Alexkor on its Annual Report 2015/16

Meeting report

As the Chairperson was abroad for official business, Ms Rantho was elected as Acting Chairperson.

Ms D Rantho (ANC), Acting Chairperson, gave the Committee’s condolences to the Alexkor Acting CEO for the loss of his father. as much as the Committee was sympathetic and understanding, what happened at the 2 November Alexkor meeting was unacceptable. The Committee was dissatisfied that the Department did not inform the Committee that the CFO had resigned, and it was offended by the COO’s negligence and arrogance as the COO did not make an apology to the Committee for not attending the meeting.

The Chairperson explained that the Committee has been trying to have a meeting with the Minister but the Minister is nowhere to be found. The Director-General was also aware of what was going on but was not doing anything about it. The Minister had just come out of surgery and that the Committee was trying its best to organize a meeting with the Minister.

Mr N Singh (IFP) stated that it was of great importance that the Director-General and Minister be present for such meetings and that they needed to meet with the Committee before it met with any other enterprises.

Alexkor briefing on 2015/16 Annual Report
Ms Zukiswa Ntlangula, Non-Executive Director on the Alexkor Board, stated that she was there on behalf of the Board chairperson. She apologized on behalf of the COO and explained that their absence was due to restructuring. She explained that the company was experiencing a high turnover in their senior management positions, specifically with CEO and CFO. The restructuring has brought about great uncertainty and as a result Alexkor is experiencing resignations, as people feel that they need more certainty with regards to their career and future. At the moment Alexkor cannot afford to retain a CFO.

Mr Vimal Bansi, Alexkor Acting CEO, stated that Alexkor is a listed schedule 2 public entity wholly owned by the government through the Minister of Public Enterprises, Lynne Brown, as the shareholder representative. The Company has two divisions: Alexander Bay Mining Operations (Alexkor RMC Joint Venture) and the Alexkor corporate unit. The core business of Alexkor is the mining of diamonds on land, along rivers, on beaches and in the sea on the north-west coast of South Africa. These activities are complemented by geology, exploration, ore reserve planning, rehabilitation and environmental management. Alexkor has significant importance for the Namaqualand-Richtersveld region. Alexkor’s distinctive competencies are its quality of diamonds and its unique land and mineral resources. Over the life of the mine, approximately 10 000 000 carats of gemstone quality diamonds have been recovered.

The Deed of Settlement (DoS) is a binding agreement between the Richtersveld Community, Alexkor, and the government of South Africa, which emanated from the land claim filed by the Richtersveld Community. The DoS principles are that Alexkor’s land mining rights are transferred to the RMC and Alexkor is to retain its marine mining rights. Alexkor and RMC will form a “Pooling and Sharing Joint Venture” (PSJV) and put the land and marine mining rights under the control of a joint venture for purposes of mining the diamond resources. Participation interest is Alexkor 51% and RMC 49%. Alexkor movable assets relating to its agricultural and multicultural businesses are to be transferred to the Richtersveld Community

When the previous Board was appointed in September 2012, the commercial and socio-economic mandate given to it was: stabilize the mine; increase carat production; job creation; explore and invest in non-mining opportunities; continuous engagement with the community; training and development.

Achievements of the Board with regards to the PSJV
• Development of the Muisvlak Plant
• Extracting value by the introduction of coffer dams and an optical sorter
• 10 million investment in a mobile prospect plant to complement the exploration program
• Expansion into mining nodes 2 and 3
• Mid-water mining desktop study completed to be followed by survey of the sea bed
• IMDSA, a deep sea mining company, commenced on 18 April 2016 in concessions 1C and 1B
• Office restructuring and voluntary severance packages (VSPs) were successfully concluded
• There are now only five permanent staff members employed at Alexkor head office
• Corporate offices have moved to a significantly lower rental

Alexkor SOC – mandate and challenges
The Minister had requested, at the Special AGM of August 2015, that the company prepare a business case for a coal beneficiation strategy. Management has embarked on a due diligence study on a coal beneficiation company, scheduled for completion by end January 2017. However, Alexkor will continue to sweat its existing assets as well as identify other diamond opportunities outside of the Richtersveld. Diamond beneficiation (the art of cutting and polishing) is severely lacking in South Africa and Alexkor sees this as an ideal opportunity to enter into this space. Alexkor, together with its marketer, SSI, will investigate opportunities to establish a diamond beneficiation factory in Kimberley.

The immediate challenges for the company lie in the fact that it has operational cash on for the next eight months, commencing November 2016. However, the mining of the mid-waters is expected to commence in Quarter 4 and the company is expected to change its bottom line figures from red to black.

