“What if someone said to you, I will give you an option to buy part of an operating mine in the world’s greatest platinum production region?” Ron Thiessen, President and CEO of Hunter Dickinson Group — and a KitcoCasey Explorers’ League honoree — recently asked us in a late-night e-mail. “You would leap at the opportunity,” he concluded.
The situation he was referring to would hardly be called an “opportunity” by most mining executives. The event in question was the 2003 South African government’s passing of Black Economic Empowerment (BEE) legislation governing ownership of industry in the country.
While the aim of this initiative–namely, giving historically disadvantaged South Africans a stake in business ventures–is understandable given decades of repression and inequality in the country, the terms the legislation set out were daunting. Major industrial operations–including mines–would be forced to surrender 15 percent of operating assets to black-owned companies, with the share afterward increasing to 26 percent.
At the time when BEE laws were coming into effect, Ron was working in South Africa with his Anooraq Resources (V.ARQ). One of the company’s major joint venture partners was the world’s largest platinum producer, Anglo Plats. Coping with BEE laws, he told us, was “making Anglo crazy.” Not only were they having to surrender a sizable chunk of their operations, but they were also finding that newfound black empowerment partners were plagued by a serious difficulty: lack of cash.
Most BEE firms were private corporations, and the ones that did go public were only listed in South Africa. The bottom line was that Anglo ended up providing money to float their partners–in effect, paying someone to take a share of their profits.
This less-than-ideal arrangement stalled one of Anglo’s major projects–the Eastern Limb expansion in the Bushveld Complex. Their partner on the venture, Pelawan Investments, had considerable expertise but no money to finance development.
This gave Ron an idea: “What if Anooraq was the BEE instead of Pelawan, and Pelawan were shareholders?”
But why would Pelawan give up a 50-percent stake in one of the world’s choicest platinum plays? Ron gave them two immediate reasons. First, cash; Anooraq offered Pelawan a market value of $250 million in exchange for their interest. Second, capital; as a North American-listed firm, Anooraq gave both Pelawan and Anglo the ability to tap significant pools of overseas investment monies.
And proving his reputation as a master financier, Ron added an additional and innovative sweetener to the deal. Not only would Anooraq issue 91.2 million of its shares to Pelawan–effectively making Anooraq a black empowerment entity–but they would also facilitate Pelawan selling C$10 million worth of the stock and distributing the money to local communities, educational groups, tribal associations and women’s groups. Such cash flow, Ron noted, is “very important to people who have not had such a receipt and are not contemplating liquidity for many years” on their mining interests.
Only because of this unique arrangement did Pelawan agree to transfer a guaranteed interest in one of the world’s biggest mining districts to a Canadian junior firm.
But getting their partner onside was only the first challenge that Anooraq faced in their quest to become a BEE company. “It was no easy matter,” Ron said, “as South Africa has exchange controls, and residents are not allowed to sell South African assets (interest in the mineral project) for foreign assets (ARQ shares). Absolutely everyone we met with said it will never be done.”
“But,” he continued, “if there is one thing you can assure yourself about Hunter Dickinson, it’s that if they say it can’t be done, but it should be done, we will do it.”
Because of confidentiality considerations, Ron couldn’t tell us exactly what political, economic and social hoops Anooraq had to jump through to seal the deal. But it’s a matter of public record that in June of last year, the South African Reserve Bank approved the “reverse takeover” of Anooraq by Pelawan, thus creating a previously unknown entity: an internationally traded Black Empowerment company.
What does this mean to investors? According to Ron, the innovative deal makes Anooraq the “partner of choice” for the numerous major mining firms in South Africa looking to satisfy their legal BEE obligations. Putting it more colorfully, he noted, “We are getting an invitation to come to dinner, and it’s not BYOB.”
Will Anooraq truly become the go-to junior in one of the world’s richest mining districts? That remains to be seen. But, judging from the financial footwork that was required to obtain BEE status, it seems likely that they will have few peers in the South African sector, which could well give them a business advantage.
It’s true that many analysts are today discounting South Africa as too politically risky, precisely because of measures like BEE. There’s certainly a case to be made in that regard. But, as resource investors are well aware, risk can create opportunities for big rewards. And if there is money to be made in this part of the world, it looks as if Anooraq is uniquely positioned to take a shot at the profits.
As a tantalizing finale, Ron summed up, “What Hunter Dickinson has been saying for months is that once South African mining companies got wind of the opportunities/advantages of having Anooraq as a partner, they would break down the doors to give us invitations. This has happened, and we are picking… stay tuned.”
We certainly will.