Struggling state diamond miner Alexkor may run out of money next month

South Africa's state-owned diamond mining company, Alexkor, is not operating as a going concern and could see its remaining cash reserves depleted by June, the department of public enterprises has warned.

Department officials and the state-owned company's former administrator, Lloyd McPatie, on Wednesday briefed Parliament's portfolio committee on public enterprises on the status of Alexkor and the outcomes of forensic investigations into the organisation.

Alexkor is a state-owned company whose core business is diamond mining around Alexander Bay on SA's West Coast. Its non-core business includes residential and community services, among others.

"It was not a going concern when I walked in, and it's still not a going concern," said McPatie, who has recommended to the department that the company be liquidated.

"The company is not a going concern. It can't generate cashflows," he said, adding that the company has been "trading recklessly" in terms of the Companies Act as it can't meet its financial obligations for the next 12 months. 

The state-owned entity's financial woes have been compounded by the poor financial performance of a Pooling and Sharing Joint Venture (PSJV) between the Richtersveld Mining Company (RMC) and Alexkor, which was established in 2011. 

"All mining operations previously performed by Alexkor SOC Limited are now performed by the joint operation. The PSJV’s mining operations are in Alexander Bay, Northern Cape, South Africa," Alexkor states in its 2019 annual report .

The PSJV is "technically insolvent" as it has not been generating sufficient cashflow due to the poor performance of its diamond outputs, said McPatie. This was due to worsening weather conditions impacting marine mining operations, declining quality of land diamonds and no production from deep sea operations, said the department of public enterprises. 

Alexkor already had to impair a R200 million loan to the PSJV in 2018/19. 

When McPatie was appointed administrator for a six-month term in September 2019, the PSJV had R126 million in outstanding debt – mainly comprised of staff pension fund contributions, medical aid contributions and tax payments such as VAT and PAYE. McPatie said that a repayment plan had been developed and by the time he left his duties as administrator, the PSJV's debt was at R50 million. It could possibly be less than R30 million at this point. 

A significant portion of Alexkor's monthly costs is also attributed to the management of the Alexander Bay, a town on the cost of the Northern Cape.

According to McPatie, Alexkor pays about R500 000 to R700 000 per month to provide water and electricity. "In my view, it should not be Alexkor's responsibility," said McPatie. He believes the handover of the town to the municipality is long overdue. Furthermore, the property portfolio should be sold off, as it is costing Alexkor more to keep up than the rental income, he said.

Rent collected is about R3.6 million annually, while the cost of maintenance is about R7.5 million per annum. Water and electricity costs about R6 million to R7 million per year.  "The economics don't make sense," he said.

CEO of Alexkor, Lemogang Pitsoe, who attended the meeting, said that the company had been in discussions with local government authorities and the premier to have the handover of the town take place from 1 July, 2020.

In terms of recommendations for the rightsizing of Alexkor and the PSJV, duplicate functions have to be removed, said McPatie. Particularly, the Johannesburg office should be closed, this would see staff be retrenched with options for a settlement. The CEO would have to relocate to the mine in Alexander Bay.

The potential retrenchments of staff from the Johannesburg office has been reported to the Council for Conciliation Mediation and Arbitration (CCMA). McPatie also wrote to the department in February for permission to start a section 189 process.

Forensic investigations

In terms of governance issues, McPatie said it was found that a contract awarded to Scarlett Sky Investments (SSI), since February 2015 according to an amaBhungane reportto market and sell Alexkor's diamonds was irregular, in that it did not have a diamond trading licence. McPatie said he did not want to cancel the SSI contract outright, because the PSJV depended on the sales of diamonds to raise revenue to cover its obligations to the Alexander Bay town.

Alexkor has since applied to the state diamond regulator to get its own a diamond trading licence. According to Pitsoe, the licence was awarded and the paperwork is expected to be finalised soon.

Further to rooting out corruption, a forensic investigation by Gobodo Forensic Services made findings against the PSJV CEO. He was also charged and suspended, but a complaint was laid against McPatie and Alexkor at the CCMA. McPatie said he was recently informed that the disciplinary hearing is due to take place in the next few weeks.

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