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Presentation of the annual report for the year ended 31 March 2014, covering predetermined objectives, corporate governance, PSJV operations, human resources and social development, control environment, financial statements, and more.
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Presentation of the Annual Report for the Year Ended 31 March 2014 19 NOVEMBER 2014
Contents • Predetermined Objectives (Performance Overview) • Corporate Governance • PSJV Operations • Human Resources and Social Development • Control Environment • Statement of the Audit & Risk Committee • Auditor’s Report • Annual Financial Statements • Alexkor Strategy • Deed of Settlement • End State of Mining • Expanded Mandate
Introduction • Background to the land claim • Split of the Company into the RMC and Alexkor (creating the PSJV) • Once the Board was appointed, the Board evaluated the status of the Company: • Commercial imperatives • Socio-economic imperatives • Board heeded the call of the Shareholder
Predetermined Objectives (1 of 2) • Alexkor had 17 approved targets during the year and 16 of those were achieved resulting in a success rate of 94%. In 2013, Alexkor achieved 28 of 30 objectives with a success rate of 93%. • The Predetermined Objectives that have been achieved include:- • On Alexkor Sustainability:- • Developing a strategy for Alexkor outside of the PSJV • Financial Ratios • On Township Establishment:- • Establishing the town of Alexander Bay • Ensuring that the township is ready for handover to the Municipality • Dealing with municipal challenges
Predetermined Objectives (2 of 2) • On the Rehabilitation Obligation:- • Implementing and executing a 5-year rehabilitation plan • On PSJV Sustainability:- • Increased profitability • Increased exploration • Safety matters catered for • On Socio-Economic factors:- • New corporate structure as detailed later • Increased BEE as detailed later • The only objective not achieved included the PSJV production target of 70 213 carats with the actual outcome being 46 681 carats and a variance of 23 532 carats. Source: * Refer to the Integrated Report, Report on Predetermined Objectives for the year ended 31 March 2014.
Corporate Governance (1 of 2) • The Independent Non-Executive Directors (INEDs) of the Board of Alexkor SOC Ltd:
Corporate Governance (2 of 2) • Alexkor SOC Ltd had four Sub-committees during the year being the: • Audit and Risk Committee • Social, Ethics & Human Resources Committee • Environmental Rehabilitation Committee • Tender Committee • The PSJV is an unincorporated Joint Venture arrangement between Alexkor SOC Limited and the community of the Richtersveld. Alexkor SOC Limited owns 51% in the PSJV and the community own 49%. • When the new Board of Directors took office in September 2012, corporate governance at Alexkor SOC Limited and at the PSJV was very poor. No proper Minutes of Board and Committee meetings were kept, budgeting was poor, there was no proper record of mine dump allocations, documentation and/or agreements with the contractors were not in order including in particular docmentation relating to PFMA compliancesuch as tax clearance certificates for contractors. • As a result, proper stuctures were put in place which included the PSJV Technical Committee, Remuneration Committee and Audit and Risk Committee. Alexkor INEDs hold positions on the PSJV Board as well as these Sub-committees.
PSJV Operations (1 of 4) • Diamond revenue amounted to R277.0m (2013: R184.1m). • The PSJV produced 46 681 carats (2013: 35 358 carats). • Sea-days decreased to 20 (2013: 22 sea-days) for the year. • A net profit of R23.7m (2013: R4.7m) was achieved for the year. • Cash reserves were stable during the year. • Capital expenditure of just over R54m was incurred.
Human Resources and Social Development (1 of 6) – Alexkor Staff Complement 2014 • Total STAFF: 106 • Alexkor employees at head office in 2013 consisted of 2 permanent employees, the CEO and a PA. All other duties were outsourced to contractors. • Alexkor employees at the Mine are managed by PSJV Management.
Human Resources and Social Development (2 of 6) - PSJV Staff Complement Union Membership:
Human Resources and Social Development (3 of 6) • Total Staff Complement between Alexkor and the PSJV went from 88 employees in 2012 to 873 employees in 2013 to 1193 employees in 2014 • The Muisvlak Plant saw a total of 140 new employees being recruited from 6 towns as follows: • Sanddrift23 • Kuboes 34 • Eksteenfntein 24 • Lekkersing 37 • Port Nolloth 14 • Alexander Bay and surrounding 8
Human Resources and Social Development (4 of 6) – EE figures for Alexkor only
Human Resources and Social Development (5 of 6) EE figures include Alexkor and PSJV Figures include Alexkor and PSJV management
Control Environment • Internal controls are designed to provide reasonable but not absolute assurance as to the reliability of the financial statements, safeguarding of assets and to prevent and detect misstatements and losses. • Alexkor’s internal audit function is outsourced and provides an independent appraisal to examine and evaluate the Company’s activities. • Alexkor’s fraud hotline facility has been operational throughout the financial year to enable all stakeholders or any other parties to report fraudulent, corrupt and unethical practices in the work place. However, the fraud hotline facility has not been effective and as a result, steps are being taken to change the service provider and market the hotline within the communities. • Internal audit has identified internal control issues within Alexkor’s environment with regards to its HR and payroll, procurement and IT management processes. Measures are being put in place to address the identified issues.