Alexkor Annual Financial Statements
Ms Tsundukani Mhlanga, Alexkor: Acting CFO, made the following points in her presentation:
• Alexkor had 19 approved targets for the year, with 5 KPIs subsequently being deferred. Of the 14 remaining KPIs, only 11 (79%) were fully achieved.
• Diamond revenue decreased by 7% from R414 million (2014/5) to R387 million in 2015/16.
• Production achieved was 45 492 as opposed to the 80 320 carats target for 2015/16.
• A net profit of R6 million (2016) was achieved for the year, compared to R18 million (2015).
• EBIDTA of R24 million (2016), compared to EBIDTA of R37 million (2015).
• AFS for both Alexkor SOC and PSJV have been prepared on a going concern basis. The external auditor’s opinion was unmodified. An emphasis of matter paragraph included non-compliance with PFMA in the following areas: Irregular expenditure of R6.9 million; Non-effective management of fruitless and wasteful expenditure of R200 000.
• Cash and Cash Equivalents: Cash has reduced due to deployment of restricted cash to its intended use, and operational cash was not replenished by cash distribution from PSJV
• Value Added Statement: Despite sustaining losses, value created for suppliers, employees and government entities.
• Contingent Liabilities: No provision has been made should legal action be pursued by Nabera Mining.
• The company has no borrowings nor does it have guarantees from the shareholder.
• No dividends declared.
• Supply Chain Enterprise Development: In 2015/6, 71 Mining contracts were awarded, of which 43 (60.5%) were to historically disadvantaged individuals. The contractors are from the Richtersveld and the surrounding towns within the Northern Cape. Contract revenue paid out to BEE compliant companies was R195 million, which includes R51 million to 100% Black-owned companies.
• Dealing with the operational cash flow challenges for 201617:
- Excess amount of R45 million MTEF allocation earmarked for Rehabilitation Liability was released for operations as approved by the Board
- Cash distribution agreement has been entered into with PSJV to regulate loan repayment and cash distribution
- Medium-term funding options are being explored
- Appointment of three independent directors on RMC board to ensure that the business and functioning of the PSJV is unencumbered.

Chief Operations Officer report
Mr Humphrey Mokwena, Alexkor COO noted Corporate Social Investment was R2 542 507 for 2015/16.

Cost containment measures were implemented to ensure sustainability of the business. There was restructuring at Head Office and new appointments. All policies and procedures been updated to ensure alignment with best practice and latest developments in all relevant legislation and industry norms. During the current financial year we will focus on developing and retaining our talent and create an environment that will maximize the potential of employees and the company. In line with the cost containment measures, through a process of Voluntary Severance Packages (VSP), the following positions were made redundant and/or personnel replaced: CEO; 2 x Executive PA; GM HR; GM Technical.

Alexkor was required, as per the DoS, to rehabilitate all areas that were disturbed and which require rehabilitation, prior to the formation of the PSJV. A female, Black-owned consulting company was contracted to draft a legacy rehabilitation implementation plan. The rehabilitation implementation plan has been completed. The plan includes the removal of asbestos-contaminated material from Alexander Bay and also demolition of old and dilapidated buildings. An open tender was advertised ending 11 November 2016.

Challenges for the year to come
Mr Bansi, Alexkor Acting CEO, outlined the challenges to be overcome by board and management:
• Lack of adequate working capital as a result of poor carat production
• Lack of resource capacity following corporate office restructuring
• Full and final implementation of the DoS
• Resolution of community issues
• IMDSA experiencing technical difficulties which has negatively impacted on marine carat production.

The PSJV challenges:
• Community issues exacerbated by the delay of the payment of the R45 million to community beneficiaries
• RMC/CPA/Propco not properly constituted which has resulted in the delay of the R45 million payment
• Poor land carat production, which has had a negative impact on the income statement. In mitigation thereof, a high level exploration program has been implemented to drive the mining process
• Optimal marine carat production is never guaranteed as the Atlantic ocean influences the number of boat days (formerly known as “sea days”)
• The OHMS plant had to be de-commissioned due to it being operationally unsafe.

Discussion
The Acting Chairperson said that the Minister and the Deputy Minister have made the Committee’s job very difficult, and that their absence has placed the Committee at a great disadvantage. There are KPIs that have not been achieved by entities and the Department itself, but the Committee cannot ask the Ministers, the political heads and overseers of the Department, what they are doing, and whether there are any strategies or mechanisms in place to help support entities and the Department to ensure that they reach their goals and objectives. it was very important that the Minister, Deputy Minister and Director-General to be present for such meetings. She explained that the Committee was trying their best to have them come before the Committee.

