Alexkor 2020/21 Annual Report; with Deputy Minister

Meeting report

The Chairperson said that Alexkor was an entity that had been struggling for quite some time, and the Minister had put in place mechanisms to improve its state. He handed over the platform to the Deputy Minister and his team to give an overview of the presentation.

Deputy Minister's remarks

Mr Phumulo Masualle, Deputy Minister of Public Enterprises (DPE), said the Alexkor accounting authority would address the Committee on the progress they had been making with the situation. He indicated that the interim board had recently come into power, in February. The interim board put in place by the Minister had had a short time to implement measures addressing issues related to the governance within the entity. Given that the interim board started with a base that was not solid, they also had to sort out issues of compliance and the requirements of the Companies Act, and the Public Finance Management Act (PFMA).

He painted a picture for the Committee of the situation that the entity found itself in since the previous board was dissolved. The current board had to come into place and work towards redress whilst ensuring that the entity was on a path towards sustainability and good health. The report shed light on the significant strides made, although the entity was not entirely out of the woods.

Alexkor report

Input of Alexkor Board

Dr Trish Hanekom, Interim Chairperson of Alexkor, said she would be presenting the 2021 integrated report, which predated the appointment of the new board. It therefore followed the presentation formula of the overdue annual general meeting. She would make comments from the perspective of the accounting authority and take this opportunity to inform the Committee of the progress made since the appointment of the interim board. Prof Trevor Fowler, the interim chief executive officer (CEO), would present the details of the 2021 reporting period and the perspectives regarding a way forward.

She commended the support of the Minister and the Deputy Minister since their appointment, and reiterated the sentiments shared by the Deputy Minister in that the entity found itself in a very difficult situation.

The presentation would focus on three particularly important areas -- governance; making sure that mining was profitable; and the relationships with the community.

The accounting authority (AA) that was in place prior to the appointment of the interim board retired in September 2019, with an administrator appointed thereafter. The former CEO had been appointed in terms of Section 49 2b of the PFMA. The new accounting authority was appointed and held an introductory meeting with the shareholder on 8 February 2022, following the resignation of the former CEO at the end of January.

The new AA did not find Alexkor in a very good position in terms of governance compliance. The external audit for 2020/2021 had not been completed. The letter of representation and report of the AA was signed on 6 May by the new AA, indicating that this may have been a record time, considering that the interim CEO was also being recruited. The annual financial statements were prepared by the former CEO and the general manager of finance. The interim board had met with the external auditor and the Auditor-General of South Africa (AGSA) to discuss the state of the financials, as there were many concerns in that particular area that may not have been dealt with correctly. Those issues would be dealt with in the 2021/22 external audit, and if any maladministration or malfeasance was found during the reporting period, appropriate remedial steps would be taken.

The governance arrangements and compliance with statutory requirements left much to be desired. No corporate plan was approved for 2022/2023, the budget and shareholder agreement were not initiated, and the 2021/2022 integrated report and annual financial statements (AFS) were not completed. At that level of seniority, it would be important to complete these statutory responsibilities, but it had not been done. It was apparent that in the reporting period and historically, the attribution of income and expenditure to Alexkor, the Richtersveld Mining Company (RMC) and the Pooling and Sharing Joint Venture (PSJV), was not in compliance with the deed of settlement and unanimous resolution. The attribution of income and expenditure for the reporting period and historically would be reviewed in the 2021/22 external audit to establish and restate the financial position of Alexkor and the PSJV.

The financial position of Alexkor was extremely precarious. She highlighted that the 2020/21 audited financial statements included a R1 million dividend and a reversal of the impairment of the ICC loan of R90 360 899, which created a false picture of the consolidated financial position of the year ending 31 March 2021. Treasury had not yet approved a request for exemption for the payment of R7.9 million for the Special Investigating Unit (SIU) investigation. There had also been no salary increments since 2018, which resulted in industrial action.

Mining activity was all undertaken by contractors who were remunerated based on a share of the proceeds of the sale of diamonds, ranging from 60% to 80% of the value of the sale. There was currently a process under way to review the contracting arrangements.

