Mzi backing R2bn gold listing

MZI Khumalo says that he’s not dressed for an interview. In fact, he’s just in from Durban, where he lives and devotes time to conservation and other duties, such as the Durban Waterfront development.

But that’s okay. In any event, this interview is with Greg Hunter, newly appointed CEO of Khumalo’s mining business, Metallon Resources. Hunter is sitting, rather nervously, on a couch waiting to field questions on their plans for Metallon Resources, including a possible listing of its Zimbabwean gold assets in Johannesburg or Toronto.

That sounds like a tough sell, but Hunter, who’s still working closely with advisers on the feasibility of the plan, later proves that he’s got a story to tell. Whether investors will accept it remains to be seen.

By contrast, Khumalo is at ease and happy to chat about the prospects of a JSE Securities Exchange-listed gold company. Will he be involved in Metallon Resources? The unspoken concern is that the media turbulence that Khumalo has suffered will be a legacy for Metallon Resources.

Says Khumalo: “I need the money but I don’t need to have my ego stroked by sitting on the board of this company (Metallon Resources). I was offered the chairmanship of Cluff Mining, for example, but I turned it down. I don’t need to take these positions because the people I’ve employed are capable of doing it themselves.”

Take Metallon Corporation’s African Harvest Fund Managers, the R18bn asset management company run by CEO Magda Wierzycka. “I don’t even sit on the board,” Khumalo says with a wide grin. And with his 50th birthday looming, he even raises the prospect of retiring.

By comparison, Hunter is a youthful 39 with ambition burning in his eyes. Commenting on his decision to leave the financial services sector – he was a sell side precious metals analyst for Deutsche Bank after qualifying and working as a mining engineer – he says: “You get the sense this is real life, dealing with real issues.” One can’t get more real than Zimbabwe, where Metallon Resources has a number of mines.

There’s no knowing how the listing of a South African company with Zimbabwean gold mines could go in Toronto, assuming that the necessary SA Reserve Bank approvals were obtained. However, in Metallon’s favour is the fact that billions of US dollars in fresh capital have been raised in the past two years in North America. This capital is for emerging junior mining companies seeking new mineral ounces.

The driving force is the undercapitalisation of worldwide exploration over the past few years. According to British stockbroker CIBC World Markets, spending on mineral exploration declined 60% to US$1,5bn last year from its height in 1997. The outcome has been a large supply deficit in commodity products, a development that’s forcing mining companies to drive capacity and find replacement ounces through exploration.

Hunter says that the climate is therefore right for new propositions to hit the market. There’s also more sympathy for gold, which has increased more than 50% since the worrying months between February and April 2000 when the price traded between $250 and $255/oz.

However, the key to convincing investors will be proving that Metallon Resources has viable mining assets and that the obvious political risks of Zimbabwe, a country pitched in to economic crisis by its trenchant leader Robert Mugabe, are surmountable.

Metallon Resources owns assets producing just over 190 000oz/year of gold, of which 90% are in Zimbabwe. The other asset is Agnes, a small gold producer near the historical mining town of Barberton in SA’s Mpumalanga province.

Agnes produces 22 000oz/year of gold. However, it has the potential to produce an estimated 60 000oz/year after two years through brown fields expansion. The Zimbabwean mines can lift output to 220 000oz/year after three years. However, both developments would require more capital, as would plans to acquire new mines.

Says Hunter: “We realise we need a balanced portfolio. We can explore, which takes longer to yield gold ounces, or we can acquire. To acquire we need a tradeable equity.” That’s why Metallon Resources is seeking a listing. First, though, Hunter wants to dismiss the notion that mining companies can’t make money in Zimbabwe.

Metallon has nearly earned back the $15,5m acquisition cost of the Zimbabwean gold assets bought in October 2002. The mines are also making real money (after capital expenditure) of $9m this year, says Hunter. Second, the Zimbabwean government has a real appetite for putting its gold industry back on the map. “Zimbabwe used to be the third largest gold producer in Africa but now it’s slipped off the map,” says Hunter.

As a result, Zimbabwe’s government has made a number of concessions to encourage investment. For example, its treasury has dropped the 3% royalty on gold mining. In addition, there’s speculation that its corporate tax rate could be reduced to 15% from its current 25%.

Metallon has also been able to negotiate a special package for two of its mines considered marginal – Mazowe and Arcturus – such that revenue is predicated on a fixed contract of Z$71 000/g. That’s equal to $402/oz, higher than the current spot price. As for the other mines, 50% of the revenue is paid in hard currency, 25% at a rate of US$1/Z$824 and the balance at whichever is the better of Z$72 000/g or US$1/Z$5 200. The net effect is that 75% of total gold production from Zimbabwe is received at internationally traded spot US prices.

Though all revenue from the mines must stay in Zimbabwe, Hunter is unfazed by this restriction. In any event, a management fee can be paid from the Zimbabwean mines to Metallon Resources in Johannesburg; there are also no restrictions on the payment of an interim dividend.

“We’ve never been held up by the Zimbabwean Reserve Bank,” says Hunter. In fact, the local authorities appear interested only in avoiding replicating the arrangement of its platinum mines, under which Impala Platinum repatriates all of its revenues. It also keeps its value-added smelting assets, and revenues, in SA rather than in Zimbabwe.

Andy Clay, a director of consulting engineers Venmyn, says international investors won’t necessarily distinguish between Zimbabwean and SA assets. “They tend to carry the same level of perception regarding risk,” he adds. The outlook for Khumalo’s company in Toronto, therefore, is promising. Brenton Saunders, an analyst for Deutsche Securities, says that if properly marketed and positioned, the company could get listed for a respectable value. The equity placing programme of Mvelaphanda Resources earlier this year proves there is an appetite for apparently risky investments among international investors. “The market is hungry for issues like this one, although the market value hoped for by Metallon might be a bit rich,” Saunders says. Turning to the potential listing, Hunter says that plans are still formative and that management time has only been fully focused on the matter for the past two months.

However, Khumalo says that a listing, if pursued, will be conducted before year-end. “First prize would be the JSE,” says Hunter. But the Toronto Stock Exchange holds attractions of its own. It has a culture of small and junior mining, provides better ratings for gold companies than the JSE and the chances of raising capital for Metallon’s needs are greater on the TSX because the capital pool is more varied and deeper. A due diligence is under way. Nonetheless, Hunter says that Metallon could be capitalised at $300m. “We have 3m ounces of gold in our reserve base that, after discounts for our producer status and political risk, could be valued at about $100/reserve ounce. But I must emphasise – we’ve not categorically decided we’re listing.”

Nonetheless, Khumalo is already thinking about potential non-executive board members. The idea is to bring a heavyweight, with experience in the international mining industry, on board. Somebody in the mould of Sam Jonah, newly appointed chairman of AngloGold-Ashanti, who’s now living in Johannesburg and is a long-standing friend of Khumalo.

There are also plans to consolidate Metallon Corporation’s other mining assets, namely a 16% stake in London-listed platinum producer Cluff Mining into Metallon Resources. That creates the prospect of an integrated precious metals company, though international trends discourage the notion of mixing platinum and gold, as shown by Russia’s Noril’sk’s interest in separating its precious metals.

However, if Metallon’s strategy of being an operator and not a portfolio manager is to be realised that would require its stake in Cluff to be increased to more than 50% and thus equity accounted. Says Hunter: “We want to increase our interest in platinum group metals, about which we’re very positive.”

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