Alexkor 2017/18 Annual Report

Meeting report

The Chairperson reiterated that the Committee is open to the public who wished to observe proceedings. The agenda is a briefing by Alexkor on its 2017/18 Annual Report. After the meeting adjourns, members should remain behind for a party caucus that members had requested.

Mr Kgathatso Tlhakudi, DPE Deputy Director General, Manufacturing Enterprises, informed the Committee that Alexkor’s Board Chairperson and some of its board members are present.

Mr Tshediso Matona, Alexkor interim board chairperson, noted that there is a transition currently underway at Alexkor and the board’s first tenure has already ended in September. However, Minister Gordhan requested more time to finalise the appointment of the new board; in a sense he is an interim board chairperson now. The intention of the Minister is to appoint a new board soon. The board is pleased to report slightly positive financial results because of a small accounting profit though not a cash profit. This means that the company is still in the black, though the situation still requires attention. Alexkor obtained an unqualified audit opinion this financial year and this is positive news. The issue at the top of agenda at Alexkor now is financial sustainability and it requires urgent attention. The company has no government guarantees and has never requested a bail out from the state. Urgent intervention will therefore be needed to ensure the company does not fall into the abyss.

Alexkor Annual Report 2017/18
On board strategy, it was noted that diversification into alternative revenue generating models was not moving forward as Diamond beneficiation was under a moratorium and other commodities such as coal had since been declined by DPE.

Ms Adila Chowan, Alexkor CFO, in her presentation noted the performance of the investment in the Pooling and Sharing Joint Venture (PSJV). The state’s capital investment is R200 million, which is an interest free loan and in 2017/18 R10 million was repaid. Due to decreased production the PSJV has a financial challenge and a potential going concern problem.

Marine carats achieved an average record price of $854.69 (2017: $744) per carat. Production for the year was 41 941 carats compared to 2017 which was162 172 carats. In 2016/17, a vessel from International Mining and Dredging South Africa (IMDSA) caught fire and was not available for mining in 2017/18 which impacted the PSJV performance negatively.

Alexkor achieved an unqualified audit opinion with significant progress in improving SCM processes with improved quality of annual financial statements and timeous reporting to stakeholders. It reported a consolidated profit of R34m (2017: R6m) primarily driven by recognition of government grants and interest earned.

The key performance indicators were discussed (see document) such as:
- EBITDA margin target was not achieved due to sea days being affected by bad weather
- Carats produced target was not achieved due to sea days being affected by bad weather
- Exploration and mining of shallow water channels target achieved.

The external auditor’s opinion was an unqualified opinion. The matters noted were to do with procurement and increase in the scope of work for a contract. Irregular expenditure was mainly as a result of:
- Increase in scope of work of R6.9m (although there was a dispute on interpretation).
- In 2017 the Minister condoned the lease rental however the amount that was ratified was only for 2016/17 and not for the remaining contract value.
- Legal services of R2m procured based on single source which should have been approved by Treasury.
- Company secretary services procured in 2016, prior to the of National Treasury instruction note 3 becoming effective, however auditors classified cost as irregular as procured through single source basis (R1m). All irregular expenditure has been identified and recorded in the AFS.

 All irregular expenses incurred have been submitted to Treasury for condonement. Two cases have been lodged with Business Crime Unit – relating to 2016/17 audit finding. These relate to tender documents which have been lost or misplaced when Alexkor relocated offices. Two verbal warnings have been issued as a result of incorrect interpretation of Treasury Instruction note 3. There is an action plan to address findings.

Way forward
- Managing the operational cash flow challenges for 2018/19
- Potential going concern challenge and risk of placing Alexkor under business rescue
- Lifting of moratorium on Alexkor investments (acquisition and disposal of assets)
- Appointment of Audit committee chairperson and filling of vacancies within the Alexkor Board

The year under review
Mr J Bonnet resigned as the Acting CFO effective 31 October 2017 and Ms A Small was appointed to act as CFO until Ms Chowan was appointed on 8 January 2018. Mr V Bansi the Acting CEO resigned 7 November 2017 and Mr L Pitsoe was appointed 01 December 2017 as the CEO. The audit committee chairperson, Ms M Lehobye, resigned with effect May 2018 and Mr T Matona has been appointed as the interim audit committee chairperson. The Alexkor board in conjunction with the Minister is in the process of filling the two vacancies on the Board and the position of Audit Committee chairperson.