Dr Hanekom said that the interim CEO would take the Committee through the remedial plans that the board would implement. She expressed appreciation to the Minister and the Deputy Minister for their support thus far. She highlighted the interim CEO and the staff of Alexkor and the PSJV had been working extremely hard under difficult circumstances, for which they certainly deserved commendation.

Briefing by Alexkor on the annual report and financial statements for 2020/21 financial year

Prof Trevor Fowler, Interim CEO, said that the Alexkor group revenue had declined by 7%, from R171 million to R158 million. The cost of sales had decreased by 4.6%. A significant number of retrenchments occurred in 2020, but core staff had been reemployed temporarily, mainly related to the maintenance of properties. Operating costs had decreased by 63%. Alexkor had reported a profit of R128 million, attributable to the impairment of the ICC loan of R90 million and the reversal of the expected credit loss of R16 million. The audit findings had been addressed, and the qualified audit opinion greatly improved the prior disclaimer audit opinion.

He gave an overview of the joint venture of Alexkor SOC LTD and the Richtersveld Mining Company. Alexkor was a 51% sharholder, and the RMC held 49%. The RMC represented the community that won the land claim and owned the land. The land and marine rights were owned by Alexkor, and the operations were done through what was referred to as the PSJV, and that was part of the deed of settlement that was established in 2007.

He gave an overview of the carats produced. In 2021, there were 28 246 carats produced. In 2020, there were 28 896, and in 2019 there were 48 127 produced. Production had been declining over these years and the calculations done for the actual carats to be produced each year was at 33 000, which meant that there was currently an under-production.

There were 809 contract employees, and recently this had been increased by approximately 100 additional employees. Production had increased quite significantly in the past two months.

He outlined the issues underlying the perilous financial position. Core regulatory requirements, including occupational health and safety requirements not being met. Recapitalisation was needed if it was confirmed that the residual deposits were financially viable. Current mining operations were unable to generate the revenue necessary to cover the recapitalisation in the event that mining operations were financially viable. The volume of the deposit was envisaged to be no less than 150 000 carats per annum, and current production fell short of that.

He referred to a strategy that had been developed in 2021 but had not been implemented. There were intentions to employ large contractors to explore and mine the land extensively. He indicated that the board would be going to tender for contractors in the next month.

He said the innovation and growth strategy was aligned with the objectives of government, including sector growth, investment, job creation, and competitiveness in the core business. The short-term strategy sought to realise an increase in production from land mining operations. The long-term strategy sought to partner with large-scale marine miners, which would allow mining during the winter periods.
He gave a brief overview of the entity's financial stabilisation.

Dr Hanekom said that the carats Prof Fowler was referring to were the break-even point, based on the data that was available on the price of diamonds. At the time of the report, Alexkor had 890 employees of the contractors who did the mining. She stressed that, in effect, the Alexkor and PSJV employees who managed the mine were managing the contractors who did the mining. Those ratios were extremely problematic. Therefore, this was the oversight for the 2020/21 financial year. There were currently engagements with the shareholders around what needed to be done to ensure that the mining operation ran profitably and securely.

See attached presentation for further details

Discussion

Mr N Dlamini (ANC) said that the first part of the presentation was not anything new. Alexkor had been in trouble for quite some time and there had also been issues related to law enforcement agencies. Since the new board had come into place, there were a few things he would like clarity on. There was a belief that Alexkor was struggling financially, yet the new board had chartered a plane twice for their board meetings. When the Committee visited Alexkor during an oversight meeting, they had been given to understand that as a part of cost-saving measures, the board would rather drive, which the former CEO was said to be doing. Considering its purported financial position, how was it justified that Alexkor could charter a flight now?
 
With reference to the rehabilitation process and the possibility that there was still value in the deposits, he asked if there was a financial plan to put that operation in place. If not, how would it be funded?

Mr G Cachalia (DA) highlighted that this had been going on for a very long time. According to his understanding, this was a rich mining resource, particularly in the marine area. The resource was mined, the costs were subtracted, the contractors were paid and the profit was split between the equity partners. What had happened over the years had been plain for everyone to see, as exposed by the Zondo Commission. Since the efforts to fix matters had been in motion, there had not been much traction and there remained plans without funding from government. He asked if that was sustainable and whether there were any prognoses on how the board planned to recapitalise what the board needed.

