Mintek Annual Report and Financial Statements 2004/5: briefing

ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE
6 September 2006
MINTEK ANNUAL REPORT AND FINANCIAL STATEMENTS 2004/5: BRIEFING

Chairperson: Ms N Ntwanambi (ANC, Western Cape)

Documents handed out:
Mintek Annual Report 2005: available later at www.mintek.co.za
Mintek Small Scale Mining Division: 2005 Annual Review
Mintek: Alloy Development and Materials Testing
Mintek: Operating Philosophy
Power Point presentation: Annual Report 2004/5
PowerPoint presentation as given to the Portfolio Committee on 16 November 2005: Annual Report 2005

SUMMARY
Mintek summarised its background and mandate, which was to develop sustainable mineral benefits and undertake and promote research and development in minerals in South Africa. Mintek was a major source of skilled metallurgists and scientists. It added value to and expanded the mineral resource industry and supported the growth of small, medium and micro enterprises and large industries in this sector. The main achievements in the areas of gold, platinum, ferrous and non-ferrous metals, bio-technical projects and uranium were summarised. Spatial development initiatives were outlined and explained. The work in small-scale mining, and in education, was detailed.

Mintek reported that in January 2006 the Auditor General had submitted a qualified audit report for the 2004/5 financial year. There had been substantial delays due to crashes in the computer systems but the data was eventually recovered and there was no evidence of any monetary loss or fraud. Mintek had followed the same accounting systems for the past 15 years, but these were no longer compliant with generally accepted accounting practices. Loss of skilled staff, a change in the structure of business units, and lack of an internal audit function all contributed to problems. Seventeen qualifications were listed. Fifteen of those had now been sorted out. The delays meant that the report for 2005/6 was also qualified in three respects. These were listed and explained and a full comment was made upon the steps taken to rectify them, and to change systems so they did not recur.

The business plan was outlined. A small surplus would go into capital reserves, since Mintek aimed to be a service organisation focussing on research and development. The largest cost increase was in staff, in an attempt to retain skills. The loss of skills to commerce remained one of Mintek’s most severe challenges. Mintek was also assessed on a non-financial basis, and positive feedback was given on its activities, with small-scale mining singled out for special mention. It was audited each year for quality, environmental and safety issues. Equipment needed to be modernised in order to work faster. Challenges included the need to acquire and retain skilled staff, the need to acquire grant funding for medium and long-term research, the need to strengthen its compliance and control systems, the ongoing need to improve gender balance at senior management and the need to meet ASGISA challenges.

Questions by Members addressed the training initiatives and the scope of Mintek’s education, its involvement in Limpopo, specific reasons for the qualifications, the increased costs on post-retirement benefits and staffing, the budgets for general overheads, and Mintek’s work in mine dump recovery. The Chairperson felt it would be useful for the Committee to visit Mintek and said that a visit would be arranged early in the new year.

MINUTES

Mintek briefing

Dr Paul Jourdan (Chief Executive Officer (CEO), Mintek) reported that Mintek was established in 1934 to realise sterilised mineral resources, where European technologies did not apply to the extraction of minerals. Mintek developed technologies to extract particular types of minerals. It had a permanent staff of 524 and 200 additional outsourced jobs. It aimed to be a global leader in mineral and metallurgical research and development, and to promote technology, industrial growth and human development.

Dr Jourdan outlined the structure of Mintek. Each division was now operating as a strategic business unit, which was highly effective from an output and research point of view but, in hindsight, had led to the qualifications in the audit report. This had however now been rectified, with audit and financial functions being controlled for all units.

Dr Jourdan highlighted the innovative research being undertaken by Mintek. Project Autek was a gold-based catalyst property project, with mining and safety applications. An agreement had been reached to produce a nono-catalyst which, if successful, would produce 50 tons of gold. Mintek was also working on bio-medical applications of gold, which was already known to have anti-cancer properties, but was hoped also to broaden into anti-malaria and anti-HIV treatment areas. Tests showed that gold appeared to suppress the replication of the HIV virus and further human testing would soon be done, in conjunction with the Medical Research Council (MRC).

