The country’s state-owned diamond company is on life support

South Africa’s state-owned diamond mining enterprise Alexkor is desperately in need of cash to pay expenses, but does the struggling entity deserve more funding?

Its marine-based concessions stretch from Alexander Bay to Port Nolloth, while its land-based concessions span the equivalent of 865km². It mines the latter through its Pooling and Sharing Joint Venture (PSJV) with the Richtersveld community.

Despite carat sales having increased from 41 941 units to 70 061 in the year to end-March 2019, diamond sales only amounted to R209.9 million (2018: R208.7 million). Cost of sales was R152.9 million (2018: R126.8 million).

The reasons given for this poor performance: an oversupply of diamonds in the market, as well as the quality and size of the diamonds produced.

Land and shallow water diamonds achieved an average of $456.77 per carat (2018: $718.86), while diamonds from its deep water mining concession achieved an average price of $305.64 (2018: $187.56). It is to be noted that International Mining and Dredging South Africa has the sole contract for deep sea mining.

Other operating expenses of R237.6 million included an impairment of the loan to the PSJV of R92.8 million (notes 9 and 18 of the financial statements).

The resulting accumulated loss is R173.6 million (2018: R13.9 million).

The overall loss, after investment income and finance costs of R24 million (2018: R48.1 million), comes to R149.6 million (2018: profit of R34.2 million).

Employee costs of R68.6 million (2018: R66.2 million) exceed the gross profit of R57 million (2018: R81.9 million); 150 employees were retrenched in June 2019.

Intangible assets include exploration and evaluation expenditure to the tune of R94.7 million (2018: R81.7 million). No details are provided as to where this exploration was carried out, and whether any of the exploration related to coal (or any other venture that has nothing to do with diamonds). And does ‘evaluation’ include the cost of feasibility studies carried out by ‘consultants’ at an exorbitant cost?

The environmental rehabilitation liability is R203.9 million, with only R168 million in the rehabilitation trust kitty.

The directors are of the view that the company’s assets fairly valued exceed the liabilities fairly valued by R205.7 million at March 31 2019.

Independent auditor’s report

The independent auditor, Ngubane & Co, has issued a disclaimer of opinion and was unable to obtain sufficient appropriate audit evidence regarding the going concern status:

• The company has a history of losses, with rental and interest income being the only positive operating revenue.
• The company’s sole source of revenue arises out of its 51% share in the PSJV with the Richtersveld community, and it is exposed to the financial challenges facing this entity.

The external auditor further noted that Alexkor sought approval from the minister to file for business rescue. No date was given. Even though the external auditor affirms that Alexkor is solvent, it noted that there were instances of the company trading recklessly as it is not liquid.

Management

Alexkor maintains a head office in Sandton and carries on business in the Richtersveld on the West Coast. Why does it require an office, costing some R3 million a year, located 1 388km from the mine?

The internal and external auditors are also located in Sandton. Either travelling costs are prohibitive, or no one visits the mining operations.

It is to be noted that the 2019 annual report is still not available on the Alexkor website, and I was not able to find any contact details to request comment.

Should a small struggling state-owned company not be run by one managing director, based in the Richtersveld? This could possibly save a few million a year …

Stopping the bleed

The Minister of Public Enterprises has:

• Placed a moratorium on all acquisitions and disposals;
• Declined the request for authorisation to establish “Alexcoal” in Mpumalanga; and
• Placed on hold the feasibility study on diamond beneficiation.

There is a danger that if the current minister is replaced, the floodgates will open.

Undeterred, Alexkor is still looking for “new business ventures”, and will approach the Department of Public Enterprises and National Treasury to reclassify Alexkor “from a PFMA [Public Finance Management Act] perspective” to permit borrowing.

This is a cue to take a deep breath and grab a coffee …

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