Annual Financial Statements (1 of 6) • The Annual Financial Statements (AFS) were approved and signed by the Board on 30 July 2014. • The Audit and Risk Committee’s report was included in the Integrated Report on pages 53 and 54. • The External Auditor’s opinion was unqualified. Issues were however raised with regards to: • Material adjustments were made to property, plant and equipment due to a revision in the useful lives; • The reclassification of grant income; and • Management did not adequately review the draft financial statements for completeness and accuracy before submission for audit.
Annual Financial Statements (2 of 6) • Statement of Financial Position (material movements): • Property, plant and equipment R72.1m (2013: R31.6m) • Cash in the rehabilitation trust R115.0m (2013: R109.5m) • Loan to joint venture R38.1m (2013: R10.0m) • Cash and cash equivalents R475.1m (2013: R556.7m) • Trade and other payables R170.6m (2013: R234.9m)
Annual Financial Statements (3 of 6) • Statement of Comprehensive Income: • Revenue R141.3m (2013: R93.9m) • Provision for the rehab liability R15.9m (2013: R10.7m) • Operating profit R20.7m (2013: loss of R38.3m) • Net finance income R30.4m (2013: R51.0m) • Total comprehensive income R47.0m (2013: R29.7m)
Annual Financial Statements (4 of 6) • Alexkor’s cash position at 31 March 2014:
Annual Financial Statements (5 of 6) • Reconciliation of government funded obligations: • All four phases with regards to the Township upgrade have been completed. The balance of the funds are retention funds that will become payable once the retention period expires.
Annual Financial Statements (6 of 6) • Litigation matters at 31 March 2014: • 1. Nabera Mining (Pty) Ltd – Nabera instituted legal action against the Compan yin 2004 and the South African Government for alleged amounts in respect of a contract wherein Nabera managed the Company’s mining assets and operations from 1999 to 2001. This matter has been dormant since 2005. • 2. Ruslyn Mining and Plant Hire (Pty) Ltd – Ruslyn instituted action in 2006 for damages arising out of a profit sharing agreement entered into on 22 June 2003. The matter was set down for hearing on 10 to 14 March 2014 but by agreement between the parties has been postponed to 2015. Settlement negotiations are ongoing. • 3. Compensation for assets transferred to Richtersveld Community claim • No provisions were made for the above cases after consultation with legal representation.
Strategy (1 of 9)Shareholder Mandate • When the Board was appointed in September 2012, the mandate given to it was as follows:- • Commercial imperatives:- • Ensure that the mine is stabilised • Appoint a CEO and CFO for Alexkor SOC Limited • Increase production • Socio-economic imperatives:- • Re-engagement with the community • Re-establishing relationships with the Communal Property Association (CPA) • Ensuring that there is direct benefit to the community from Alexkor’s efforts
Strategy (2 of 9) • What we inherited was the following:- • A. On the commercial side • Alexkor is currently the core business and the PSJV partnership the only commercial asset • However this business was in serious distress and the initial engagement identified critical problem areas. • 2. Profitability Eroded • The PSJV was in a loss making position for more than 10 years. • 3. Corporate Governance Compromised • No Minutes of Audit Committee Meetings kept; • Budgetting needed to be improved; and • No record kept of mine dump allocations, and no tax clearance certificates for contractors.
Strategy (3 of 9) • 4. Decline in Production and Employment • Carat production dropped from 216,000 carats in 1995/6 to only 37,000 carats in 2011; and • Employment dropped from more than 700 fulltime employees to about 88 in October 2012. • 5. Environment Became Hostile • A significant loss of trust in community structures and a growing feeling that the old scheme was better. • 6. Executive vacancies: • No CEO for over 2 years with a single consultant filling the CEO, COO and CFO roles. The secretary was the only full-time employee.