Mintek had worked on cyanide reduction and would be expanding its work to build expertise on the management of arsenic. Both were used extensively in the mining industry but had adverse ecological effects.

Platinum was the most important mining sector at present and two collaborative research and development projects were being undertaken on super-alloys. A Technology and Human Resources for Industry Programme (THRIP) project was investigating platinum smelting. Mintek was the main centre, worldwide, for pilot plant testing for platinum and would advise companies on the best ways to extract the ore. It also undertook feasibility studies on new mines and worked on recovery of metals from mine dumps, which had positive economic and environmental benefits.

Mintek launched new ferrous metal projects in Kazakhstan. Locally, it was working on producing stainless steel with a lower nickel content, both because of the scarcity of nickel in South Africa, and because low-nickel stainless steel was more effective in corrosive environments such as coastal towns. New rockbolts had been inserted in two mines on the West Rand, which were able to indicate when a rockfall was about to occur, which had significant effects on underground safety.

In the non-ferrous metal field, Mintek co-ordinated a project for the European Union, and had piloted heap bioleach projects in Iran. These would be applied in Southern Africa. Although there was not much potential for using this technology in South Africa, the intellectual property rights would remain in South Africa. Mintek had also developed two projects to break down sulphides, to minimise negative environmental impact from mining. Bioleach projects had been instituted in China and Malaysia.

Mintek was busy with a feasibility study for a manganese plant in South Africa as there was increased use of manganese in manufacturing. Its work in uranium was substantial, and it was a technical partner for a Brazilian company in Africa.

Mintek also undertook spatial development initiatives, which aimed to use the mineral resources to kick start development in a number of African countries. When the mines were no longer sustainable, they would at least have built sustainable infrastructures and economies by using the opportunities presented by the mining. Mintek was working on mineral-based strategy development across Africa. In the artisanal and small scale mining areas it had supported small scale mining and had trained 700 small scale miners to date in both technical and business skills. Community based training was also offered in ceramics and recycled glass

On the financial side, the highlights for 2005/6 included growth of 13% in total revenue, which was now up to R287 million. There had been a surplus of R5 million. Mintek did not budget for large surpluses, as it was a service organisation, and surpluses were put into capital equipment. Dr Jourdan tabled the financial summary. Commercial revenue had increased by R17.2 million and other operating income (bad debt recovery, revaluation of investments and bursary income) by R12.5 million. Expenditure also showed an overall increase of R34.9 million; the majority of this in staff and post-retirement medical liability costs. There was an urgent need to close the salary gap in order for Mintek to retain more skilled staff. Its largest challenge was that although it trained many scientists the experienced personnel were head-hunted by commercial organisations, often at double or treble the salaries that Mintek could offer.

Dr Jourdan moved on to deal with the Auditor-General’s disclaimer for 2004/5. The Auditor General had identified non-compliance with the generally accepted accounting practice (GAAP). The SAP accounting system that was used previously had not complied with GAAP in a number of respects. There was therefore inadequate disclosure of certain items. The new financial officer (who had since resigned and been replaced) had insufficient knowledge of and experience with Public Finance Management Act (PFMA) requirements and there were weaknesses in internal controls and inadequate business practices. In addition, during February 2005 there was a crash in the SAP system, which severely impacted upon the preparation of records and interaction with the Auditor General. The decision to form separate Business Units was successful from an operational and research point of view, but they were inadequately provided for on the financial side, resulting in many incorrect data entries. The problems were compounded by staff turnover and loss of skills. A new controller had now been appointed for the business units. Corrective action had been taken to address the shortcomings, to deploy personnel and to improve the control environment. By the time the audit report had been received, there was only three months to take corrective action. Nonetheless, 15 of the 17 qualified areas had been rectified. In the short term, support had been obtained and systems augmented. In the long term, a new accounting system had been put in, which was fully GAAP compliant, the financial division had been restructured, and effective controls introduced in the business units. Personnel had been recruited and trained and the operational procedures had been standardised. The post-retirement liability, which was also mentioned in the qualifications, was being valued and would be disposed of.

