Alexkor Annual Report: briefing

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Public Enterprises

20 October 2004
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Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
20 October 2004
ALEXKOR ANNUAL REPORT: BRIEFING

Chairperson:
Mr Y Carrim (ANC)

Document handed out:
Alexkor briefing
Draft Committee itinerary for visit to Alexkor
Summary and Analysis of Alexkor's Annual Report 2003
Alexkor Limited Amendment Bill

SUMMARY
Alexkor Limited gave a presentation on its Annual Report that would be presented at its Annual General Meeting (AGM) on 29 October 2004. It detailed Alexkor's location, corporate structure, financial position, forms of mining and some of the challenges it faced. The Committee raised concerns about Alexkor's intention to hand over its non-core infrastructure operations to the municipality of Alexander Bay and the effects of the land claims instituted by the Richtersveld Community.

MINUTES

Alexkor briefing
Mr D Zihlangu (CEO) explained that Alexander Bay and Alexkor were situated on the border of Namibia at the mouth of the Orange River. Port Nolloth was the closest South African town and the local communities were the Richtersveld communities. Alexkor owned 120 km of coastline divided into concessions and a total of 85 000 hectares. Alexkor Limited had three divisions: Alexander Bay Mining (ABM), Alexander Bay Trading (ABT) and the Social Infrastructure Division. ABM dealt with the various mining activities while ABT operated the various farming operations, guesthouses and the airport. The Social Infrastructure Division managed the Alexander Bay hospital, schools, recreational facilities and 437 houses. Alexkor net profit had increased dramatically over the past six years from a net loss of R67.1 million in 1999 to a net profit of R35.73 million in 2004. Alexkor's debt ratio was 1:4.96 and its shares were at 358 cents per share. Its total revenue had decreased since 2003 due to the strengthening of the Rand to the Dollar. Alexkor had marine, land and beach mining operations. It faced challenges of a land claims case, the massive expense of capital replacements and the cost of extensive exploration into land mining.

Discussion
Mr P Hendrikse (ANC) said that if the Richtersveld community acquired 65% of Alexkor, and were entitled to employ a Strategic Equity Partner (SEP), that would be given a 51% shareholding. Would the present Alexkor managers still manage the mine? Mr N Moloi (Alexkor Chairperson) answered that the appointed SEP would manage the mine.

Mr Hendrikse asked if the complaints about the use of polygraph testing had been resolved and how the board was composed. He enquired if the attitude of Alexkor toward Illicit Diamond Buying (IDB) had changed and why there was a shortfall of carats mined in 2004. He suggested that profits spent on fulfilling the municipal function were government profits and asked if handing over this function would not be "re-arranging the furniture".

Ms N Ngcengwane (ANC) wanted clarity on what skills training programmes had been available to retrenched employees and what Alexkor's Employment Equity levels were.

Mr S Manie (ANC) asked the delegation to comment on the view of the Community and employees of Alexkor that old style political views were still prevalent in the management structure of Alexkor. He commented that it was advisable for Companies who benefit from a geographical area to take responsibility for the municipal needs of that area. He asked what the role and the responsibilities of the SEP was and enquired if the SEP that the Community appointed would also have the responsibility of managing the Social Infrastructure Division and the ABT. He asked why Alexkor had not homed in on industries that would add value to the diamonds mined such as diamond cutting and polishing. He remarked that Alexkor was aware of its rehabilitation liability and asked why it was not making a more accurate allocation of funding to address this liability.

Mr Moloi answered that Alexkor shareholders appointed the Board according to the Alexkor Act. The members had various skills such as mining, legal, community development and financial knowledge. The present Board's term was ending and a new Board would be appointed by the Minister at Alexkor's AGM. He responded that Alexkor had, since 1999, been focusing on tightening the security on the mines. Between 1997 and 2002, Alexkor had nine CEOs but the present management had made Alexkor stable and successful. He explained that when it was decided to apportion 51% of the Community's 65% shareholding to a SEP, only the core functions of Alexkor were included in the SEP's function as the Minister did not want to encumber the SEP. He continued that there would be a strategic handing over of the municipality and that the state would be willing to bequeath the existing infrastructure to the municipality. He commented that Alexkor was not re-arranging but rather focusing on its core functions.

He responded that the employment of five retrenched employees was part of Alexkor's outsourcing contracts for marine mining. Alexkor had retrained and helped retrenched employees acquire skills for marine mining. Alexkor also gave first preference to retrenched employees when a new post was available. This meant that most of the retrenched employees were reabsorbed into Alexkor or one of its contractors. Alexkor employed 450 permanent employees and had 1 188 contractors. Another condition of the outsourcing contracts was that the contractors had to rent the houses that the retrenched employees lived in to provide accommodation for the employees. He said that he would give an extended presentation on Alexkor's Employment Equity status during the Committee's on-site visit.

