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Patrice Motsepe: a rare success story

The billionaire’s tale is somewhat of an anomaly; BEE-discontent is growing.

Prudence Moime looks up from stirring a pot of corn meal in front of her two-room shack in northeastern South Africa and gazes across the surrounding hillside. Just beyond her view lie some of the world’s best platinum deposits.

She says she waits in vain for some of the money promised to her village by African Rainbow Minerals (JSE:ARI) or ARM, part-owned by Patrice Motsepe, the richest black South African and a [black economic empowerment] beneficiary.

As former President Nelson Mandela enters his 96th year recovering in a Pretoria hospital, his dream of widely distributing the country’s riches has faded. Discontent is mounting 19 years after his election over how a tiny elite with ties to the ANC benefitted from more than R600 billion in BEE deals.

Almost 14% of the South Africa’s 53 million people live on less than $1.25 a day, according to the World Bank. Black citizens on average earn a sixth of what their white counterparts do and 1.9 million households have no income, census data shows.

Villagers say that in 2000, Motsepe’s people offered them an 8.5% stake in the Modikwa platinum mine on credit, promising to develop schools, hospitals, homes and roads in the hills of Limpopo province. While Motsepe today is a billionaire, the 80 000 community members still collectively owe about R158 million on their share.

“They promised to develop the village,” Moime said. “Houses were never built. Roads weren’t built properly. We’re not happy at all.”

No jobs

Moime, 30, and fellow inhabitants have no running water.

Modikwa officials say the company has spent R110 million on community development projects, including a R65 million road, and recruits more than three-quarters of the mine’s workforce from the surrounding area.

“Sometimes the mining industry doesn’t get the recognition it deserves for a lot of the good, good work we do,” Motsepe said in September last year. “We can always do more. Our commitment to communities, to labour and to shareholders is without question.”

On January 30, Motsepe pledged to donate at least half his family’s future income to charity “to uplift poor and other disadvantaged and marginalised South Africans,” joining Berkshire Hathaway Chairman Warren Buffett’s Giving Pledge initiative to boost philanthropy. His family foundation, established in 1999, already funds educational, religious and community projects, according to its website.

Billionaire ranking

Motsepe is worth $2.2 billion, according to the Bloomberg Billionaires Index. His 40.7% stake in ARM is worth $1.39 billion and a share in financial services group Sanlam (JSE:SLM) Ltd. is worth $597 million. He also has about $200 million in cash and is the board chairman of Harmony Gold (JSE:HAR), in which ARM has a 14.6% stake.

In addition to his ARM stake, Motsepe has had control of the Mamelodi Sundowns, one of the country’s biggest soccer teams, since 2003. His wife, Precious Moloi- Motsepe, is a medical doctor who runs African Fashion International, which promotes SA fashion.

Though blacks were banned from studying at Johannesburg’s University of the Witwatersrand, he obtained a waiver allowing him to join a small group of black law students. Motsepe joined Bowman Gilfillan in 1988, becoming the law firm’s first black partner in 1993. The next year, he quit law to go into mining, beginning by offering services to operators.

Motsepe acquired his first mine in January 1998, from Anglo American plc (JSE:AGL). The company sold six gold mine shafts to ARM for the equivalent of $7.7 million, allowing it to pay out of future profits. Motsepe turned loss-making shafts around by cutting costs and firing workers, and paid off the debt.

ARM listed on the stock exchange in 2002, just as it was becoming clear the government would legislate that mining companies needed to include black owners into their business models.

Mining deal

That was critical in helping Motsepe secure the deal in 2003 that turned ARM into the company it is today. It took control of Anglovaal Mining, giving it stakes in iron ore, manganese and chrome mines. One of the main reasons Anglovaal folded into ARM was to achieve “a significant black shareholding,” Anglovaal said at the time.

In that transaction, black empowerment “was a huge factor,” according to Gerard Kemp, who advised Motsepe at the time. Big companies “probably wouldn’t have come to him” without the black-empowerment push, said Kemp. “He was bankable because he had a track record. You must give him credit for his first few transactions,” which he did on his own.

The newly acquired mines contributed R3.5 billion to earnings before headline earnings, in the financial year ending in June 2012. That was more than ARM’s overall earnings since some divisions incurred losses.

Concentrated ownership

Motsepe’s ARM was one of just six companies benefiting from almost three-quarters of the R28.4 billion worth of assets transferred into black hands in 2003, data released by the dti show. The others included Ramaphosa’s investment company, Shanduka Group Ltd., and Sexwale’s then-company, Mvelaphanda Resources (JSE:MVL) Ltd.

In 2003, Parliament adopted the Broad-Based Black Economic Empowerment Act. It gave companies promoting black investment and ownership preferential status in securing state contracts, and encouraged them to hire and promote more black staff and buy more goods from black-owned companies. Mining companies also agreed at the time that they would sell 26% of their assets to black investors by 2014.

Village debt

When the mine was established, ARM not only promised an ownership stake, it arranged an interest-free loan for the villagers to pay for it, the company, villagers say. Seven communities borrowed R306 million from ARM.

While ARM has paid off its own debt through income from Modikwa and other operations, only about half the villagers’ debt has been repaid, Mokgosi Nkoana, the mine’s general manager, said. Built more than a decade ago at a total cost of R3.6 billion, the mine should operate for another 80 years, Nkoana said, adding that a downturn in platinum prices probably will delay repayments and dividend payments to the communities.

In addition to the Modikwa-funded community development projects, including the road, 78% of Modikwa’s workforce comes from the surrounding area, according to Nkoana. They have earned R4.2 billion in wages to date, he said.

“You might not necessarily with the naked eye see the improvement in the community, but I’m certain that from where we were ten years ago to where we are now there has been a lot of development,” he said. “To really satisfy all of them isn’t a ten-year process, it’s a lifetime process.”

Empowerment changes

By 2007, a study published by economics professors Daron Acemoglu of the Massachusetts Institute of Technology, Stephen Gelb of the University of Johannesburg and James Robinson of Harvard University found 56 senior ANC officials had positions on listed companies’ boards.

More recently, a study published by Johannesburg’s Sunday Times newspaper last year shows that of the 54 South Africans who own listed shares worth more than R500 million, a dozen were black or of mixed race. Four of them hold or have held senior posts in the government or ANC, including Cyril Ramaphosa, the party’s deputy president, and Tokyo Sexwale, who was human settlements minister until July 9.

On June 20, the National Assembly approved changes to the empowerment laws to enable the government to fine companies at least 10% of sales for deliberately misrepresenting the measures they have undertaken to promote black participation.

The amendments also provide for the establishment of a new commission to oversee compliance and investigate complaints.

The government says the initial difficulties that saw deals benefitting a select few have been largely fixed.

“It’s become much, much more broad-based,” said Lionel October, dti director-general. “Most of the deals now include staff, communities, women.”

While President Zuma says black empowerment needs to be refined and that “the majority of the black people still suffer as they did many years ago,” he denies the policy has failed or is politically tainted.

“I don’t think it is true that black economic empowerment has benefitted ANC people only,” he told lawmakers in Cape Town on March 20. “It has benefitted a particular percentage of the black people in this country, who are not ANC. If there are people who may be ANC, who are black, who qualify for black economic empowerment, why should they be punished, why should they not participate?”

Motsepe declined to be interviewed for this story. ARM executive director and former chief executive officer Andre Wilkens and head of investor relations Jongisa Klaas declined to comment.

©2013 Bloomberg News

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