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Rio Tinto may lose black partners

A move that would leave it below the legal minimum for Black ownership.
Image: Chris J. Ratcliffe/Bloomberg

Rio Tinto Group’s South African operation is facing the loss of a large bloc of Black investors, a move that would leave it below the legal minimum for Black ownership, two people familiar with the situation said.

The main investors in Blue Horison Investments Ltd., which holds 24% of Rio-controlled titanium producer, Richards Bay Minerals, have told Rio they want to be permitted to to sell a stake they value at R5.5 billion ($393 million) or have it bought out by RBM, the people said.

The Black investors are frustrated by the suspension of dividends, partly due to disruptions caused by the coronavirus pandemic, and community opposition that stymied expansion plans. By law, mining assets in the country, at the time when the deal was concluded, must be at least 26% Black-owned. RBM is also 2% owned by Black employees.

“It remains the company’s desire to have a strong and supportive shareholder base for RBM and a structure that ensures ongoing compliance with applicable Black economic empowerment legislation,” Rio said in a response to queries, declining to comment further on the dispute.

Should the Black shareholders get their wish RBM could need to find new partners to comply with the law. Not complying with the law would jeopardize its right to operate.

Lodged complaint

Blue Horison, which is 55% held by Black investment companies and 45% owned by communities that live near the operation , which produces minerals used in paint and plastic on South Africa’s north east coast, is locked into the holding until 2022 under the terms of a $550 million refinancing that was concluded in 2015. After that they are permitted to sell the shares but other RBM shareholders have a pre-emptive right to buy the shares should they choose to do so.

One of the investment companies lodged a complaint with a unit of the country’s Department of Trade and Industry that arbitrates in disputes over Black economic empowerment holdings after they received no response, the people said.

An acknowledgment of receipt of the complaint made to the Broad-Based Black Economic Empowerment Commission on April 8 said the body may take as long as a year to make a finding, the document seen by Bloomberg shows.

RBM is one of the world’s biggest so-called mineral sands operations. Rio doubled its stake in the operation in 2012 by buying BHP Group’s 37% stake for $1.7 billion.

Debt repayments

While RBM has been paying off debt in increments of about $29 million every six months, it is due to make a balloon payment of $223 million in November next year, documents seen by Bloomberg show. That is raising concern that there will be a further recapitalisation that would lock the Black shareholders into the holding until 2030, the people said.

“A strong operational performance with minimal disruptions is required to meet the the capital and loan repayments,” Bradley Reddy, then RBM’s chief financial officer, said in a document sent to shareholders on January 14 and seen by Bloomberg. “The projected capital and loan repayments is likely to exceed $700 million over the next two years.”

Rio Tinto and RBM aim to maintain a balance between cash returns to shareholders and investment in the business, Rio said in its response to Bloomberg’s queries.

The Black investors, while agreeing to the 2015 refinancing, have since become disenchanted by recurrent community protests that have led to the periodic shutting of the operation and halted the planned $463 million Zulti South expansion, the people said.

Late last year RBM’s earning fell $180 million short of projections, a shareholder document seen by Bloomberg shows.

© 2021 Bloomberg

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By its very nature, an investor is someone who has accumulated saved earnings. The only way to acquire saved earnings is by consuming less than what you earn. To consume less than what you earn, you need financial discipline, a future-orientated mindset, and a basic understanding of the power of compound interest. This why legally acquired wealth is merely a reflection of the character, work ethic, discipline, and mindset of the saver. Only those individuals who add sufficient value to society have the ability to earn more than what they consume. This implies that in order to build wealth, one has to add value to society first. This is how the capitalist system rewards individuals for their service to society.

What does this say about the need for BEE schemes?
The socialist redistributive scheme known as BEE will never create long-term, sustainable wealth for the beneficiaries. As we have stated before, accumulated wealth reflects the mindset of the saver. BEE beneficiaries, per definition, consume more than what they earn. Their life experience focuses on the past, not the future. They honor their forefathers and ignore their progeny. They believe in immediate gratification and frown upon “hoarding” or saving. If they were able to provide a valuable service to society they would not need a BEE scheme in the first instance. Their current position already reflects their mindset and a BEE scheme cannot change this mindset. That is why a BEE scheme is nothing more than a glorified social grant project, sponsored by white savers with the proper mindset. Therefore, BEE is a mindset tax.

A shareholder is a business partner. The market mechanism, with the affordability factor, screens these business partners and allows only those high-quality investors who can add value to society. A BEE scheme allows people who consume value to become business owners. That is why they will, at the very first opportunity, express their mindset by cashing in their shares in order to finance their consumption. They consume the asset value of their business, in other words.

If the law enables and enforces this process of the consumption of productive assets, then the law enables legalized plunder and economic decay. The law rewards the consumption mindset and punishes the frugality mindset. This can only lead to rising unemployment and an exploding Debt/GDP ratio.

Another one bites the dust!

What happened to manage expectations and what happens after the deal?
The majority of BEE deals methinks fail to add value and the reason for this are problems with post-merger-integration i.e. what happens after the deal and who does what.

The ”colonial” owners now have a business partner they expect to be hands-on, but the black investor may want no such thing.
The new black owners might have over-promised on his/her ability to get deals, and frustrations may result. The simple advice is to spend as much time and effort building an actionable plan as to what happens in the 12 months after the deal as you spend actually doing the deal.

Methinks the elephant in the room with most of these BEE transactions is that most prospective BEE ‘investors’ have no money. This means that in order to conclude a sale and purchase (of shares) agreement, the seller finances the buyer – this is known as ‘vendor finance’ and about half of all BEE deals are concluded in this way.

For inexperienced ”transactors”, the idea of the seller paying for the buyer to own shares often feels like an injustice (in reality, vendor finance is very common in private capital market transactions around the world).

Which begs the question – what did Blue Horison Investments Ltd pay for the 24 % of their Rio Tinto shares?

A BEE scheme funded with vendor finance is a free Call option in the hands of the beneficiaries and a billion rand liability, a Short Put Option, in the hands of the lender.

The beneficiaries have an unlimited profit if the share price rises and pays a dividend. They do not lose anything and can simply walk away, if the share price goes nowhere or if it crashes and pays no dividend. They received a gift, a donation in the form of a Long Call Option.

The lender has an unlimited loss if the share price crashes, or if the company can’t pay dividends. The company will have to absorb the bad debt of the failed BEE scheme, plus it is still liable for dividends, if and when, it can declare dividends. This implies that the company has sold a Put Option or is Short a Put Option.

For the empowering company, the BEE scheme is an unlimited liability with zero profit potential. For the BEE beneficiaries, the scheme offers unlimited upside and no downside. No manager or shareholder in his sane mind will willingly enter into such a one-sided and dangerous transaction. This is where the legislature enters the deal. The law enforces this one-sided transaction between an unwilling seller and a coercive buyer that does not contribute anything. This is pure expropriation of property without compensation.

This transaction bankrupted Lonmin and it is a ticking time bomb for every business.

This seems to be a naked ”Put Option” with unlimited downside loss potential!

Racial collectivist nonsense. Pathetic.

End of comments.

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