Business rescue will keep future economic growth in check

When I was a financial services journalist (that focused on the insurance industry), the massive scandals of Sharemax and Steinhoff dominated the headlines. Many people asked how this could have happened and how nobody saw that there was something amiss with these two companies. The real question that should be asked is: what damage did these scandals do to South Africa’s economic growth and could business rescue have addressed this?

Sharemax and Steinhoff were classic examples of financial mismanagement and how this practice completely destroys companies. Imagine being a shareholder of one of these companies and you found yourself in a position whereby you were losing sleep on how you were going to recuperate any value from the investment that you made into these companies?

The business rescue profession, and the process itself, has had its fair share of scrutiny and critics over the past two years. From the value of the process to labour unions labelling business rescue as a scam (in the case of Comair), people are desperate to see the value in the practice that turnaround professionals swear by.

What business rescue does do is unearth the rot found in companies (in most cases) and holds them accountable for their actions. This can only benefit the country’s future economic growth.

Business rescue exposing the rot at Arnot Opco

I recently read an article which highlights the value of the business rescue process.

Sunday World reported on 15 August that Wescoal had approached the courts in a desperate attempt to salvage Arnot Opco. Business rescue has exposed extent of the rot in the company that Wescoal hopes the process will clean up.

The article adds that Salungano, the parent company of Wescoal Mining, told the court that Arnot Opco’s assets exceeded its liabilities. Robinson Ramaite, the CEO of Salungano Group, said two board meetings that took place in February and March this year showed the depth of Arnot Opco’s financial problems.

It is at these meetings that Ramaite in the application said that the management accounts of the business were tabled. “The accounts indicated assets in the amount of R41 686 218 and current liabilities of R297 201 739,” the affidavit reads in part.

The article points out that Ramaite said the situation was worsened by the trade payables, obligations to pay for goods or services in an amount of R157-million, with more than 55% of that owing for more than three months.

“Consequently, it became clear that Arnot Opco was in a state of illiquidity and would not be able to discharge its short-term obligations when they fell due,” Ramaite said, adding that attempts to solve the company’s liquidity challenges proved futile.

The Sunday World article points out that Salungano has agreed to make funding available to Arnot Opco in its business rescue application if successful, which funding envisages the injection of R150-million into the business.

Details of the feeding frenzy

The Arnot mine, previously owned by Exxaro, has reserves of more than 190 million tonnes of thermal coal. The asset, which is situated in Middleburg in Mpumalanga, was the surrounding community’s main source of income for four decades and its closure in 2015 dealt a big blow to it.

However, eight former Exxaro employees decided to revive the mine, using the proceeds of their severance packages to form a company called Innovators Resources (IR).

The Sunday World article points out that IR partnered with Salungano to form Arnot Opco. Salungano took a 50% share in the company, while IR secured a 25% share and the 1 029 retrenched Exxaro employees all received 25%.

A report by Sizwe NtsalubaGobodo (SNG) Grant Thornton showed that no sooner had Arnot Opco (Arnot) risen from the ashes, did the feeding frenzy take root at the company, with procurement processes flouted.

Arnot makes most of its money from supplying coal to Eskom’s Arnot-power station.

Corruption played a role

The article adds that SNG Grant Thornton’s findings were particularly scathing on suspended Arnot Opco CEO Bontle Aphane, who was found to have, among other things, hired her personal assistant without a fair process, and receiving shift allowances against company policy.

Aphane, the company’s COO Mathias Sithole and HR GM Eddie Pienaar were allegedly paid a combined R339 768 between September 2020 to October 2021 in shift allowances – money that was not due to them.

In her defence, Aphane told investigators that she was not aware she was receiving shift allowance as she “did not check her payslips often”.

The article pointed out that the probe found that several companies were paid amounts that exceeded those on their invoices. One supplier was paid R2.4-million more than what was agreed. The investigation also found that Arnot gave work to seven companies it did not have contracts with. The audit firm could also not find evidence that invoices to the tune of R3.8-million were for services provided.

The company was found to owe service providers more than R130-million. Investigators also found more than R40-million was spent on consultants and Covid-19 initiatives with little or no financial controls in place.

Delinquent Director applications

The article adds that Ramaite told the court moves are afoot to have several Arnot Opco’s managers and directors declared delinquent following the allegations of mismanagement.

“Wescoal has been advised that pursuant to the SNG report, Arnot Opco is in the process of issuing proceedings against certain members of the board and management of Arnot Opco seeking them to be declared delinquent and instituting civil proceedings as a result of further conduct by those individuals including the alleged irregular granting of contracts.”

Arnot Opco board chairperson Mxolisi Hoboyi said he doesn’t know which directors and executives are set to be declared delinquent. “I can’t comment of the SNG report as the matter is in court.”

Hoboyi added that they will oppose the business rescue application. “We have many reasons to oppose the action that was taken by Wescoal, as we were never consulted about the application,” he said.

Sithole said: “I have not seen neither the preliminary nor the final SNG report and cannot comment on any fairness aspect without context.”

High demand

Turnaround Talk recently published an article (referencing a News24 article) which points to a demand for SA coal that is itching to be filled.

The article points out that Despite railing troubles and limited port capacity, Exxaro Resources plans to bolster its coal exports by 24% to help feed Europe’s ravenous appetite for South African coal.

The diversified miner, a major coal supplier to Eskom with interests in energy and iron ore, said its ambitions to feed more coal into the global market had been spurred by strong demand from Europe, the likes of which was last seen in 1990.

The article adds that, as an energy supply crunch has gripped Europe, overall coal exports from South Africa to Europe rose from 1.7 million tons in the second half of last year, to 4.5 million tons in the first half of this year, Exxaro said.

The group itself sent 2.5 million tons into export markets in the first half of 2022. Some 32% of these volumes were delivered into Europe, a significant increase from just 6% in the second half of 2021.

Despite severe railing troubles preventing optimal volumes from moving through the Richards Bay Coal Terminal, Exxaro now aims to send a further 3.1 million tonnes into export markets in the year’s second half.

“We are really trying every avenue that there is. With Transnet Freight Rail performance currently sitting at an annualised 54 million tons per annum [against a capacity of 81 million tons], we simply cannot just rest on our laurels and hope that our coal will get to markets,” said Sakkie Swanepoel, Exxaro’s general manager for marketing and logistics.

Business rescue holds companies accountable

We are currently sitting with the current situation:

• South Africa is battling economically and is facing a dire economic crisis;
• European countries that previously relied on Russian gas to supply energy to drive their economies are now turning back to coal powered energy in an attempt to address energy crises; and
• Europe is ravenous for SA coal.  

There is a clear and present opportunity for South Africa to cash in on this demand. Yet, the owner of Africa’s coal reserve has filed for business rescue, and the process has revealed the true extend of the rot at Arnot Opco.

In the high stakes game of financial mismanagement, the fiduciary duty of the company to provide fair value to shareholders is often forgotten. This is where the value of business rescue cannot be questioned. In February this year, President Cyril Ramaphosa said that future economic growth in South Africa will need to be driven by State Owned companies and financially strong companies from the private sector. We cannot afford to let opportunities like the European demand for South African coal slip buy. While there is no end to the Ukraine War in sight, it would seem that Europe will be battling with its current energy crises for the immediate future. If the business recue/turnaround profession can play an increased role in ensuring that companies are well positioned to take advantage of this demand, can the value of the profession truly be questioned?