African Vanguard Resources (AVR) executive chairman Sandile Zungu epitomises the new breed of black entrepreneurs at the fore of the second wave of black economic empowerment (BEE) transactions that started about four years ago.
The founding fathers of BEE brought their struggle credentials to the table and their white partners were enticed by the possibility of securing political connections.
Though the founding fathers preferred to sit in holding companies, removed from operations and relying on advisers to structure deals, their white partners soon discovered that political connections did not guarantee juicy tenders and licences.
Zungu, however, understands high finance and can structure his own deals. He prefers to get involved in operations.
Armed with an engineering degree and an MBA, he raised most of the funding for the R2,7bn Johnnic transaction in 1996 while employed at African Merchant Bank. He went on to start the SA Railway & Harbour Workers' Union Investment Co, which grew its net asset value to R400m during the 1990s tech boom.
He says his vision in starting AVR was to create a company that would invest in a range of resources, with a primary focus on precious metals.
The company's first transaction, securing a 26% stake in Harmony Gold's R1,3bn Doornkop project, is a case study in how to create upfront capital for BEE shareholders out of nothing. "BEE companies do not have capital. What is critical is the ability to leverage and create equity value for BEE companies using someone else's money," he says.
The beauty of the transaction is that AVR managed to secure almost R130m for shareholders at no cost.
"Half our equity stake in Doornkop is unencumbered," Zungu says. This was achieved by selling an option to Harmony to acquire AVR's share of production at Doornkop for 10 years at a price of R120 000/kg. Derivatives experts came in and valued the option at R110m, which AVR used to reduce its funding costs. Nedbank then came in and provided debt of R110m.
The final leg of the transaction involved raising equity of R30m and funding costs of R5m from AVR shareholders. Stanlib came to the party and paid half the required amount (R17,5m) for a 20% stake in AVR. The transaction valued AVR at R87,5m.
"The critical issue in this transaction was timing, the ability to price an option on our production when the rand value of gold was favourable. At the time, at the end of 2002, the rand gold price was at about R100 000/kg. Now it is below R80 000/kg. "If we had to value the option now it would probably be worth R10m. Obviously Harmony cannot exercise the option now." For now, that is Harmony's problem.
Zungu says AVR does not want to start a black mining house. "Our approach is to get involved in operations where we can roll up our sleeves. The mining finance house model is good for some companies but we believe that it limits the ability to develop black skills."
AVR recently participated in a 50-50 joint venture with Afrikander Lease to buy 100% of Kalgold for R275m. The deal fell through and AVR is now expected to submit its own bid for the gold mine. The next plan is to list on the JSE Securities Exchange and, possibly, a foreign bourse.