He said that there seemed to be insufficient security measures.

He asked how the board planned to meet the situation of covering costs in the absence of funding. Would the board would look at having a private partner in order to set this right?

Referring to the issue of governance, he said the requirement of the board representation on the PSJV was three from Alexkor, three from the community, and the quorate requirement was five. He asked why it was currently only three. What payments had been made to SARS, and what payments had been made to the community? What was being done about the unhappiness of contractors in the marine area relating to ongoing issues of theft?

In the past, there had been culpability in terms of Alexkor’s contract to the Scarlet Sky Investments (SSI), and asked if the contract was unlawful and irregular, with an unlicensed entity that undervalued diamonds and sales. What was being done about that issue? Why had the former CEO resigned, and would he be called to answer for the lack of strategy, statutory responsibility, and other transgressions? How would the board learn from this going forward? He asked for transparency on the PSJV financials, as the Committee had never seen them.

He was interested in cogent answers to the concerns raised and what was going to be done, as the government had indicated that it would not be giving the entity any money. Despite having such a rich resource, the entity did not have any money.

Ms O Maotwe (EFF) asked which process was followed in appointing the AA. She wanted clarity on the statement that “the governance arrangements and compliance with special requirements leave much to be desired”, and which period was being referred to in this instance, as the follow-up point spoke about the 2022/23 corporate plan.

She asked how much the cost of mining exceeded the revenue from sales, and for the board to provide an idea of the age creditors' report and the value being referred to.

Why had Alexkor asked for an exemption, and what had been the response from National Treasury? She also referred to the lack of a salary increment since 2018, and asked if there had been any labour agreement in place and what the terms of the agreement were.

She asked for clarity on the issue of current mining operations being unable to generate revenue which was necessary to cover the recapitalisation.

She agreed with the sentiments of Mr Cachalia, that the growth strategy was not presenting anything new. She asked for clarity on the discussion around bringing in a new partner.

Ms J Mkhwanazi (ANC) referred to the financial stabilisation report, and said there was an urgent need for financial and non–financial support. She asked for elaboration on this matter and the role of the DPE as the overseer.

She asked the presenter to expand on the community concerns with the new business direction of contracting larger contractors for the land operations. Had the community's concerns been addressed, and what plans did they have, going forward? What plans had been implemented to address the procurement targets, as the report indicated they had not been met? What were the entity's plans to get a better audit outcome for the next financial year?

Mr F Essack (DA) commented that the presentation indicated that the financial position of Alexkor was quite precarious. The Zondo Commission had exposed that Alexkor, through the infamous Scarlet Sky Investments, was alleged to have sold diamonds below market prices. Since the findings had surfaced, he asked what steps had been taken to address the distorted diamond pricing system, and to ensure they were sold at current prevailing market prices.

What was the exact plan of action for the precarious situation they found themselves in? What issues were currently being faced by the Richtersveld board members? There was meant to be a budget implemented in terms of the remuneration for the board, and he asked for an update on the process.

He asked if polygraph tests were being conducted.

He said that the economic opportunities for the Richtersveld community had not been forthcoming, and asked what plans were in place in terms of economic opportunities for this community. How much was Alexkor currently spending on external consultants?

Mr S Gumede (ANC) said it may have been a good move that the CEO resigned, as the entity would not be where it was currently. The resignation of the CEO served as a lesson. He referred to the corporate agreement, which stated that an individual could not resign without completing some of their critical tasks. This should be incorporated into the agreement to ensure that the entity did not lose people who would have undertaken some of the work in the future.

He commended the Minister for the Department's timely intervention in the matter, such as implementing the interim board. For two consecutive years, Alexkor had achieved a disclaimer and in the current audit report, he believed Alexkor got a qualification. It was progress towards achieving a good story. He commended the interim board, which had had the ability to take the entity to a level of qualification, despite other elements that other Committee members may have raised. He commented that the commonalities amongst entities were the issues of fruitless expenditure and irregular expenditure which were significantly high.

He expressed dissatisfaction with the current number of retrenchments in the entity, as this had affected its productivity levels, and they had not been meeting deadlines as scheduled. In turn, this may impact the opportunities for the locals who aspired to secure employment to feed their families.

