbitration is not necessarily anything to do with the restoration of mineral rights - it is the restoration of our commercial agreement with Kumba, which we contend, remains irrespective of the ownership of the mineral rights.  So that process will continue - if you think about it carefully enough, what ArcelorMittal is doing in this action, is making certain that we've got a number of irons in the fire - and whichever scenario ultimately plays out successfully, would find us well positioned in relation to that.  That is really all that we're doing. 

    ALEC HOGG:  And as you say you're looking at it dispassionately - you're not looking at it from a moral or any other kind of soft perspective - because that's who you are - you are a person who comes with a high reputation and high morals and to deal with people who seem to have high-jacked your mineral rights in the first place, it does beg a belief in some quarters.

    NONKULULEKO NYEMBEZI-HEITA:  What I will say is that dispassionate does not equal not paying attention to the law.  There will be a process where we satisfy ourselves that nothing unlawful has taken place because if it did, then it would render that prospecting right defective - I'm not suggesting that the end justifies the means - not by any means.  We are bound as a company to comply with anti-corruption legislation in South Africa and as ArcelorMittal Group we are also bound by the Foreign Corrupt Practice Act out of the US - therefore there is no suggestion at all that we are going to cut corners.  But we cannot make business decisions based on speculation or allegations printed in the media.  We have to base it on facts which is basically what we're doing now - establishing the true position as told to us by the protagonists ...

    ALEC HOGG:  That's fair enough, but these protagonists, these individuals - Jagdish Parekh and some of the ‘Kimberley Kids' as we call them here at Moneyweb - they are also participants in your R9.75bn BEE transaction that you announced today.

    NONKULULEKO NYEMBEZI-HEITA:  This is correct.  Now go back to the value question - while the two transactions - the BEE and the acquisition of the ICT shares are not financially linked - you can well imagine that at a strategic level, they are.  Then there is a sense that there is more value in this than ICT rightly believes or to derive, and that can also be achieved through them participating in our BEE deal.

    ALEC HOGG:  Lets get things straight here - in other words if you were going to pay them - if you didn't include them in your BEE transaction, you would have had to pay more than R800m...

    NONKULULEKO NYEMBEZI-HEITA:  Yes...

    ALEC HOGG:  And how did the Gupta family become BEE participants, or how does one justify their participation in this, given that they are Indian nationals?

    NONKULULEKO NYEMBEZI-HEITA:  The Gupta family is not really participating as a BEE participant so much as they were a major facilitator in the transaction between ICT and ArcelorMittal South Africa.  And this really just becomes a way to compensate them for that - now this is a tried and tested method where facilitators get to participate in the equity deal as a recompense for their efforts.

    ALEC HOGG:  But black economic empowerment is meant to empower those who need empowering.  In this case, your transaction today - there are very wealthy people who are going to benefit from this.  How can you look at a person in the street who is struggling to make ends meet, and say to them: "yes we are empowering you through this transaction" or is this too, just a commercial deal?

    NONKULULEKO NYEMBEZI-HEITA:  Well you get different models of empowerment, but all of them ought to have something in common and that something is a broad based element.  So we have not tossed the broad based element out completely and in fact have made an allocation that goes to 8,500 staff of ArcelorMittal South Africa.  We also have an element ring-fence within the Ayigobi Consortium itself where 25% of their share allocation will also go to the broad based elements of BEE groupings, which we have targeted, or we've said we will target women, youth and our new entrants into the empowerment...

    ALEC HOGG:  Have you seen the detail?

    NONKULULEKO NYEMBEZI-HEITA:  As ArcelorMittal South Africa we will actually be involved in the final selection process of those groupings - that is something that we have insisted on doing, and therefore we will make sure that those happen, they're verified and they're audited and the benefits flow to those parties...

    ALEC HOGG:  But there is still three quarters of that transaction and this is a massive transaction, going to Sandile Zungu who is a member of Zuma's BEE Council - Duduzane Zuma who is obviously a member of the President's family, the Gupta family, etcetera - I just wonder when you look back on this maybe in time to come, whether you wouldn't have wanted to have done things differently or whether you were forced because of the commercial situation.

    NONKULULEKO NYEMBEZI-HEITA:  I think the driver is definitely the very strong commercial requirements for us to solve the problems that we face as a company.  If you cast your mind back three weeks ago and remember the announcement that ArcelorMittal made and the sheer mayhem that could be unleashed if we don't find a way to solve this thing - it says the stakes are very high - not only for ArcelorMittal South Africa, but for South Africa as a country in terms of potential closures of plants, potential losses of jobs - so in thinking about this, this became quite an arresting feature that we have to find a solution for this, because it's important and it's urgent.

    ALEC HOGG:  But why call it a BEE transaction because it clearly isn't empowering those who need empowerment?

    NONKULULEKO NYEMBEZI-HEITA:  As I said before, you do get models of BEE that are almost en masse a broad based deal, which is great.  But you do get other models where that is simply not achievable - and you've seen in South Africa, over time, models where strategic investors play a very large role and that typically is where a company needs assistance in a particular area that they are trying to pursue.  So if all ArcelorMittal was efver going to do was produce steel in South Africa, probably the strategic element wouldn't be so important, but given that we're striking out into an arena that we have staked out in mining where we do in fact need assistance, it makes sense for us to go and get around us other people who may be in a position to assist us in that regard - starting with the very serious and grave situation of Sishen Mine.  So it needs to be looked at in that way - while the heartstrings could pull in one direction, commercial reality does dictate that we have to find a solution that fits our unique needs at this time in South Africa.

    ALEC HOGG:  A strange country to do business in...

    NONKULULEKO NYEMBEZI-HEITA:  Your words Alec, not mine.  I'm just paid to find solutions to problems, and sometimes you do things that under other circumstances you might not do, but it is what it is.

    ALEC HOGG:  I hope our children judge us favourably because in this kind of a transaction wow, it doesn't look terribly empowering, but Nku you've laid it out and we appreciate your honesty, as always, and best of luck going forward.

    The SAfm Market Update with Moneyweb is broadcast on SAfm 104-107fm, weekdays at 18:00 to 18:30.
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