The Auditor General’s report for 2005/6 also showed a qualification relating to compliance of fixed assets to GAAP, and a further qualification that unearned revenue did not fully comply with the GAAP system of recording. Both had been dealt with. Interventions included revision of accounting policies and processes, appointment of new personnel and appointment of a full-time Mintek internal auditor instead of outsourcing this function. The reporting systems were improved, and significantly improved controls and policies were being implemented.

Dr Jourdan briefly presented the business plan and budget. He reported that Mintek was also subject to non-financial reviews. These had shown that the Mintek brand was highly regarded and that Mintek held a high degree of technical competency. Mintek had world-class plant facilities, and strong research capability. Its small-scale mining division was commended as particularly innovative. It was busy with a project to find alternatives to mercury for small-scale miners. It also offered training to the semi-literate and, surprisingly, had offered one project where the trainees had ranged from unskilled to MBA degree holders, but all had commented positively on their experiences and learning gained. The Department of Science and Technology had held a nation-wide review in 2006 and had recommended that Mintek’s client interaction system be replicated in other science councils. It had also been commended on good human resource achievements and transformation levels, particularly in regard to gender. It was an effective point of contact with universities for carrying out research. It was well aligned with the strategies of the Departments of Science and Technology and Minerals and Energy. It actively promoted the sciences at all levels from matric to post-doctoral.

Strategic priorities for the future were to achieve a good balance between commercial and research activities, with the emphasis to remain on innovative research, which was to contribute to wealth building, while retaining the Mintek brand, and strengthening its control and compliance systems and capacity. Its greatest challenges remained the head-hunting of staff, by international as well as national commerce, the shortage of other skilled personnel, the need to obtain more grant funding for medium to long-term research and development and the need to strengthen the compliance, and to meet the Accelerated Shared Growth Initiative of SA (ASGISA) objectives.

Discussion
The Chairperson commented that it was very difficult to follow the acronyms in the presentation and suggested that they should be avoided in future.

The Chairperson asked whether Mintek covered all mining.

Dr Jourdan explained that Mintek did not undertake mining activities or the identification of deposits. It focused on extraction techniques of ore from mined rocks. Mining Tech in the Centre for Scientific and Industrial Research (CSIR) concentrated on the business of mining.

The Chairperson asked if Mintek was doing any work on the mine dumps in Johannesburg. She asked if Mintek would be able to comment on the lifespan of the mines.

Mr N Hendricks (UIF, Western Cape) was most interested to hear of the research in the bio-medical field. He asked what technology was being used in the mine-dump reclamation projects.

Dr Jourdan replied that the mine dumps contained very low-grade ore; only about half a gram of gold was recoverable per ton. It was difficult and expensive to extract this ore. Mintek had developed technology, which was used in 98% of gold mines throughout the world, and had also introduced optical sorting for rubble, but these operations were no longer viable when the price of gold had dropped. Mintek could not comment on the lifespan of the mines, as this was not its field of expertise. It would try to find ways of making the extraction processes cheaper or easier, so that recovery from dumps could become more viable.

Ms M Themba (ANC, Mpumulanga) asked about the training centres in Barberton, Limpopo; in particular who had co coordinated them, and how many women were trained. She disagreed with his assessment that men, across all cultures, tended still to have access and funding for further education rather than women.

Dr Jourdan did not have details of the Barberton facility with him but undertook to ask his colleague Dr Mutameri to forward the details to Ms Themba. Barberton worked with informal miners, and with a mine owner in the area. He was not sure who had done the coordination. However, he could confirm that most of the trainees had not completed matric, and most were women. Some programmes existed, and had been very well received by all participants, that catered for a full range of trainees from semi-literate to MBA graduates.

Ms Themba noted that Mintek had stated wealth creation as one of its objectives. She wondered why it seemed to regard this as paramount to poverty alleviation and capacity building.

Dr Jourdan answered that he had not in any way suggested that wealth creation was more important than poverty alleviation. However, he saw the two as linked intrinsically. He did not refer to wealth in the sense of a major commercial enterprise, but as it applied to the poorest people wanting to improve their livelihoods. Training to generate income was wealth creation. Although Mintek assisted the large companies, who, after all, employed Mintek trained staff, it also helped the small-scale operators. Programmes were aimed at matters such as adult literacy and were helping the very poor.