Challenges for the year to come
▪ The Alexkor board and management have a number of challenges to overcome in the year ahead: Insufficient traction to fast track the implementation of the diamond beneficiation projects (due to the recent moratorium placed on Alexkor);
▪ Lack of adequate working capital due to poor carat production that resulted in lower ICC loan repayments;
▪ Lack of resource capacity following board resignations;
▪ Full and final implementation of the Deed of Settlement (township handover and handover of properties together with the R45m);
▪ Properties identified to be transferred to the Richtersveld municipality.
▪ Certain services provided by Alexkor to be under Richtersveld municipality going forward;
▪ Illegal occupation of properties in Alexander Bay.
▪ CPA not properly constituted which has resulted in the delay of the R45m payment.

PSJV Challenges
▪ 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 which will drive the mining process. It is also planned to complete an airborne geophysical survey. No funds to execute land exploration resulting in mining blind. A desktop study was co-funded by DPE to evaluate potential reserves, this led to understanding that more resources were needed to confirm reserves.
▪ Optimal marine carat production is unpredictable as the Atlantic ocean weather conditions influences the number of production days.

Discussion
Dr Z Luyenge (ANC) appreciated the simplified and easy to follow nature of the presentation unlike that of the previous years. He praised the positive changes in the administration and governance at Alexkor. He asked what the relationship is like between the Richtersveld community and the company. The R45m for the community - how did Alexkor deal with it? He remembers that the community was revolting against the Pooling and Sharing Joint Venture (PSJV) method. Has the company come up with another method of mining that will complement what Alexkor is presently doing? Is the company working well with the municipality? Is there any service the company is rendering within the scope of the municipality that is lessening the burden on the municipality?

Ms N Mazzone (DA) thanked the board for the presentation and said she understands that this is a new board, and it might not be responsible for everything that took place at Alexkor in the past. There is overwhelming evidence coming to the fore of possible state capture at Alexkor. A dossier may be created to present to this Committee for an investigation at the company. It will go along the lines of shelf companies created and tender processes approved within three days of opening the shelf companies and all evidence points to the Gupta family. Most disturbing is the process of benchmarking rough diamonds. If comparisons were done comparing rough diamonds in the various indexes, one would find that a crash occurred in the rough diamond markets in 2008 worldwide. The problem is that Alexkor started to lag behind when the price started to recover in 2013; it amounted to a 40-point lag in international standards, and increased to a 50-point lag in that same year. The question is, was there a tender rigging to intentionally sell the rough diamonds at a lower price to the preferred bidder? It is worrying to see a differential of 40 points. Compared to international standards, in 2015 the lag increased to 70 points and slightly to 65 points this year in comparison to international benchmarks. We know that Alexkor went through a rough patch in terms of carat quantity, undercapitalisation and community restlessness and its relationship with them but something is not right here. How can the company lag 65 points behind the international benchmark in the price for diamonds? We also want an update on how the company is attending to host community concerns because this Committee does not take lightly seeing people coming all the way from Namaqualand to Parliament to voice their trepidation.

Mr M Dlamini (EFF) said one the things being dealt with in the Eskom inquiry is the proposition put forward by Mr Matona that some of his reasons for leaving was interference by the board, deterioration in governance and all other concerns. What was uncovered too was that board members were appointed as hired guns to serve the interest of those that appointed them especially the politicians. After leaving Eskom, Mr Matona pointed out that he wanted to continue with his life but he is now back at another SOE. This Committee does not want to see this continuous rotation of individuals from one SOE to another and to replace one capture with another. How did he become the interim chair of Alexkor? Who appointed him? We are beginning to see similar things happening in other SOEs now. There is also the illegal of occupation of the company’s property because our people are in need of land. Why is the company failing to deliver what was promised to our people until they take it by force. What were the timelines for the handover of these properties? Incompetent company officials cannot hold our people to ransom.

The Chairperson said that in all fairness no board member could appoint himself or herself. The Minister appoints and then takes the names to cabinet for approval. If any member of the Committee wants to know how and who appoints board members, that question should be directed to the Minister. The Minister is expected in this Committee before the end of November, so prepare to ask him this question.