He referred to the recent events involving zama-zamas (illegal miners), and he said that the report should have a strategy to prevent this kind of scenario from happening again.

As the Portfolio Committee, they were reminded to strengthen and improve on their oversight, and to be in a position to hold the DPE to account in all instances.

He asked for clarity on whether the entity had a board in place, or whether they were still operating with an interim body -- although he would like to believe that they were still operating with an interim board. It would be interesting to find out when the real board would be put in place, as this remained critical. He asked if the interim board was ready to steer the ship and, if they were, what plans they had in place.

Some of the findings by the AG were that there were no plans in place, so it would be good for the Committee to get information on these plans and the supporting structures.

He commended the work done by the interim board.

Ms V Malinga (ANC) said that she had been covered by her colleagues. She acknowledged the efforts of the interim board at Alexkor, and wished them well.

Ms J Tshabalala (ANC) also acknowledged the work done by the board. She said that although the entity had achieved a qualified outcome, the emphasis should be on adhering to the AG's requirements. The board should be able to come back with an unqualified audit.

She echoed the sentiments that the report did not include anything new on the financial statements, but still acknowledged the work done by the new board. She asked for clarity regarding the placement of a permanent board. She also referred to the fact that only three members of the board were present in the meeting, and asked about the whereabouts of the other board members.

The issue of transformation during the oversight visit was still quite prevalent. When were black African women, which was inclusive of other racial groups, going to be appointed within the entity? She referred to the unemployment situation in the country, and asked whether there would be people younger than 35 years appointed to the vacant positions. Would these appointments occur any time soon, as the issues of unemployment needed to be addressed?

She asked what was being done about the land, to ensure that justice was done to this particular community. Were there any concrete plans from the board to uplift the community and play their part in the communities' well-being?

She commented on the employee remuneration issue, and said that the staff morale was quite critical. She asked for a concrete plan to deal with the matter.

When the company started, there had been an emphasis on shutting down its offices in Pretoria to be closer to its operations. She asked if the programme for cleaning diamonds at the branch in Kimberly was still in operation. How much was being paid for the Kimberley offices, as it was envisaged that the amount would be less, as the entity would be working with the government, the municipality and the provincial government?

She said that Alexkor had shown improvement, with a net asset value of R128 million compared to a prior year of R106 million. If there had been no irregular, fruitless or wasteful spending, the entity would have achieved three of the nine performance targets for the 2021 financial year. Some of the performance targets had not been achieved, including but not limited to the execution of the rehabilitation plan and the procurement from companies owned by blacks, youths and people with disabilities.

The PSJV had achieved a revenue of R310.1 million and a profit of R22.9 million, primarily due to the better market for its diamonds and the favourability of the US$:Rand exchange rate, despite the lower production.

She said that the PSJV achieved its financial sustainability through earnings before interest, taxes and amortisation (EBITA) of 11.8%, which was higher than the 10.5% target by the shareholder for the 2021 financial year. The reduction of employees as a cost containment measure had improved efficiency at the PSJV, which in turn impacted positively on the joint venture, although the PSJV had been unable to sustain its diamond production during the difficult Covid-19 pandemic. She asked what would be done to ensure that all targets were achieved.

The set targets for land and marine production were not achieved, and she would like to know what was being done to address the issue of skills development and artisanal engineering and technical training, and how it impacted socio-economically.

The Alexkor report indicated that the entity’s five-year (2019-2023) social and labour plan (SLP) was yet to be finalised, and local and economic development projects were not executed for the period under review due to the combined financial challenges encountered by the entity and the failure to implement the SLP and local economic development (LED) projects. She asked what the DPE was doing to address the triple challenges and monitor the implementation of the LED projects to address development challenges in surrounding mining communities.

She asked if any mechanisms were earmarked to ensure that local communities and township businesses were the beneficiaries of the partnership with large mining and marine contractors.

Alexkor needed to focus its attention on the core operations of diamond mining. She asked when the establishment of the local task team would be finalised. She also asked for clarity on the issue of the flight taken by the board -- what was the reason for taking a flight and not using land, and what were the cost implications?

The Chairperson said that all his questions were covered by the Committee Members, and he would not ask any further questions. He appreciated the progress being made by the entity and the Department.

