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ARM to restructure empowerment trust

Mining company to repurchase shares from empowerment trust and refinance debt.
Patrice Motsepe, African Rainbow Minerals Chair

JOHANNESBURG – African Rainbow Minerals (ARM) intends to restructure its empowerment trust in order to protect its black economic empowerment (BEE) status and limit financial stress on the company.

The restructuring comes after a fall in ARM’s share price forced the company to increase guarantees provided to the BEE trust from R700 million in mid-2015 to R850 million, in order to support the financial covenants of a loan undertaken with Nedbank. The trust used the loan to fund purchase of some 28.6 million shares in ARM from Harmony Gold in 2005.

While ARM has not suffered any losses, it said the value of shares held by the trust is below the loan covenant, making the current funding structure “untenable”.

Based on the share price at the time of writing (R71.84/share) the value of the shares held by the BEE Trust amounts to R2. 055 million versus the outstanding bank debt at the end of December of some R1.883 million.

“Given the size of the bank loan, the roll up of the interest less dividends received is likely to result in the bank loan balance continuing to increase and thus continue to put pressure on the ARM BBEE trust’s financial position going forward,” ARM said in a statement, dated February 15.

In lieu of providing further guarantees, ARM will restructure the trust’s shareholding and refinance its outstanding debt.

ARM, through a wholly-owned subsidiary, will repurchase 12.7 million shares held by the trust at a price of R51.91/share. Cash, including proceeds from the sale of ARM’s 50% interest in the Dwarsrivier Chrome Mine, will be used to fund the repurchase.

The proceeds of the repurchase will be used by the trust to pay down R651 million of its outstanding R1.88 billion loan to Nedbank. The remaining R1.3 billion will be refinanced with R300 million from Nedbank, R200 million from Harmony and R800 million from ARM. “The Nedbank loan is senior, secured against the remaining shares held by ARM Broad-Based Economic Empowerment Trust with no recourse to ARM,” it said.

ARM shareholders including ARM, Allan Gary and Kagiso Asset Management have undertaken to support or recommend that their clients vote in favour of the proposals. Together, the shareholders hold 75.09% of the effective for the transactions.

Although the deal would see ARM repurchase 5.8% of its shares from the BEE trust, the company said its BEE shareholding would remain above 50%. The irony is that because the purchase of the shares by the subsidiary will deem them as treasury shares, on a like for like basis, ARM’s net asset value and headline earnings per share will rise by 6% and 3% respectively.

The company has also cited the legal attempt by the Chamber of Mines to clarify the “once empowered, always empowered” evaluation of black ownership as motivating factor behind the restructuring. “The current court process to determine the legal status of the ‘once empowered, always empowered’ principle also makes it necessary that ARM minimises its legal and financial exposure should this principle not be upheld by the court,” it said.

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