Ms Themba stated that Mintek had referred to school programmes across the country, but had focussed on Limpopo. She asked what projects were in existence in schools, and how the participants were selected.

Dr Jourdan replied that programmes were run nationally. There was a coordinator in all provinces and regional championships were held, in which Mintek collaborated with science teachers in providing training material and helping to run the competition. Mintek supplied periodic tables and other training material to schools. It had developed and was trying to get sponsorship for a card game based on the periodic elements. Edumaps were used to upgrade those who wished to have better matric results, and companies would also develop edumaps in their areas. Unfortunately Mintek did not have the budget to become much further involved but did communicate with the Department of Education. In the poorer areas staff members would adopt a school and spend Saturdays teaching and upgrading the science teachers. Further projects concentrated on setting up jewellery workshops or ceramic facilities and teaching further techniques to those who were already involved in craftwork. Twenty-six co-operatives existed across the country and workshops were run. The New Partnership for Africa’s Development (NEPAD) and mining partnerships in Africa had arranged with Mintek to bring trainers from Mali and Ghana, who could pass on traditional gold smelting methods and filigree technique, which did not require capital equipment.

In regard to selection of candidates, Dr Jourdan stated that the schools would send those learners most likely to benefit, and the co-operatives selected those wishing to attend. He stressed that the Limpopo project had been run as a pilot project, and would be rolled out to all other provinces. Mintek’s involvement in schools was mostly in the provision of training materials and games, and the Adopt-a-School project.

Mr Hendricks asked if any reports were available on small-scale mining.

Dr Jourdan reported that there was a report on small-scale mining projects in the pack handed to Members.

Mr Hendricks reported that he was most concerned about the disclaimers, which were more serious than qualifications. Although he noted that correctional steps had been taken, he was worried that ten years had lapsed without any changes in the accounting systems, and no faults had been picked up before. He asked if there was any evidence of fraud or misappropriation.

Dr Jourdan confirmed that there was absolutely no evidence of fraud or misappropriation and all funds were intact. He had asked the Auditor General to put this in the report, but had been told that this was not standard procedure. He agreed that the disclaimer was indeed serious.

Mr Imraan Hassen (Financial Consultant, Mintek) stated that all records had eventually been able to be recovered, after a series of unfortunate incidents including the destruction by the computer hardware of the streamer tapes, and the fact that they were lost (eventually recovered) in transit from the consultants who had recovered the corrupt data. The qualifications did not relate to any actual losses, but to a failure to follow correct procedures. The records were previously kept on a cash system. Revenue was only recognised in the new system if costs had been incurred. Warranty provisions posed a further problem. Mintek issued guarantees in respect of the quality of its research work. At the relevant dates no contingent liability had been recorded.

Mr Hendricks asked if the Auditor General had not called for a half-year audit.

Mr Hassen replied that there had been no loss of money and therefore the provisions of the PFMA in respect of fruitless or wasteful expenditure did not apply. It was not possible to do a half-year audit as the audit report was only compiled in January 2006, and the next audit commenced in April 2006.

Mr Hendricks asked for details of the uranium mining in the Karoo.

Dr Jourdan stated that all uranium in South Africa was, at the moment, a by-product of the gold mining industry. Although uranium was found in the Karoo it was very low grade. Mintek believed that it was the best institution to try to optimise recovery. Uranium circuits had been developed in the 1960s and 1970s for gold mines, but many had fallen into disuse or been dismantled. Plants were now being reinstated. Namibia had deposits outside Swakopmund.

Mr Hendricks enquired whether Mintek would attempt to impose restraints of trade on any of its employees, particularly the bursary holders, to retain skills.

Dr Jourdan stated that those in receipt of bursaries were bonded to work for Mintek for a period after graduation, until the bursary had been repaid. The problem remained that commercial organisers would headhunt the staff, and would be more than willing to pay off the bursary to get the staff across. It was not possible to put restraints of trade on employees other than in these situations as this was unconstitutional.