Alexkor's response

Dr Hanekom expressed her appreciation for the thoughtful questions raised by the Members.

She began by outlining the status of the accounting authority in governance, and confirmed that it was an interim board. The former CEO, who also served as the AA, had resigned in January. The acting CFO and general manager of finance resigned soon thereafter, which meant that two of the most senior people at Alexkor had left quickly. She agreed that there should have been contracts and consequence management, as it was stated there was an obligation to see through what was started. There needed to be an evaluation based on the evidence and facts as to whether there was justification. She gave reasons why they felt the need to discuss the issue with the external auditor and the AGSA, stating that issues of concern could be addressed.

The interim board had been appointed for a year. As chairperson of the board, she believed that the current interim board was a good one, and was deeply committed and hardworking. She confessed to having served on other state-owned enterprises (SOEs) and said this remained the most difficult SOE.

She agreed with the Members that some of the issues addressed were old news. The report had been a review of the 2020/21 financial year that ended in March 2021, so it was well over a year old. The interim board had been doing its best to address issues, keep its focus on the future, and make sure that what happened going forward put Alexkor, PSJV and the community in a better position. Unfortunately, the ultimate objective of the deed of settlement and a unanimous resolution was not achieved.

She said that as the AA, there needed to be a corporate plan and a budget at the end of the financial year, and there must be an integrated report. Arriving as interim board members to find that none of these had been done, was completely shocking. She had never been on a board where most time was spent getting a board fixed instead of playing the normal quarterly oversight role. The lack of money had restricted the role of the board in various ways. She added that not everyone had been claiming fully for their participation in the board due to the lack of funds.

She responded to the question relating to charting a plane to Alexander Bay. The board first had to look for someone who could serve as the interim CEO, with the ability to fix the governance shortcomings and turn around the mining operations within a short time. The position considered people who had an engineering background and governance experience. There was an extensive interviewing process to appoint someone on a renewable six-month contract. Everyone approached was either in early retirement, or had recently completed their tenure elsewhere. The board had also indicated that the appointed person would have to reside in Alexander Bay, as it seemed unrealistic and financially irresponsible to have a CEO based in Johannesburg going up and down all the time at the expense of the company, while claiming travelling expenses and allowances for being away from home. She appreciated Prof Fowler, who had made himself available and opted to live away from his home and family. He had been back to Johannesburg once for a series of commitments and meetings.

She explained why the board went on a charter flight to Alexander Bay, pointing out that it was cheaper to put ten people on to a plane than having ten people driving overnight, as there were expenses once they arrived in Alexander Bay. These were also people who were not remunerated on a full-time salary. It would have been an unaffordable process. She indicated again that the board did not claim the fees they were entitled to for all their participation.

Prof Fowler had been appointed in March, and the first payment was only in April. However, he was earning far less than the benchmark for someone in the same role. There should be an incentive for the inconvenience of living away from home; therefore, Prof Fowler was doing national service in his retirement. He had to appoint an external auditor, as due diligence had not been done for the 2020/21 financial year. She hoped the external audit would not have to wait until May next year. The shareholder had approved the request for the AG to opt-in, which meant that the AG would conduct the audit themselves for the 2022/23 financial year. The board was in the process of getting the concurrence of the external auditors who had audited for the past three years, to audit again as there were specific issues they needed to look into.

She said there were areas where proper procurement processes had not been followed, or if the process was followed, it was not always defensible. She referred to the branch in Kimberley, and indicated that there was no due diligence or feasibility study done to establish the branch. This was related to the evidence given to the State Capture Commission and the report, which found evidence of underpricing and selling diamonds in a closed tender system. There were no returns realised for these sales. There were no more closed tender systems -- the bulk of the diamonds went to the State Diamond Trader and were sold on an open tender at peak, where there was maximum exposure to international and domestic buyers. The board had been soliciting the best expertise that did not have a self-interest of any kind, in contractual agreements to assist the board going forward. Recommendations would be made to the shareholder to find ways to realise better prices.

Contracts, where proper procedures were not followed, had been presented to the board, and a number of those had been cancelled. The board would be happy to make a detailed presentation in that regard, although it would be information coming up in the 2022/23 reporting period.

