Alexkor Annual Report briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
26 OCTOBER 2005
ALEXKOR ANNUAL REPORT BRIEFING

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Alexkor Limited Annual Report 2004/05 [see www.alexkor.co.za]
Alexkor PowerPoint presentation [email [email protected] for problems with downloading]

SUMMARY
Alexkor Limited presented its 2004/05 Annual Report to the Committee. The last reported year included only nine months because the fiscal year had ended June 2004, rather than March 2004. The last year had resulted in a R4.7 million deficit. Key topics included the effect of the high turnover of ten Chief Executive Officers (CEOs), as well as uncertainties arising out of the pending legal claims against Alexkor and the Department. Alexkor was working on increasing work possibilities for Alexander Bay Trading (ABT).

The Committee praised Alexkor for its establishment of community infrastructures, such as the hospital, airport, schools and worker housing, but were alarmed by the losses and seeming lack of forward planning. The Chairperson stated that the Committee would expect a more detailed report and explanation of the company’s performance next August. He also asked for a report on the company’s empowerment of women by March 2006.

MINUTES

Alexkor briefing
Mr N Moloi (Alexkor Chairperson) gave a brief overview of the company’s position. He discussed one of the key challenges to the company, namely the high turnover in CEOs. He reported that Alexkor had had ten CEOs since 1995, in addition to the accompanying change in senior management with each CEO. Alexkor had been unable to maintain a long-term business and investment strategy due to this high turnover. As Chairperson, it was his job to ensure some continuity in company strategy in light of the frequent changes. This year, the company expected to look beyond for more opportunities.

Mr Moloi continued that the Board had made efforts to analyse the company’s environmental liability, by consulting with the developmental authorities on the law. Auditors had looked thoroughly at Alexkor’s compliance on this issue. Alexkor continued to operate one mine, but was much more than just a mining operation. It also operated the town hospital, airport, school and housing. The company continued to maintain good, creative post-mining functions.

Mr M Mdaka (Alexkor Acting CEO) presented the Annual Report to the Committee. Mr Mdaka had been Acting CEO for only four months. He had a background in mining, finance and had worked in the stock market. He presented the annual financials from the past 9 months, since the past financial year had not started until July 2004 and had ended March 2005.

Alexkor’s core business consisted of one diamond mine, located in a remote area at the mouth of the Orange River. The company’s non-core business consists of agriculture and tourism performed through Alexander Bay Trading (ABT). The Company was looking into new opportunities for growth in this area. It was important to make sure there was a market for products. In some instances, such as with maize, ABT had the product but no markets. Part of the problem was ABT’s distance from major cities. For example, it was 800 km from Cape Town. Despite this, Alexkor was hoping to enter into the Cape Town and Johannesburg markets.

Mr Mdaka presented the budget and actual expenditures for the past nine months. Total income budgeted was R242.68 million. Actual total income was R171.6 million. This was comprised of diamond income in the amount of R143.96 million (budgeted at R211.63 million) and other ABT income of R27.62 million (budgeted at R31.05 million). The total expenses budgeted for the nine-month period were R218.93 million. Actual expenses were R176.36 million, resulting in a surplus of R42.63 million. This reflected the company’s success in controlling costs. The R41.74 million actually spent on salaries and benefits had made a real difference to the local community. The amount budgeted for professional services was R25.78 million, and R9.52 million had actually been spent. Of particular note was the R1.2 million paid toward legal fees. The company had experienced a total loss of R4.78 million.

In summary, diamond production had gone down 38%, but operating costs had also decreased by 32%. The ABT operating loss increased from R0.08 million to R5.5 million. The two key challenges related to the Capital Expenditure (Capex) replacement of equipment programme and exploration for new mining possibilities. Capex had gone up 43%, with the main expenditure of R13.53 million being on replacement of equipment. Exploration had been reduced by 69% to R4.18 million. Alexkor did not have a consistent, proper exploration programme, but this was important to growth. He identified land mining as having the best potential for new opportunities. While expenditures for replacement of equipment had increased, it had been a necessity. However, there was a lack of funding for both of these important items.