The Chairperson expanded on Mr Manie's question about the employees and the Community's view of Alexkor's management structure. Alexkor's 2002 Annual Report said that there were comments that an inner core of 'Broederbonders' managed the mine.

Ms N Khondlo (ANC) asked about the relationship between the trade unions and the mine management.

Mr Moloi responded that while in the past it had been confrontational, there was a healthy relationship at present. This was partly because Alexkor's CEO had introduced monthly community, labour and company discussion forums.

Mr Zihlangu said that the Minister had put together a team, including Alexkor management, to investigate the viability of diamond mines using Black Economic Empowerment (BEE) enterprises, but that issues such as security need to be addressed.

Mr I Davidson (DA) commented that it was the correct decision for Alexkor to focus on its core functions. He continued that capital and exploration expenditure had been hampered by a lack of cash flow and asked how much Alexkor intended to spend in the future. He enquired why there was an increase in the balance sheet between 2003 and 2003 in staff liabilities. He invited Alexkor to give the Committee a better understanding of its cost structure.

Mr C Gololo (ANC) asked what the demographics at Alexkor were and what future plans it had to curb diamond theft.

The Chairperson stated that due to its cycles, the Committee would not be able to fully report on the R500 million capital expenditure that Alexkor was asking government for. He noted that this matter was being put to Parliament and the Committee would take it further. The Committee would apply its mind to this matter and approach the Minister, who would have to respond to the issue. He commented that state owned enterprises were under pressure to improve financially while still meeting their public obligations and asked what the real cost of Alexkor's financial success was. He enquired about the status of Alexkor's restructuring and asked what the likelihood was of the company acquiring a SEP and what its character would be like. He remarked that he did not think that Alexkor should focus only on its core functions, as they were a necessity for the communities in Alexander Bay and the surrounding areas. He suggested that municipal control be phased in over a period of five years.

Mr Moloi stated that very few failing public enterprises had been successfully turned around and that there was far too little publicity on Alexkor's success.

The Chairperson agreed with Mr Moloi and encouraged Alexkor to use the Committee and Parliament as a means to publicise their success.

Mr Moloi continued that there had been no compromising or costs in making Alexkor successful. He said that it was a win-win situation for all the parties involved. He answered that in the future Alexkor should invest more in the exploration of land mining and the development and increased productivity of land and deep-sea mines.

Mr Zihlangu explained that the actual staff liabilities in the cost structure had not increased. When the actuaries worked out the staff liabilities in 2003, they assumed that some staffing costs that were actually carried by the company were not liabilities. This mistake was corrected in the 2004 cost structure and the increase only reflected the true state of the staff liabilities. He added that the majority of Alexkor's costs were paying the shallow sea diamond contractors. This cost the company about R100 million a year. Alexkor split the revenue of the diamonds with the contractors based on pre-arranged proportions.

Mr Manie asked for clarity about the concessions given to the contractors, and if they were employees of the company. He observed that there appeared to be many businesses within a business.

Mr Zihlangu explained that there had been a decrease in the number of employees. Alexkor previously owned boats that they had hired out to employees to use for marine mining. The employees had eventually purchased these boats and now ran their own closed corporations.

Ms Ngcengwane asked how Alexkor monitored the contractors.

Mr Zihlangu responded that Alexkor used a Global Positioning System (GPS). The position of every boat could be seen on a screen and Alexkor could make sure they were in the correct concession.

Mr Moloi added that the productivity of marine mining had increased dramatically as a result of the outsourcing.

Mr Hendrikse asked why Alexkor was trying to fix something that was not broke with regards to their Social Infrastructure Division.

Mr Zihlangu explained that Alexkor was carrying all the costs of infrastructure and if the mine closed, the town would have no infrastructure. He continued that Alexkor had had discussions with the provincial and local government to arrange for the municipality to take over these functions in an orderly manner.

Mr D Matjila (Department: Restructuring Acting Chief Director) explained that Cabinet had halted the restructuring of Alexkor until the results of the Richtersveld land claim had been finalised. As the Community already had two verdicts in its favour, it was threatening to interdict any restructuring at Alexkor. He added that the Minister was in the process of engaging the community to find a resolution.

The Committee briefly discussed their Alexkor site visit between 31 October and 2 November. The itinerary would be finalised and circulated in 24 hours by Mr Hendrikse.

The meeting was adjourned.

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