Nkomati: BCL�s curate egg

Brian Benza | Friday March 24, 2017 15:52

 

The sudden closure of BCL has been largely blamed on the botched P3 billion deal to buy half of  Nkomati Mine from Russia’s Norilsk Nickel. A few days after the closure of the mine, former BCL chairperson Khaulani Fichani hinted to BusinessWeek that retaining control over the liquidation process was one of the factors that drove government to apply for voluntary provisional liquidation.

This came about a month after the South African minister of minerals gave consent to the transaction, an approval the Russians are now saying was the only outstanding condition for the deal to become binding. BCL, through the liquidator, on the other hand is  also now arguing in South African courts that the minister should have never given that consent as BCL did not have the wherewithal to meet the requirements of being a shareholder in Nkomati.

 

Origins of the BCL Nkomati deal

Under its Polaris II strategy embarked on in 2012, BCL sought ways of both diversifying its revenues and securing nickel ores in the face of declining nickel and copper grades in its own mines. Declining ore grades had resulted in higher operating costs such as deeper shafts in the BCL mines. All this occurred in the face of weakening commodity prices for nickel and copper on the international markets. 

Part of the strategy entailed buying a 50% stake in South Africa’s Nkomati Mine operated as a joint venture between South African Patrice Motsepe’s African Rainbow Minerals (ARM) and Norilsk. This acquisition would allow BCL to secure a high quality feed to the BCL smelter. The BCL smelter is regarded as one of the biggest of its type in the world. The 2014 transaction also saw the handing over of Norilsk’s Tati Nickel Mining Company (TNMC) to BCL and the exit of Norilsk from its minority stake in BCL.

To prepare itself for the Nkomati acquisition, BCL with the support of government, saw a substantial restructuring of its balance sheet with accumulated loans that government had provided swapped for more equity. This was essentially a debt write-off as the government already owned all the shares. Previously, when BCL had hit hard time, the government had always stepped in to provide funding on soft terms. However, the government did receive a substantial payout from BCL’s cash reserves. To execute the Polaris II, a subsidiary company, BCL Investments, was incorporated. Later, the government’s shares were transferred to a new government-owed entity, the Minerals Development Company of Botswana (MDCB).

The transaction with Norilsk was structured as a share Sale and Purchase Agreement (SPA) and signed on October 17, 2014 and subject to the fulfilment of certain conditions such as regulatory approval in both Botswana and South Africa. Regulatory approval from authorities in Botswana for the acquisition of TNMC were secured quite quickly while approvals for acquisition of Nkomati remained outstanding.

 

Funding collapses and MDCB pulls plug

In the chairman’s statement in BCL’s 2014 audited financials, it was noted that BCL was then debt free and the acquisition of Nkomati and BCL’s other plans could then be funded by new senior debt provided by commercial banks. Nedbank and Absa are mentioned as likely co-funding parties. At that point, BCL’s total assets amounted to P4.349  billion compared to total liabilities of just P1.618 billion.

On this basis, BCL’s balance sheet was sound, reflected in the comment in the chairman’s statement that BCL had adequate resources for 2015 and the balance of mine life.

The turn around seemed well underway.

According to a 2016 BCL strategy document, the initial net payable consideration for Nkomati was $305.9 million net payable, but was in a series of further negotiations brought down to US$170.3 million net payable. The Nkomati share was to be funded through a combination of senior debt facilities and medium-term note facilities. As mentioned, the senior debt funders were to be Nedbank and Barclays who had consistently supported the Nkomati acquisition and had an in-depth knowledge of Nkomati’s operations. Together, they had approved $200 million in loan funding. At the end of 2015, another proposal to fund the transaction was through a $250 million government guaranteed medium term note (a corporate bond), arranged and sponsored by Barclays, to be issued by BCL.

However, it is reported that MDCB, the new owner of BCL, had taken the decision to terminate Barclays’ mandate. This was communicated to BCL in December 2015. Other funding mechanisms then being considered never reached finality. By May 2016, Nedbank advised BCL that they would no longer support their lending for the transaction.

On  May 16,  2016, BCL and MDCB met Norilsk Nickel in London and proposed a further $70 million reduction in the purchase price of Norilsk’s share in Nkomati based upon a lower nickel price environment, a revised Nkomati life of mine plan and the possibility that Nkomati’s shareholders might have to inject capital to support mining operations over the short term potentially amounting to $40 million, or $20 million for each joint venture partner in Nkomati.

Legal advice sought by BCL’s then management prior to the London meeting cautioned that discussions of this nature may be viewed as a repudiation of the SPA with potential litigation consequences, but BCL took the view that these risks were small as both parties had previously negotiated two purchase price deferrals amounting to $90.6 million.

At some point though, MDCB led by Paul Smith who the government had appointed to manage the transaction, decided that no further negotiations should be conducted as there was no funding that could support the transaction.