Ms T Stander (DA) thanked the Alexkor team for the presentation. She explained that public entities should be sustainable and commercially viable while fulfilling the mandate of socio-economic development. She asked whether the high turnover in senior positions, especially the position of CFO, was related to the fact that those individuals did not see the company as being sustainable. She specifically spoke of the case of the CFO that recently resigned. The CFO had eight months of cash flow left when she resigned. She asked Alexkor to elaborate on the resignation of the CFO, if there were any specific reasons she gave for her resignation in her exit interview, other than her career. She asked if she resigned or took a severance package.

Mr Bansi explained that the CFO’s reasons for resigning were two fold. Firstly, it was related to the coal case business. Her skills and expertise lay in the beneficiation of coal and coal diversification, but because of all the changes taking place it has become of lesser importance. Although there are efforts to go into the beneficiation of coal at the moment it is not the focus, so the job was no longer enjoyable or challenging for her. Secondly, the job was incurring reputational damage for her as she was the CFO of a company that was struggling financially and one that did not have enough operational cash. It was a full resignation and that she took no severance package.

Ms Stander asked whether Alexkor had hired a service provider for geological data, whether they had to pay for the data and if they did, whether they were in the process of getting their money back since the geological data that was provided was inaccurate.

Mr Bansi explained that the data given by the service provider was inaccurate and that it made projections that were not true. Alexkor could not get the money back, and that the team used the data the best way that they could and tabled a report.

Ms Stander stated that it was very concerning that the company had only reached almost half of its target when it came to carat production. That was very concerning because of the cash position the company finds itself in. She asked what the company planned to do about this.

Ms Stander asked about the Deed of Settlement. It was mentioned that it is currently in the court process and that it was improperly constituted. She asked where it was in the court process and when this matter would be resolved. This matter needed to be concluded.

Ms Stander asked that Alexkor elaborate on the socio-economic measures mentioned, such as cattle ranching.

Ms Ntlangula explained that ensuring the development of black industrialists was in the company’s requirements when reviewing and selecting contractors.

Ms Stander stated that Alexkor has spoken about plans to go into the dispatching of coal since 2013. She asked what their plans were around this, and how they would manage such a project when they are struggling to manage their current mining. She asked where they would mine coal and with what resources they would do it with as they had very little resources.

Mr Bansi explained that they have identified a potential company, which is part of the Woodbank and Middleburg coal hub but it does not have a Broad-Based Black Economic Empowerment (BBBEE) certificate. They have hired a consulting company to complete due diligence on the potential company that they have identified. The company planned on getting coal from small emerging miners, and these miners would be paid according to the quality of their coal. The company would beneficiate the coal through Eskom.

Ms Ntlangula explained that the company had presented the idea to the Department but it had experienced delays in getting approval. The Minister told Alexkor that it needed to develop a coal business proposal that would inform their plan and strategy, but that in the mean time it needed to focus on stretching its current asset and resource. The resolution the company had reached is that while it works on its coal business plan, it will concentrate on diamond beneficiation and not extend itself to anything else until it gets diamond beneficiation right.

Ms Stander suggested that Alexkor be more tactful in their strategy when it came to community engagement. She understood that communities are passionate and divided but there had to be a way to get them on board and make them understand why the money cannot just be paid over. The Committee did not want anyone running away with the R45 million.

Ms Stander asked whether Alexkor had plans to borrow or apply for a government guarantee.

Mr Bansi explained that they have not considered it because they already know that the answer will be no. As a result, the company was trying its best to be self-sustainable and move forward.

Ms Stander asked how the company’s legacy rehabilitation programme was going to affect the company’s cash flow, she asked what the cost projection was.

Mr Mokwena explained that the company has set aside money for the legacy rehabilitation programme. The amount set aside is currently R245 million, so it will not affect the company’s cash flow.

Ms Stander asked whether temporary employees that became permanent employees were double counted.

Ms Ntlangula explained that the company did not double count. If a temporary becomes permanent then they are removed from the temporary employer list.

Mr R Tseli (ANC) thanked Alexkor for the presentation. He echoed the concern about the absence of the Minister and Deputy Minister. This was a matter of serious concern and that it was not right. The Committee relied on the Chairperson to take this matter up with the Minister and Deputy Minister.

Mr Tseli wanted to know the community progress in relation to the R45 million.

Mr Tseli drew attention to the KPI that was not achieved due to a lack of geological information. He asked how the lack of geological information contributed to Alexkor not achieving their KPI.

Mr Bansi explained that this was due to the lack of quality data.

Mr Tseli asked how having operational cash available for the next eight months was a challenge, and how the company planned on resolving this challenge.

Mr Tseli asked how much the reduced rental was compared to the previous offices.

Mr Bansi replied that the company had been paying R230 000 per month and that has been significantly reduced to just over R90 000 per month.

