There is significant value in business rescue

Gareth Cremen
Partner: Cox Yeats Attorneys

Over the past two years, business rescue has received a lot of media attention. This has been driven by the business rescues of South African Airways, Edgars, CNA and Ster-Kinekor.

In many of the above cases, significant questions were asked about the value of business rescue and whether the above companies were ideal candidates for business rescue as opposed to liquidation.

It is important to highlight the value of business rescue. this was the case with Nkomati Anthracite where creditors received significantly more value following the implementation of a business rescue plan.

Nkomati Anthracite engages in the mining of anthracite coal. It owns and operates the Nkomati Mine. It has done so intermittently for over 30 years since 1985. The mine is located in

the Mpumalanga province close to the borders of Mozambique and Eswatini (formally Swaziland).

Following a few unfortunate events, which includes the onset of the Covid-19 Pandemic, Nkomati Anthracite found itself in financial distress.

Background to the financial distress
The company’s financial distress can be attributed to the events discussed below.

Between September and October 2019 there were several fall of ground events that occurred in the Company’s underground mine due to subsidence. The ceiling of the mine collapsed which caused severe damage to a coal cutter and a feeder breaker.

Apart from this damage, the fall of ground events prevented access to the mine resulting in the shutdown of the mine by Nkomati Anthracite management and relevant authorities. These fall of ground events resulted in an estimated loss of 20 000 run of mine tonnes and 13 600 saleable tonnes per month, which, in turn resulted to a monthly loss of approximately R25.3 million in revenue since the fall of ground events.

The Company received legal advice that its insurance does not cover claims for business interruption where the interruption arose in consequence of damage to uninsured peril. Accordingly, the Company could not submit a claim for business interruption and it was unable to recuperate any funds to stabilise the area where the fall of ground events took place, or to create a new mine access to the underground mine and recommence operations.

The Nkomati mine is a profitable asset
Photo By: Nkomati Anthracite

Afrimat, a specialist mining company and creditor, considered the viability of re-opening the underground mine after the fall of ground event, to ensure that it can become operational again. After several consultations between Afrimat, the Company’s management and experts it became clear that the re-opening of the shaft where the fall of ground events took place would not be viable due to safety concerns. Therefore, in order to resume underground mining operations, the Nkomati Anthracite would have to develop a new shaft at an estimated cost of R68 million.

Nkomati Anthracite experienced a production disruption of between two to three weeks at the opencast mine due to the liquidation of the opencast mining contractor employed at the time.

Although operations at the open cast mine resumed in November 2019, approximately a month’s worth of plant feed was lost yielding saleable product of approximately 17 400 tons at a 58% yield and resulting in a loss of revenue of approximately R32 million.

Both of the aforementioned events resulted in severe cashflow and working capital shortages, which shortages were further compounded during the National Lockdown. For the month of April 2020, the Company only generated revenue of R118 306 which resulted in a loss after tax of R12.9 million. In addition, negotiations with regards to salaries and wages payable for the lockdown period resulted in an unprotected strike and ultimately the workforce was dismissed. These two factors had a severe impact on the production Run of Mine tonnes (“ROM”) and consequently the production of saleable tonnes.

During June 2020, only 3 827 tons were sold. This resulted in further losses of R3.4 million after tax but before impairments. This trend continued from July to October 2020 where a total of 15 246 tons were sold. The combined loss after tax for the period July to October was R78.4 million.

Due to insufficient funding to further develop the mine to ensure constant run of mine (and therefore a consistent revenue stream) the mine was only able to sell 15 246 tons of final product over the period from July to October 2020, generating revenue of R21.0 million.

If the opencast operations were able to provide a consistent run of mine of 25 000 tons per month (at a yield of 58% final product) additional revenue of R86.9 million could have been generated, ensuring a breakeven position.

Nkomati Anthracite has resumed operations at its current opencast mine and is in the process of ramping up production, with the limited cash resources available. Further working capital is required to unlock the mine’s full potential which will result in the company generating sufficient profits to maintain and expand the current operations. The underground mine remains closed and the development of a new underground shaft is currently not possible due to Nkomati’s liquidity challenges.

A tale of two options
From the outset, the BRPs were faced with a decision of either placing the company into liquidation from the outset, placing the company into liquidation after some interventions to restore some value, or drawing up a business rescue plan to try and return Nkomati Anthracite towards a profitable core.