 

BCL mine closed

On  October 9, 2016, government through the MDCB applied for the BCL Group to go into voluntary liquidation. In the liquidation application, it was stated that BCL had over 2,000 creditors who were owed about a billion pula. But the elephant in the room was Norilsk’s P3 billion claim for the Nkomati stake. The return date set by the High Court to make a final liquidation order was set for February 7, 2016.

But in December, Norilsk filed an application with the Gaborone High Court seeking leave to have their claim in terms of the SPA to be referred to arbitration and to prevent any final liquidation order being made until the arbitration is concluded. In the SPA, all disputes between the parties were to be referred to arbitration in London. The outcome of this litigation is still pending.

In the meantime, the provisional liquidator, Nigel Dixon-Warren, applied for an extension of the return date saying he had been advised by the MDCB that a potential buyer had shown interest in buying the BCL Group.

According to the Minister of Mineral Resources, Green Technology and Energy Security Sadique Kebonang, a company from UAE is currently in the country conducting a due diligence on the assets of BCL. The website of this potential named investor, The Emirates House Group shows that it has no existing investments on the African continent or in mining. While its investment arm, Emirates World Investments has a modest investment portfolio, it appears to be owed by the Abu Dhabi government, which has a vast sovereign wealth fund.

 

Matrix  around future of BCL

It appears the acquisition of the Nkomati stake has to be critical in any sustainable future for BCL. Besides a superior quality ore with high nickel content compared to BCL’s mines or that of TNMC, the acquisition of the Norilsk stake would enable BCL to inherit the supply/marketing arrangements for Nkomati.

A combination of  deep shafts, declining ore grades at its own mines make BCL, on its own, a high cost producer unable to make a profit during sustained low nickel prices on world markets, suggesting that restarting BCL without Nkomati is not possible.

For the smelter to be viable, the supply of ore concentrates from Nkomati is essential.  Apart from Nkomati there is no other operational nickel mine in the southern African region that can sufficiently satisfy the capacity of the BCL smelter if it is to run optimally. There is a possible supply from a First Quantum project called Endeavor in Zambia, but there is no sign of it coming on stream in the near future. Nkomati is therefore a key part of any solution.

 Last week’s revelation that the BCL liquidator has instituted legal proceedings to challenge the approval by the South African government for the Nkomati acquisition in an effort to have the SPA nullified might be seen as an effort to keep BCL alive and to deal with the large $277 million Norilsk claim that may make this effort impossible.

Without the Norilsk claim, BCL could be acquired by an investor for a reasonable price from the government and then new investors could renegotiate a deal with Norilsk for the Nkomati stake and settle for a better price.  

 

Valuation of Nkomati

The valuation of the Nkomati stake is a difficult calculation. On its own, its value would fluctuate dramatically depending on the nickel price. However, investments in mining are not just made on the daily price of a commodity as most mines have a lifespan of well over 20 years.

The value of a mine therefore is more about how one sees commodity prices well into the future. At the time the Nkomati stake was first negotiated, the parties had a more positive view of Nickel prices than most analysts have at the moment. 

Whatever was finally negotiated with Norilsk might now be seen to be too high in view of the current nickel prices and therefore the need to extract BCL from the Nkomati SPA. One way of determining value is an accounting valuation.

Accounting rules require that an investment be given a market value each year. ARM, which owns the other half of Nkomati, reported in its most recent annual financial report that its 50% is worth R2.051 billion or about $130 million.

The current accounting valuation does not mean ARM would sell its stake at that price. It too would see the value of its stake based on its understanding of the future price of Nickel. After all, ARM in just the last five years would have seen the accounting value at more than double the current price. 

The value of BCL or Nkomati depend on one’s view of the nickel prices. On the analysis, the nickel price has to be close to $5.85 per pound for Nkomati to be a valuable asset for BCL based on the Net Present Value (NPV) calculations. What is clear is that a nickel price of close to $8/pound, the Nkomati asset is very valuable on an NPV basis.

The question therefore is whether Nickel prices will recover to previous levels and if they do, how long will it take?

Norilsk, which is focused on Nickel in its global operations, appears to be very confident that nickel prices pick up in the long run due to a global supply deficit for the metal.

 

Possible Conclusions Scenario one –BCL liquidated

If BCL finally liquidated, then there will be no winners. Under a final liquidation, BCL will cease to exist and the company’s assets are sold out of hand and whatever can be sold is used to pay off creditors. There is very little value in BCL’s assets so creditors are likely to get very little, if anything at all. This is particularly the case if the Norilsk claim is finally accepted. In this case, there will likely be further enquiries as to what went wrong and who is accountable.

 

Scenario two- Investor buys BCL

In this case, BCL is rescued from liquidation and is recapitalised to operate on a sustainable basis. In this scenario, how to deal with Nkomati is a central question. In this scenario, government might have to sell BCL to the new investor for a nominal fee, forgive whatever BCL owes it but secure a commitment to re-invest in its operations and come to terms with Norilsk.