Mr R Tseli (ANC) was happy with the unqualified audit the company obtained, the R34m profit it made and that no state guarantees were needed. However, the way forward says that there is risk of placing the company under business rescue. Why is this beautiful picture that is painted have to end in the company being maybe placed under a business rescue? This contradiction is confusing. This has to be clarified.

He noted the company said it is having difficulties in identifying persons with disability and youth led companies; are women also in the mix? Why is it hard for the Central Supplier Database to identify companies led by people from these designated groups? It is worrying that you do not state in the presentation the interventions put forward for unachieved targets. There is R1m irregular expenditure as a result of the procurement of the services of a company secretary. What led this? There is no corporate social responsibility mentioned in your presentation? What progress has the company with the challenges noted in your previous appearance before the Committee? When will the R45m for the community be resolved?

Mr E Marais (DA) asked why the ongoing challenge of who is representing the community is not resolved after all these years. Leadership is seriously needed to solve this longstanding problem to get this R45m transferred to them. The underselling of diamonds under benchmark prices is a serious matter and an inquiry is needed and those held accountable must face the full might of the law.

The Chairperson asked why the company is not able to attract youth, the disabled and women owned businesses. This Committee keeps seeing community members and the contractors attending our meetings and raising their concerns – why are they not addressed? Timelines were even given by the Select Committee to sort out these challenges. Why were these not adhered to? The community representatives that met the chair before this meeting began have confirmed that when the meeting that elected members of the community to represent them was held, it was contrary to the court order, no report was given to the community, the community contractors were not consulted and the contracts with PSJV were unilaterally awarded without consultation. A copy of the community’s grievances will be given to the Department and the company today. These must be attended to, and the Committee briefed before the end of November.

Response
Mr Lemogang Pitsoe, CEO of Alexkor, replied that the township handover has been segmented into phases. The phase comprising the graveyard, hospital, schools, police stations and all properties owned by the government is in the process of being transferred to the relevant departments. The delay is emanating from the State Attorney’s Office presently doing the conveyancing. All documents are being converted into a new system because of non-alignment. However, the MOU should be finalised with the municipality and the provincial government by 22 November. The phase one is in process as we speak.

As for the question posed by Ms Mazzone, Mr Pitsoe replied that the sales contract is not with Alexkor but with PSJV. We welcome the comparison made with other indexes. The shareholder is also escalating this issue after the last AGM meeting. On the R45m community funds, Alexkor is a state owned entity and has to abide and comply with the PFMA. As accounting officer, we have the responsibility of following the prescripts with funds coming from the fiscus despite all the emotions. However, we would like to transfer the money quickly but we cannot break the rules as the money is in a dedicated account and processes have to be followed. Alexkor has the willingness to meet with the community but there is an investigation by DPE that will precede this meeting. On procurement for the disabled and women, the company is 200km away from Springbok, 600km from Uppington and 1000km from Kimberley. The company has to use the Central Supplier

Database and to travel this distance to access a tender is not possible. We are now trying to localise certain services to benefit local companies. The cash constraints are affecting the CSI projects as well.

Ms Adila Chowan, CFO of Alexkor, clarified the R1m irregular expenses made on procuring a secretary. Due to the high turnover of staff, when the previous secretary left, another secretary had to be appointed because the position is a strategic one. The board was not informed of the new treasury regulation that curbs the amount that can be used to single source or appoint someone. It should have gone to Treasury for approval as a single source. That was why it was classified as irregular.

On the challenges that might lead to the company going under business rescue, the single biggest investment of the company is the PSJV with R200m allocated to this investment. Alexkor has been facilitating the process in terms of releasing the funds when required for its operation. The company has certain projects in the pipeline one of which is the coal project, which was not approved by the DPE, and the diamond beneficiation project, which is also now put on hold. These projects were supposed to generate an income for Alexkor. The non-flow of revenue because these projects not being in operation have put the company in a precarious position. Alexkor needs sustainable income streams urgently. The PSJV has also not been performing well as reported and there is no way of getting any returns from this investment.

Mr Sembie Danana, Alexkor board member, said that when the board came in 2015, there were prospects that the R45m would be paid out. However, suddenly a court order was brought to the board disputing the settlement agreement. Various organs of state such as DPE, the Department of Rural Development and Land Reform (DRDLR) and Alexkor itself have addressed the challenges behind forming the CPA but somehow solving it has been an unattainable goal. The community must be assisted to solve this problem and not left for the company alone otherwise it can be accused of taking sides. On a positive note, this present board during its tenure has ensured that a chamber of business is formed. Local business both on the marine and land side have received many contracts and been paid as well. Alexkor pays for all the maths teachers in the area through our CSI portfolio.