Liquidating the company from the outset was not an option. Therefore, Nkomati Anthracite’s BRP presented creditors with two options.

Mining operations face operational challenges every day
Photo By: iStock

Option A
Given the distress of the company and the lack of funding to maintain the substantial

operational requirements of the mine, the only way to maximise recovery for the creditors

and restore the trade, dealings and affairs of the company would be to sell Nkomati Anthracite to

an interested creditor, namely Afrimat.

Afrimat has approached the BRP and offered to recapitalise the business of the Company and inject fresh capital into Nkomati Anthracite in order to rehabilitate the financial and operational affairs of the mine, on terms to be agreed upon with the BRP.

Afrimat will acquire the shareholding of the company at a cost of R1 which amount has been

agreed with and between the BRP following a professional valuation obtained by McA Accounting and Tax Services.

An envisaged dividend of 100c/R1 will be paid to creditors in the following manner:

  • the capital portion of normal operational creditor claims to be settled in full.
  • Any interest portion included in these claims and claims older than six (6)
  • months on the Commencement Date will be compromised in full;
  • The pre-business rescue claims of Afrimat, as well as creditor claims acquired
  • by Afrimat will remain due in full and will be settled over time from company
  • profits;
  • The claim from the liquidator of Liviero Mining Proprietary Limited as well as
  • the claim received from AMCU are not dealt with in this BR Plan and will be
  • dealt with subsequent to the Substantial Implementation Date. The
  • aforementioned does not in any way deprive these contingent creditors from
  • receiving a dividend from the Company but is subject to a proper adjudication
  • process;
  • the capital portion of all other creditor claims will be settled in full. Any
  • interest portion included in these claims and claims older than six (6) months
  • on Commencement Date will be compromised in full;
  • the shareholder and intergroup loans will remain due in full and will be
  • settled over time from company profits subsequent to settlement of claims.

It must be pointed out that existing BEE shareholders and the Afrimat BEE Trust in aggregate hold 35.3% of Afrimat’s issued shares. Afrimat has a fully empowered ownership platform in line with the Mining Charter requirements. Trading activities under this option will not cease and the current employees will retain their employment. This would not be possible under Option B or Liquidation circumstances.

In addition, the shareholders will not share in the distribution under this BR Plan. The BRP is hereby given full power of attorney to sign any and all documents (including share transfer forms, Section 11 Applications and Approvals, or any other documentation on behalf of all Shareholders) in order to give effect to this BR Plan.

Option B
In an attempt to ensure a better return for the Company’s creditors than under liquidation

circumstances, the BRP has initiated various discussions with affected and interested parties with a view of securing as much value for the creditors as possible.

The structured disposal process will consist of the following:

  • marketing and structured disposal by approved agent/auctioneer; and
  • disposal of movable assets at better values than under liquidation circumstances.

This will be done to maximise the value of the assets and also to reduce the duration of the

disposal process as a liquidation process could easily last 12 to 24 months to finalize.

Overcoming challenges
Implementing a business rescue is a sensitive process as emotions are running high and the company is facing significant levels of stress and distress. This was complicated even further in this case bearing in mind the importance that any mining company plays as a economic driver of the country.

The was a fully functional mining company that held strong assets and was very profitable at one stage. The company ran into some bad luck with its fall of ground event and it was unfortunate that the mine couldn’t be brought back online before the National Lockdown was implemented on 24 May 2020. We were then faced with the decision to either liquidate the mine or to try and salvage any value that was left in the company.

There were significant calls for liquidations before the decision was taken to place the company into business rescue. These calls were led by the company’s major shareholder, the Mpumalanga Economic Growth Agency. If the company was liquidated at the commencement date of the business rescue plan, creditors would have received between eight cents to the Rand and ten cents to the Rand. Further, this would have only been offered to Preferred Creditors; Secured Creditors and Concurrent Creditors would have received nothing. Further, a significant consequence of liquidation would have been that Nkomati Anthracite would not have been able to retain any of its staff.

Daniel Terblanche, Nkomati Anthracite’s business rescue practitioner, and Cox Yeats felt that there was an opportunity to salvage value through the implementation of a well structured business rescue plan. Through the implementation of a business rescue plan, creditors received 100 cents/R1 and all jobs were secured. This shows that there is significant value in the business rescue process.