Mr Tseli asked for a detailed progress report on CSI the next time Alexkor came before the Committee. He wanted to know what the company had done, where it was active, and who was benefitting from these initiatives. He explained that this was important to ensure that people were benefitting from these initiatives, and that it was also important for oversight. The Committee could visit one of the communities Alexkor was active in for oversight to see what progress was being made and whether there was community impact.

Ms Ntlangula said that the company had all this information and it would be sent to the Committee.

Dr Z Luyenge (ANC) asked if the Board had the capacity to fast track the process of employing a CEO and CFO and if they could attach a time frame to this. He asked how many employees it has at the ground level. He asked what other projects Alexkor had beyond mining. He asked for an explanation of the partnerships Alexkor has with community stakeholders.

Ms Ntlangula replied that the board did have the capacity to fast track this process. She explained that the company had combined the CFO and CEO role and were looking for a candidate who could fulfill both roles and functions. The vacancy would be advertised this week.

Ms Rantho, the Acting Chairperson, thanked Alexkor for the presentation. She echoed Mr Tseli’s remarks about a CSI progress report. The Chairperson asked for a breakdown of CSI in order to understand the R800 000 overspending that was found. She asked Alexkor to elaborate on this matter and to justify that overspending. She did not understand how the company spent money it did not have.

Ms Rantho noted that a lack of compliance was reported by the independent auditors. She asked if the people found guilty of non-compliance were still part of the company, and if yes whether they were still there because of the law or because leadership felt that these people could learn to be compliant. She felt that the leadership and management were not taking control or making efforts to put mechanisms in place to combat such behavior.

Ms Ntlangula explained that non-compliance in the company has been extensively investigated. The problem that became evident was that of the function of controls. Since then efforts and changes have been made to tighten these controls. She explained that the non-compliance was irregular expenditure and not wasteful expenditure, so the company did benefit from the services it paid for.

Ms Rantho was very worried about the Deed of Settlement. She felt that Alexkor’s resolution on the matter was not clear or certain. She felt that Alexkor did not understand the challenges surrounding this matter. One of the major challenges of this matter is that if this is not resolved soon enough the original beneficiaries of the money would not be the ones who received the money, instead it would be residents who have moved to the area and become permanent residents. As it currently stood, anyone could claim the money. She asked whether Alexkor would be able to state who filed for the claim and whose families are the beneficiaries. The Committee needed to help Alexkor resolve this matter within the next five years, especially since this matter threatens to tamper with the Committee’s integrity. At this rate Alexkor would end up having to give the money away to a non-governmental organization instead of its rightful owners.

Ms Bansi explained that the company was in constant engagement with its attorneys on how to deal with this matter. The company was trying its best, and that it was a constant back and forth that was costing the company and the people a lot of money. They could not say when it would all come to an end. He asked that the Committee assist Alexkor in getting traction from the Department of Rural Development and Land Reform, as they were a key player in this matter.

The Chairperson asked if the company would be viable over the next few years and what their strategy would be for the next few years

The Chairperson asked whether the 43 previously disadvantaged business owners given contracts were building and developing their skills and their employees’ skills. The Committee needed to meet with these business owners in their communities in order to interrogate and see whether they are benefitting from these contracts and whether they are playing a role in developing the community, moving it forward and contributing to its socio-economic development. The Committee also wants to know whether the skills that are being developed through these contracts are relevant and transferable to other work opportunities.

Ms Ntlangula replied that all contractors are local, and that the skills that they gained were transferrable. She said the Board would be more than happy to avail themselves to accompany the Committee for oversight.

Ms Stander thanked Alexkor. She said that the team’s answers were very encouraging because they were full and transparent. There was still hope for this public entity and she encouraged them to not to be captured by the state.

Dr Luyenge asked about the number of employees at the ground level. He asked how many people were hands on, on the ground.

Ms Ntlangula and Mr Bansi explained that mining took place at different levels. With land mining, contractors are hired to physically dig out diamonds. With shallow water, contractors are hired to use divers to extract diamonds. With the deep sea, an IMDSA contract is given where large boats are contracted with very specific machinery to sweep the floor of the sea and extract diamonds. They explained that they were unable to give the number of workers on the ground, and that they would send this in writing to the Committee later.

The Chairperson thanked Alexkor for the presentation. There needed to be a meeting by the end of this year where the Minister, Deputy Minister and Director-General were present.

Committee minutes of 2 November 2016
The Committee reworded the resolution as it currently appeared as if the Committee was attacking the board chairperson and that the board chairperson was in the wrong. The Committee wanted it to be clear that Alexkor was in the wrong and that the resolution was talking about Alexkor. The minutes were adopted.

Meeting was adjourned.