Mr Mdaka reported that Alexkor had achieved better diamond prices. Specifically, it had received well above US$100 per carat, which was good in the diamond business. However, he reported a downward trend in carat production.

Mr Mdaka further identified major difficulties in current marine mining methods. Days spent sea mining had been reduced due to bad weather, high waves or strong currents. In 1996, sea diving operations had occurred on 140 days. The number of sea diving days had not even been half that number in 2005. Diving had occurred on only 20 days so far in the current year. The company was looking into other alternatives, such as the use of robots to perform the sea mining in lieu of people.

Alexkor generally used independent contractors to perform part of its mining operations. One area that had contributed to production shortfall was the withdrawal of a land-mining contractor due to its inability to continue operating financially.

Short-term production improvement plans included implementation of staff double shifts in land mining operations. This measure had already been implemented and seemed to be working. The company was also involving labour in production planning sessions, so that employees would understand the plan better. This also seemed to be working well, with the employees appearing to be more motivated. Implementation of remote sea mining techniques were being researched. Alexkor was working on market development for ABT products, in addition to cutting costs.

Finally, Mr Mdaka spoke about the uncertainties and litigation issues facing the company. They were awaiting the completion of court proceedings in the land claims case against Alexkor. This would potentially involve a restructuring. Limited provision had been made for payment of possible settlement amounts. Alexkor expected completion of the cases by the second quarter of 2006.

Discussion
Mr P Hendrikse (ANC) stated that the Committee had visited the facility in Alexander Bay earlier in the year and had been impressed with its non-core activities. The Chairperson agreed and stated that Alexkor should not ease too soon out of the community services it was providing (as it had indicated the prior year that it wished to do), even though the state and local government should be providing them.

Mr Moloi stated that even though Alexkor was looking at disposing of the non-core functions due to financial concerns, the best strategy was for Alexkor to continue providing them and ultimately place them into separately funded organisations. Mr Mdaka added that the challenge was to make these functions profitable.

Mr Hendrikse asked why there had been such a high turnover of CEOs. Mr Moloi believed the biggest factor was the CEOs’ frustration over the inability to prepare and maintain a business plan due to the lack of sufficient funding and uncertainties arising from the litigation. All of the CEOs had complained about lack of funding, specifically for exploration and Capex.

Mr Moloi did not believe remuneration was a determining factor in the loss of CEOs. Once the land claims issues was resolved, that uncertainty should disappear and reduce the CEO turnover. The company had spent a few months without a CEO after the last one left.

Mr Hendrikse thought this was irresponsible. It was very difficult to get people to come to Alexander Bay, resulting in a delay in getting a new CEO. The Board had however taken steps to ensure that the assets of the company were safe and that the company did not go into a downward spiral after the loss of that last CEO.

The Chairperson asked why Mr Mdaka was named only as Acting CEO and when this appointment would become permanent. Mr Moloi stated that the Board was going through due process procedures to name the permanent CEO.

Mr R Nogumla (ANC) asked whether there was also a high turnover in the Alexkor Board. Mr Moloi stated that there had been three Chairpersons since 1995. The main issue was with CEOs and the effect on senior management when they left the company.

Mr Hendrikse also asked whether the Department was paying any of Alexkor’s legal fees in connection with the land claims cases. He had heard that the Department had budgeted a substantial amount for legal fees and payment of land claims. He also clarified whether the claims were against the Department or Alexkor.

Mr Moloi responded that the land claims were against both the Department and the company. Alexkor had its own legal team separate from the Department’s, and that the company was covering its own legal fees. The total amount of Alexkor’s fees to date was R7 million. The company hoped that the shareholders would carry the cost of the payment of claims in the event of awards against the company.

Mr Hendrikse then asked about the cause of the decline in mining. Non-mining activities also appeared to be down. He specifically wondered how ABT’s production of ostriches had been affected by the avian flu epidemic. As ABT’s ostriches were in such a remote location, they might have been protected from the virus.