Mr D Gamede (ANC, KwaZulu-Natal) also expressed his concern on the disclaimers in the audit report. He asked if there was any nexus between the SAP crash and the fact that the reports were qualified.

Dr Jourdan replied that although there was no sinister nexus, in the sense that the crash was not precipitated by anyone wanting to cover a trail, it had certainly led in part to the qualifications. An external audit on the SAP crash had been done. Backups were made, but all had failed – the last through sheer bad luck. The computers had been serviced and it was purely a mechanical breakdown that led to loss of the backup tapes.

Mr Gamede commented that the top management structure still was male-dominated, and asked what plans had been put in place, and what time frames allocated, for redress of this situation.

Dr Jourdan stated that historically Mintek operated in a very male-dominated area. More female professionals were being trained, and there were a number of females at the lower levels of management. Mentoring and succession planning systems had been set up, and two successors had been identified for each general manager, both to improve the demographics and to ensure that Mintek was prepared for the future. No time frames could be set absolutely as the profession would change in time.

Mr Gamede was concerned about and asked for further clarity on the sharp rise in post-retirement benefits.

Mr Hassen confirmed that the queries related to the 2004/5 financial year. Mintek’s post-retirement benefits in 2004 amounted to R49 million, to R52 million in 2005, and R51.5 million in 2006. The liability was calculated on how many members were in the pool, and when they had retired. It covered all staff who were employed as at 2000. The increases were also affected by the rise in healthcare costs and inflation. They were revalued on an annual basis to ensure that reserves were available. It covered 500 employees up to 2000, but anyone joining after that date was on an individual medical aid. This system was a legacy of the old state system, and all the science councils were experiencing similar problems. It had been fully revalued, and would be disposed of to an insurance company, so that the liability would no longer appear on the books. The Board had approved the transfer.

Mr Gamede asked for more detail why the general overheads, and repairs and maintenance, showed such a sharp increase.

Mr Hassan referred Members to the Annual Report and pointed out that although the allocation of the figures had changed, the actual totals were similar. The reallocation and reclassification arose through the different set up of the business units. Overheads included facilities and utility costs, stationery, running expenses and similar items. Dr Jourdan added that new techniques had been developed to get platinum from waste material but the costs of electricity for smelting were high. About 1 000 tons per day had been smelted in the pilot phase. Mintek was in fact limited in its research by the power supply available from City Power.

Mr Gamede asked what communication techniques were used for the provinces.

Dr Jourdan replied that communication was done through the Departments of Economic Affairs and the developing financial institutions, such as Wesgro and Eastern Cape Development Corporation. It was also facilitated through the MECs.

Mr Gamede asked if Mintek could advise government or individuals on the availability of minerals.

Dr Jourdan reiterated that Mintek did not employ geologists and would not do so. It could advise how best to turn the availability of minerals into opportunities for job creation and development, even something like a small scale clay development, and how best to exploit the extraction.

Ms S Chen (DA, Gauteng) commented that Mintek could be proud of its brand.

The Chairperson asked if Mintek employed any interns, or whether it concentrated on a particular age or level of student.

Dr Jourdan replied that there were currently 160 or 170 interns “in the pipeline” of training through Mintek. Some were trained at technikons, others were post graduate and post doctoral researchers. In addition, basic literacy was taught to adult learners, and high school students were being targeted and encouraged to further their scientific studies. The speciality was probably on post-doctoral researchers, who trained in the most relevant institutions in their field all over the world. The number of trainees was therefore half the number of permanent employees, which was a huge burden. Mintek supplied the nation with quality personnel, and as a result suffered from headhunting by others.

Dr Jourdan referred to the fact that the Select Committee had not before visited Mintek and would be pleased to extend an invitation. The Portfolio Committee on Minerals and Energy had visited it, and he felt the Select Committee could be taken to specific projects of interest.

The Committee formally resolved to adopt the report of Mintek. Mr Gamede moved for the adoption and was seconded by Ms Chen.

The meeting adjourned.