Mr Trevern Haasbroek, Alexkor board member, said that the relationship between the community and Alexkor is very cordial but with the PSJV, there is some animosity. This stems from the factions within the community. Whenever the community formalises to get into electing persons to represent them, they always are interdicted. The community cannot organise themselves. The board has also considered projects like fish farming that would be good to do in the area.

Mr Haasbroek replied that our investigations found no evidence of state capture. The diamond project was a big concern of the Minister in the AGM. The diamonds from the South fetch a lower price than those from the North. Diamonds on land fetch $130-$250 a carat, the diamonds from the beach fetch $450-$550 a carat while diamonds from the deeper sea fetch $160 and best we ever got in an auction was $330. All these auctions are well attended by international buyers. For diamonds, the geography, size and quality determine the price. It is difficult to benchmark these prices and we shall welcome any investigations. On its sustainability, the company needs help otherwise it will run out of money by 31 March 2019.

Ms Morongwa Mothengu, DPE Director of Mining, said that the Department is committed to ensuring that the community is stabilised. DRDLR attempted to convene a meeting with the various community factions, about four of them. Some want the money to be paid to beneficiaries while others want it paid via a deed of settlement. Due to these challenges, DRDLR could not complete that task as the factions could not agree on a way forward. In September, the Department met with the DRDLR Director General to elevate the discussions. The CPA Act gives powers to the DG to intervene decisively on CPA challenges. We are hoping to get direction at month end on the way forward from DRDLR.

Mr Tlhakudi confirmed that Ms Mothengu has spent quite some time with DRDLR in the Northern Cape trying to resolve this issue. The overwhelming decision of the community is that the R45m should be paid directly to each beneficiary and this will require that the deed of settlement will have to be amended. There is a joint team working together with CoGTA to facilitate the handover of the township. By the next municipal finance cycle in June 2019, funds will be made available for the municipality to take over the township. The investigation started on the recommendation of the Department to the Minister because of the concerns raised by various stakeholders such as contractors on the appointment of a company (SSI). Issues to be looked at are how diamonds are being sold and the entanglement of service providers in state capture. A law firm that was initially appointed to investigate these allegations was cited in a matter at PRASA, so to protect the integrity of the investigations, that law firm was terminated and another will have to be appointed in its place. This now means that a lot of time will be lost.

Mr S Swart (ACDP) asked if Alexkor values the diamonds before they leave the mine at Alexander Bay and if so who does that valuation? Looking at the irregular expenditure, has the new board embarked on going through irregular tenders, contracts and other irregular expenditure? Is it something the board will be doing?

The Chairperson said that the Committee needed to meet more frequently with the entities even though the parliament schedule is tight. The Committee would have loved to visit the areas Alexkor operates but time is not on parliament’s side because of the forthcoming elections. The Committee requests DPE put in writing a progress report at the end of November on what is being done about the Richtersveld community constituting a CPA and the efforts by the Department of Rural Development and Land Reform towards that end. If need be a joint meeting with other the Portfolio Committee overseeing Rural Development will be held to ascertain progress.

Mr Matona clarified the irregular expenditure for hiring a company secretary. When the vacancy for that position arose, the company went to companies that provide that service. The only problem was that the company did not comply with Treasury’s rule that there must be three quotes and that led to the classification of this transaction as irregular expenditure. Value though was gained in this deal because a very good, capable and knowledgeable person was hired.

Mr Tlhakudi recapped about the municipality that DPE has a joint committee with province and the municipality working on ensuring that the municipality takeover is smooth. Feasibility is been done to ascertain the skills required to run the systems that has been installed. The report will be provided as well as the one requested by the Committee on progress made by the Department of Rural Development by the end of this month.

In summation, the Chairperson thanked the delegation. This Committee hopes that the board and Alexkor will keep to their word on their assertion that they will strive to have a very good working and cordial relationship with the community. The Committee looks forward to getting an update on progress being made by the Department and DRDLR in breaking the impasse faced by the community in the formation of a CPA.

The minutes of the last meeting was adopted without amendments.

The meeting was adjourned.