She referred to the state of mining, and said that diamonds from the west coast were extremely sought after and valuable, so they did not doubt that there may be some potential left in the mine. However, as the interim CEO mentioned previously, a certain threshold is needed to break even. The board was of the view that the threshold could be met, but it would be crucial that mining operations continue, as there were better economic opportunities in the future that might be realised, and any collapse of the mining operations would be detrimental to that. She noted that mining in the area had been active for about 100 years, and mines did not last forever. There was word that there still remains a lot of potential in the marine mining area, and the interim CEO had already been there and had managed to ramp up production. Security had also improved.

She said all six PSJV board members were in place, with three representatives from Alexkor. In 2016, to not have the PSJV collapse, the court-appointed three non-executive directors to represent the RMC; in 2019 the three non-executive directors representing the RMC were replaced by new non-executive directors. They were hopeful that in the course of the next month, the Communal Property Association (CPA) administrator, working with the Department of Rural Development, would have completed the process of constituting all the entities of the CPA, so that the RMC was properly constituted and the CPA members were appointed to the RMC board and directly represented the CPA from there.

There were currently court processes underway, and Prof Fowler would speak more about them.

She referred to the question related to the SIU and the R7.9 million for which the board had requested an exemption. She said the reason an exemption was requested was due to the fact that the entity did not have cash. While it may have seemed that the entity had reasonable liquidity, it did not, as the funds were reserved for the rehabilitation of the township handover. Alexkor might have had some reserves, but the PSJV did not have any. The SIU advised the board that they could ask for an exemption from National Treasury (NT) on the R7.9 million, but NT declined the request. The matter was currently being discussed with the DPE, as it added to long outstanding debts.

The board was of the view that the current arrangements with the PSJV, Alexkor and the two parallel boards -- which also had two parallel committees dating back to 2007 -- were not appropriate in 2022. They were also extremely costly.

The interim CEO had indicated that just to avail himself for the board and committee meetings would take out 44 working days if they were the minimum in terms of the quarterly oversight meetings. She said that the board looked forward to the Richtersveld mining company being properly constituted, so there could be a mandated discussion with the CPA representatives to get a way to manage mining.

Prof Fowler touched on the issue of the polygraph test being used. He said polygraphs were used in cases where there were instances of theft or irregularity. There had been resistance from members of the union around polygraph testing. There had been a case where an unauthorised person had entered a place where there were diamonds, and that person had since been dismissed. Mechanisms to address the issues of theft had definitely been set in motion.

In 2020 there was a challenge around illegal mining on the Alexkor concessions, but since 2020 security had been increased. Illegal miners had been operating on concessions that they had since sold. The board was aware of one of the access points to the De Beers concession, but actual mining did not occur on the Atlantic seaboard. In the last three months, the police had undertaken an operation during which they had confiscated equipment and arrested close to 400 miners.

Follow-up discussion

Mr Cachalia asked what was being done about the R90 million capital contribution that was meant to start the PSJV, which was operating under a loss, but Alexkor was using that to make its profitability look better. He touched on the issue of the R65 million for rehabilitation efforts to remove asbestos, but there had been only a R10 million reduction in its rehabilitation liability. He asked where the rest of the money had gone.

Mr Essack asked for clarity on the issue of royalties from contractors which had not yet been paid to the South African Revenue Service (SARS), nor refunded to contractors. He added that the response given on the issue of the chartered aircraft was not sufficient, as it had not outlined exactly how much was spent and how much would have been spent on alternative transportation.

Deputy Minister's comments

The Deputy Minister said issues of funding were raised by the Committee, and the Department also shared the pain of realising that if there had been an injection of capital into the entity, it would have performed much better. There needed to be very critical investments in infrastructure to make mining profitable. The entity constantly relied on National Treasury for a window to present itself, and they could get money to be directed towards Alexkor's operations.

He said that perhaps there was a realisation that many structures were envisaged as part of the deed of settlement, which was a court order. The structures were too complex and served the purpose of prolonging the ability of the community to reprocess.

Committee matters

The minutes of 1 and 8 June were amended and adopted.
 
The Members adopted the third term programme.

The meeting was adjourned.