MOSCOW—A group of South Africans, led by Tokyo Sexwale, has devised a scheme to take over mineral assets and mining concessions in the west African republic of Guinea, which the government plans to renationalize after revoking deals struck by previous Guinean governments. The Sexwale scheme is a growing threat to Oleg Deripaska’s Rusal in Guinea, as the offers Deripaska has proposed to Guinean President Alpha Conde and his family miss their mark.
On the eve of Rusal’s annual general meeting of shareholders in Hong Kong, due on June 15, there has been no fresh warning to Rusal shareholders that their Guinean bauxite mines and alumina refinery are facing confiscation, and transfer to a state mining company controlled, indirectly, by the South Africans. These Guinean assets account for more than half of Rusal’s global bauxite reserves. On last year’s production results, the Guinea bauxite mines represent 36% of Rusal’s annual bauxite production of 13.5 million tonnes; 7% of Rusal’s alumina output of 8.2 million tonnes. Both totals were down below past-year volumes.
In its latest challenge, the Guinean government charges Rusal with fraudulent under-reporting of output figures. A billion-dollar claim by the Guinean government dating back to 2009 accuses Rusal of under-counting the volume of its bauxite and alumina exports, and under-paying on taxes.
The only reference Rusal has made to the potential losses is this line in the annual financial report for 2011: “Operations in these countries involve risks that typically do not exist in other markets, including reconsideration of privatisation terms in certain countries where the Group operates following changes in governing political powers.” In its May 2012 financial report, Rusal also claims that the government’s position in the Guinean courts “has no merit and the risk of any cash outflow in connection with this claim is low and therefore no provision has been recorded in this regard in these consolidated financial statements.”
The collapse of Rusal’s position in Guinea this year is one of the targets for legal challenges against Deripaska’s management by shareholding partners, Victor Vekselberg, Len Blavatnik, and Mikhail Prokhorov.
Rusal’s share price is currently fixing in the Hong Kong market at an all-time low of between HK$4.20 and HK$4.60 (54 and 59 US cents). At US$9 billion, the company’s value in the market is $2 billion less than its bank debts. The Russian government’s official and unofficial stake in the company is now worth about $2.6 billion, two and a half times less than it was worth when the Kremlin agreed to bail Rusal out of insolvency and default in November 2008; then underwrite Deripaska’s initial public offering of shares on the Hong Kong Stock Exchange in January of 2010.
Sexwale is one of South Africa’s wealthiest black leaders, with substantial holdings in the minerals and mining sector through his Mvelaphanda Group . He is also the Minister for Human Settlements (slums) in the current South African government, a critic of President Jacob Zuma, and a potent challenger at the next presidential election in 2014.
According to sources in Johannesberg, Sexwale is discussing with Eurasian National Resources Corporation (ENRC) a plan to buy into mining interests in Guinea. London-listed ENRC is one of Kazakhstan’s dominant mining companies, producing iron-ore, ferro-alloys, copper, coal, bauxite and alumina. Although ENRC is smaller than Rusal as a global bauxite and alumina producer, if Sexwale manages to oust Deripaska from Guinea, that would change dramatically. Currently, ENRC’s market capitalization is $8.1 billion.
Sexwale is believed to be the power behind two obscure British Virgin Island vehicles, one called Palladino Holdings and another called Floras Bell, which are managed by Olaf Walter Hennig. An investigation by David Gleason in Business Day of Johannesberg reports that a year ago Hennig arranged for a loan of US$25 million to finance the start-up of a new Guinean state mining company. The new mining code, drafted by Conde’s advisors, would grant that new state entity a free 15% stake in the country’s mining projects, and the option to buy another 20%.
Behind Hennig and the $25 million loan, according to Gleason and confirmed independently by sources in Conakry, the Guinean capital, are Sexwale; Mark Willcox, the chief executive of Mvelaphanda, and several other businessmen of South African, Polish, and British extraction. One of them reported by Gleason is Ian Hannam, a City of London financier who tried to arrange Rusal’s float on the London Stock Exchange in 2007, but failed.
Guinean sources say Sexwale, Willcox and Hennig are the control shareholders of the BVI entities. A report in the Sunday Times of London in May claimed that Hennig was a “shadowy middleman”, and that the Palladino loan had been signed in April 2011 by the Guinean finance minister and a local proxy for Palladino. The terms look as if they were copied out of the Russian loans-for-shares book. If the Guinean state entity defaults on repayment of the Palladino loan, Sexwale and his pals would be eligible to convert the debt into a 30% stake in the state mining company and its assets.
A senior Guinean official says this is one of several non-transparent deals arranged by President Conde which have convinced BHP Billiton to withdraw from concessions they currently hold in Guinean bauxite and iron-ore. Rusal’s concessions are a target, the source adds, because of the personal falling-out between Conde and Deripaska chronicled here.
Guinean officials who have tried to persuaded Conde to continue the reforms initiated by former Mining Minister Mahmoud Thiam had hoped the new code would establish a transparent foundation for renegotiation of many of the Guinean resource deals. Those have enriched the country’s rulers, deprived the country of taxes and investment, and left its resources in the ground. The reformers suspect Conde of appearing to endorse the public goals while secretly bargaining for private gains to be channelled through newly created entities backed by fresh alliances. Sexwale, said a Conakry source, “and the South African gang were [President Conde’s] business partners through the ANC [African National Congress, the ruling South African political party] from before he became president. There is that trust and an agreement to do business that predates everything.”
Other Guinean sources contend the Palladino loan is illegal, because it hasn’t been ratified by the Guinean parliament; because violations of US and UK anti-corruption laws are suspected, and because the government in Conakry has pledged that in return for debt relief from the Club of Paris government creditors, the World Bank and the International Monetary Fund (IMF), it cannot pledge or transfer national resource assets bilaterally.
“The [share] pledge made in this [Palladino loan] agreement by the Government cannot be implemented. Under Guinea’s procurement and asset disposal law, any transaction with state-owned assets with a value exceeding 800 million Guinea francs ($120,000) has to be made through a public tender process. [The Palladino loan] also violates Article 150 of the new mining code which says the same things. Perhaps the [Palladino] consortium, aware of the provisions of the mining code, part of which they may even have drafted, secured their agreement five months ahead of the release of the mining code in the hope the new law would not be retroactive. Too bad! The public procurement law overrides the mining code.”
A high Guinean source describes the Palladino scheme an “an attempt to seize the assets of the Guinean Government by the back door, on the cheap and risk free. Essentially, whoever is behind Paladino has found it easy to penetrate the higher echelons of the new Guinean administration. The $25 million loan, far from being a loan, can actually be perceived as ‘entry ticket’ or ‘signature bonus’. All the consortium has to do is bide their time seat and wait.”
An advisor in Conakry says that for Rusal to wait for Conde’s relationship with Deripaska to improve plays into the South Africans’ hands now. “Deripaska and Conde had a marriage of convenience that worked in the beginning and each side thought it would extract maximum value for very little in return. Neither was able to deliver to the other’s expectations.”
South African Oligarch Beats Oleg Deripaska To The Pot In Guinea - Business Insider
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