Strategy (4 of 9)B. On the socio-economic side: • 1. Community was extremely divided • There were various factions and there were all manner of accusations against various people within the community including the then existing CPA members. • 2. Mistrust • Alexkor’s relationship with the community, between the period of the filing of the land claim and 2012, when the new Board ws appointed, deteriorated significantly due to job losses. • 3. Laid blame on Alexkor for the decline • 4. Court cases
Strategy (5 of 9) Steps taken by the Board to address the challenges:A. Commercial Imperatives
Strategy (6 of 9)B. Unlocking Value of the PSJV The objective is to embark on an aggressive growth strategy to ramp up operations over the next 5 years from 35,550 carats to over 70,000 carats per annum.
Strategy (7 of 9)Failure is not an Option • Failure of the PSJV will pose significant and broad political consequences: • To date this was the largest successful land claim against the state with significant external pressure to succeed. • Failure will have a major impact on the community: • The development of the Richtersveld, Alexander Bay and Port Nolloth communities have been neglected for many years; • In the 10 years since the settlement the community regressed rather than progressed; • Failure might have minimal impact on the State, but for the Alexander Bay Community and region it will be severe and will have material socio-economic impact. • The state has an obligation to the wellbeing of the community: • The state as a shareholder has an obligation to enhance the wellbeing of the community. Failure to do so will create a significant socio-economic burden for the State. • A successful turnaround strategy will create a flourishing economic viable and sustainable community. Unlocking the PSJV value provides a final opportunity to revive the community now in critical distress.
End State of Mining Exiting the Structure • DoS envisages the state will exit to a strategic partner. The exit must however be in a responsible manner to ensure long term sustainability • Options whereby the community can receive cash rather then shares. • The sale must derive maximum value for the State. • The only real opportunity for meaningful job creation and economic development in that region is for there to be a consolidation of the various mining companies including De Beers, Transhex and Alexkor. • Alexkor has to ensure the sustainability of the community post-mining due to the anticipated life of mine of 15 to 20 years. It has therefore taken steps to create non-mining opportunities for the community by putting out a tender for a company to partner with the community and create opportunities.
Expansion of Mandate (1 of 4) The need to diversify • Exit from diamonds and the Richtersveld • Challenge by the Deputy Minister and the Department at the strategy session in December 2012 to broaden its focus within the context of the mandate specified in the Alexkor Act 116 of 1992 as amended by the Alexkor Act 29 of 2001. • Alexkor Act is broad and covers all mining. • To provide a counter-cyclical approach of disinvestment by major companies.
Expansion of Mandate (2 of 4) Why Coal Mining? • The Coal Security of Supply Task Team study, commissioned by DPE, predicted a crisis in coal supply to Eskom by 2018: • By 2022, the coal shortfall could exceed 30Mtpa, equivalent to 6 - 10 large coal mines and over 20% of Eskom’s total demand; • This is mainly due to mining companies cherry picking mining licence provisions to concentrate mainly on high grade coal for export and moving away from less profitable steam coal. • This creates multiple opportunities for Alexkor to reduce Eskom’s coal supply risk: • Utilise the current Eskom Infrastructure investment fund to develop a state owned capability in Alexkor; • Agree a cost plus commercial model with Eskom to supply coal; • Renegotiate lossmaking supply contracts with companies like Glencore-Optimum; • Long and expensive litigation can be avoided by ceding coal supply rights to Alexkor e.g. Khuthala. Source: Coal Security of Supply Task Team Report (CSSTT 2012), 31 January 2013
Expansion of Mandate (3 of 4) Benefits of Alexkor’s entry into coal • To ensure security of supply to Eskom • To create a stable economic and investment environment • To improve the national credit rating • To ensure transformation of the sector Perception of conflict of the Mangaung Resolution • The Mangaung resolution requires that the State Owned Mining Company (SOMCO) should be established and be under the direct supervision of the Department of Mineral Resources. Furthermore, SOMCO should gather all the State’s interests in mining including those in Alexkor, AEMFC and other stakes which Government holds in mining corporations. • As a result, Alexkor’s entry into coal is actually no conflict to the Mangaung resolution. • This is a policy and political discussion and Alexkor will comply and has no preference as to where it is located. The energy crisis is now and the responsibility to resolve it lies with the DPE (with Government through the Integrated Resource Plan)
Expansion of Mandate (4 of 4) Steps for Implementation • Collaboration between Eskom and Alexkor including the transfer of certain assets from Eskom to Alexkor in respect of coal. • A policy document being prepared by Alexkor and DPE for submission to the Economic Transformation Committee by December 2014 to be tabled at the Policy Conference in June 2015. • The implementation set out above will now take effect in January 2015 when the Boards of Eskom and Alexkor have been reconstituted.