Mr Mdaka responded that South Africa had also affected by the avian import ban and prevented from exporting birds into the international market, even though its birds had been spared due to the remoteness of their location. On the issue of ostrich production, Alexkor had visited the top South Africa ostrich producers and determined that it could not compete with their capital structure. However, it could link up with them and increase business that way.

Mr Hendrikse further asked whether the Capex of R17 million was part of the income statement. He wondered how Alexkor could have a R38 million profit one year and then a R4 million loss the next. If the withdrawal of an independent contractor had been a large contributing factor, was Alexkor looking at sustainability of the contractors when determining to whom to award the contracts? He also asked about the women’s groups included in Alexkor’s operations. During his visit to Alexkor, he had noted that these groups had been having a problem making money, because they usually ended up owing money to Alexkor after leasing costs were subtracted from their revenue portion. He asked whether this had changed.

Mr Mdaka responded that the company did have a selection procedure that checked the financial sustainability of the contractors, along with their technical ability and other factors. The women’s groups were included among the independent contractors. Management had had a number of meetings with the women’s groups. While the money issue still existed, he believed the women understood that they were doing well since they did not carry any of the risk or costs.

Ms N Ngcengwane (ANC) suggested Alexkor provide a report each year on the empowerment of women. Mr Moloi noted that the women’s empowerment group was getting more favourable funding terms from Alexkor than it would through a private institution. The Chairperson noted that reports on the progress in this area were important to the Committee’s oversight responsibilities and that the Committee should not wait until next August to hear the next report. He asked for a report in March 2006.

Finally, Mr Hendrikse wondered what effect HIV was having on the closed Alexander Bay community. Mr Mdaka believed that HIV affected 2% of the Alexander Bay population. Mr Hendrikse noted that the Committee had been impressed by Alexkor’s approach to the HIV/AIDS problem.

Next, Mr Moloi talked about the single mining issue. Alexkor had started to look at other mining opportunities, but only in South Africa. They would report next year on progress. The main challenge was funding.

Mr Ngcengwane asked whether Alexkor was targeting the local communities with its bursaries. Mr Mdaka reported that five out of ten current bursary holders were female and most bursaries went to the Alexander Bay area.

Next, Ms Ngcengwane questioned whether it was really necessary for workers to work double shifts. Mr Mdaka stated the double shifts had definitely improved operations.

Ms Ngcengwane then commented on the small percentage (6%) of black Africans reflected in the Annual Report staff numbers. She also asked if the company employed disabled workers. Mr Mdaka agreed that the number of Africans employed was small, but that it reflected the proportion of Africans in that community. In response to a question regarding the issue of fronting by independent contractors, he thought that most were compliant. However, most of the historically-disadvantaged employees were employed by Alexkor.

Ms Ngcengwane further asked if Alexkor had considered cutting diamonds as part of its operations. Mr Moloi responded that that this issue would be controlled by the amendments to the Diamond Act that the Department was currently discussing. Under such amendments, Alexkor’s diamonds would be offered to other cutting operations.

Mr T Louw (ANC) asked whether there was much theft at Alexkor’s operations. Mr Moloi stated that theft been addressed through the tightening of security systems, as well as working more with law enforcement officials. He could not say that there was no opportunity for theft, but the measures seemed to be working as indicated by the prices Alexkor was obtaining for its diamonds. As a general rule, theft most affected the best diamonds. Since the company’s prices were increasing, this was an indication that the best diamonds were no longer being stolen.

The Chairperson concluded that the Committee had been pleased with Alexkor’s progress the previous year. However, he expressed regret with Alexkor’s performance and the R4.7 million loss during the past nine months. This was no reflection on Mr Mdaka, who had only been with the company four months. He advised Alexkor that the Annual Report provided was too general to give the Committee a clear picture of why Alexkor had performed in this way. He did not see a compelling strategy for better performance in the next year. For example, it was not enough to simply state that the uncertainties related to the land claims prevented a strategy going forward. Alexkor needed to provide different plans in light of the possible outcomes from the court case. Likewise, there needed to be forward planning for the loss of CEOs. There needed to be a local person perhaps, who would be trained to take over in the event the CEO left. The Committee would expect a more detailed report in 2006.

The meeting was adjourned.