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Palabora Mining Company Limited (“PMC”)
The effect of suspending section 45 on PMC’s BEE transaction21 June 2011
Key points
• PMC’s BEE transaction enables meaningful economic benefits
to HDSA’s, including 20% equity participation by communities
and employees
• The transaction structure is in place for sound commercial
reasons, is not an avoidance scheme and is fully taxable
– no tax loss to SA
• The suspension of section 45 will result in a tax charge which
is not financially feasible for the transaction.
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1. Introduction- The business
• PMC is a South African company located in the
Limpopo Province and listed on the JSE
• The company extracts and beneficiates copper,
vermiculite and magnetite
– It is South Africa’s major producer of
refined copper
• PMC employs around 2,500 people, of which
79% are HDSAs
• PMC has a market capitalisation of c.$6.1
billion (as at 20 June 2011) and its FY2010
Revenue was R7 billion realising a profit after
tax of R595 million.
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1. Introduction (contd)
• HDSA equity participation is a requirement of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry (Mining Charter).
• It is a business imperative for PMC to secure conversion of its mining rights under the Minerals and Petroleum Resources Development Act, 2002.
• PMC therefore entered into an empowerment transaction in June 2010, which is to be implemented in the near future on fulfillment of certain conditions.
• This followed an intensive consultation process which commenced in 2008 with multiple stakeholders, including communities, trade unions and other BEE partners.
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BEE equity participation structure
Loan
PMC
BEEConsortium
Palabora Copper(new company)
74%
10% 6% 10%
BEE Employee Trust
BEECommunity Trust
Sale of business and
shares in foreign
subsidiaries
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Transaction steps
• Empowerment partners obtain their 26% shares in Palabora
Copper for a negligible price.
• PMC transfers its business and assets to Palabora Copper.
• Consideration is left outstanding as a inter-company loan.
• The loan will be repaid out of cash flow.
• Based on current consensus pricing, the loan will be repaid in
approximately 2 years.
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No loss of tax to the country
Interest income
taxed at 28%
PMC
BEEConsortium
Palabora Copper
74%
10% 6% 10%
BEE Employee Trust
BEE
Community Trust
28% tax relief
on interest
expense
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Benefits of the structure
• As Palabora Copper will be fully geared, it can issue shares to the Empowerment Partners at a negligible cost
– Enables Empowerment Partners to become shareholders without having to raise funds;
– Creates a stable structure that creates real value for the Empowerment Partners.
• The Empowerment Partners get full voting rights from day 1.
• The Empowerment Partners will have the same class of shares as PMC in Palabora Copper.
• Structure not dependant on strong growth in the listed share price of PMC or interest rates.
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Benefits of the structure (contd)
• A third party would have required the Empowerment Partners to
raise R6.1 billion of debt.
• A structure at the level of PMC was considered inappropriate as it
would have a finite term and is also dependant upon the future
share price of PMC.
• The commercial attributes of the structure favour the
Empowerment Partners and enable meaningful economic
benefits to the partners.
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Specific attributes of the structure
• Price for business is transparent as it is based on PMC’s current share price.
• Full voting rights from day 1.
• Minimum dividend of c. 28 million (increasing each year) from day 1.
• Board representation for Empowerment Partners.
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Community Trust
Community participation
Makhushane Community
Mashishimale Community
Maseke Community
Selwane Community
Majeje Community
Palabora Copper
• All surrounding communities are participating in the transaction.
• Dividends received from Palabora Copper used for sustainable
and meaningful community upliftment.
10%
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Employee Trust
Employee participation
PC
10%
• All employees except CEO and expatriates.
• Dividends received from Palabora Copper flow equally to all employees.
• All employees to benefit directly as beneficiaries, not linked to union affiliation or participation.
All employees
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Engagement Process
• Active engagement with the Communities and the Consortium from Q3 2008.
• Engagement with the main unions (NUM and Solidarity) from February 2009.
• The Communities nominated their own lawyer to represent all three Empowerment Partners.
• Financial adviser was appointed in 2008 by the Communities.
• From 2009 the transaction agreements have been prepared, and negotiated.
• The transaction agreements were signed by all of the parties on 10 June 2010.
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Suspension of section 45
• The outstanding conditions should be fulfilled shortly and the transactions are about to be implemented.
• The suspension will result in the business transfer being fully subject to tax.
• Tax will therefore be payable on R6 billion in terms of a transaction that will have no loss to the SA’s tax revenues and is aimed at broad-based empowerment.
• This tax charge is not financially feasible for the company or its Empowerment Partners.
• Our shareholders are gravely concerned with the proposed suspension
– PMC’s share price has dropped 20% last week on the news of the potential impact of the proposals on PMC.