In the media

Impala BEE deal revised

28 September 2006

Source: Business Day

Publication: Business Day Online

Presenter: Lindsay Williams

Lindsay Williams:

Dave, why the revision? What’s happened?

David Brown:

I think there were two major aspects. First, obviously we’ve had some interaction with the National Treasury - as you know there’s a Royalty Bill that’s about to come out in draft form again, and quite clearly the contents of that had quite a significant influence on our thinking. The reason for that is quite clearly we were always – and I’m going back four or five years – we were anticipating converting our royalty stream into equity. We seemed to think that was a very nice and tight solution in terms of achieving our empowerment aims. Coupled with that was the fact that the National Treasury at that particular juncture gave us a significant indication that we would more than likely be able to look at an offset for the royalty that we paid to the Bafokeng against the state royalty. What we’ve obtained in the last little - we’ve been given significant steerage that basically says the new draft will probably not encompass an offset provision. The old transaction we did on the basis that we didn’t want to tamper with the royalty – because we were keeping it in effect available for an offset. The fact that the National Treasury were giving us a steerage that said in all likelihood we wouldn’t get that offset – that prompted us to re-look at the transactions, and go back to the transaction that we’d looked at a number of years ago with regard to converting the royalty.

Lindsay Williams:

It says here that Implats and RBH are “pleased to announce they have reached agreement in principle in terms of which the agreements relating to the IRS transaction will be allowed to lapse. Impala will pay all royalties due and payable to the Royal Bafokeng Nation for the 32-year period from 1 July 2007 to the last day of the lease period.” What amount are we talking about here?

David Brown:

Effectively what we’re going to be doing – for the period from 1 July 2006 to 30 June 2007 the Royal Bafokeng will still receive their royalty in accordance with the minerals royalty agreement that we have. With effect from 1 July to the end of the lease period we have effectively net present valued the value of that royalty, and that value effectively becomes due and payable. In order to discharge that debt we will effectively issue shares to the tune of R12.1-billion - which effectively represents R10.6-billion worth of value embedded in the 32-year royalty stream, and at R1.5-billion in terms of discount or BEE compensation charge. The reason for the BEE compensation charge people asked today – that’s really because of the fact that in the original transaction that we did, the IRS transaction, there was a certain amount of value that was embedded in that. In order to reach a commercial agreement between ourselves and the Bafokeng it was necessary to ensure that the same value was embedded in the new transaction as well. So it was effectively a net present value calculation to get the royalty stream of R10.6-billion, and a R1.5-billion compensation charge which was the original value proposition that the Bafokeng were going to get in the original transaction. That totals R12.1-billion - now they get shares to the value of that R12.1-billion.

Lindsay Williams:

The R1.5-billion discount or 12% – one analyst on Miningmx.com says: “It’s quite a discount, but it’s probably better to have done the deal like this.” The market seems to have taken this in its stride…

David Brown:

I think the deal is incredibly simple relative to the previous transaction. One of the benefits that we really look forward to in this transaction is the certainty of outcome – if you remember in the previous transaction they bought 49% of IRS. At the end of 10 years we would have fair valued that 49% - and that would have then translated into a number of shares in Implats. As you can imagine the Implats share price and the IRS underlying value won’t necessarily move in tandem - so there was the potential for a misalignment in terms of those two valuations, and therefore it wasn’t necessarily certain in terms of the total number of shares that they would get. That was obviously disturbing from a Bafokeng point of view - because they would want certainty of their outcome. At the same time from an Implats perspective we want certainty on the amount of BEE credits that we would ultimately get as well in terms of the Mineral Charter - so from our perspective it made sense to try and crystallise it. There’s a bold discount in terms of 12.6% on the Implats share price, but that’s no different in terms of the discount that was originally embedded in the original transaction - so to say that there was any difference in the discount probably wouldn’t understand the transaction fully.

Lindsay Williams:

So everybody is happy – the National Treasury, Impala Platinum and the Royal Bafokeng. It’s all smoothed out now. As far as shareholders are concerned again a quote from that Miningmx.com article: “The old deal complicated matters. This deal is much easier to understand - it’s straight forward shares and no more royalties.”

David Brown:

Absolutely. That’s exactly the point.

Lindsay Williams:

A couple of other things. The Implats dividend policy was a question at your presentation this morning. You were drawn into a change in your dividend policy — can you expand on that?

David Brown:

Let me reiterate what I said at the meeting today. I was asked the question in terms of the fact that by doing this deal we are net present valuing the royalty stream, and we are extinguishing our obligation to the debt by the use of shares - that obviously means over the next 30 years we are not going to be paying out the cash dividend that we originally would have paid out, and quite clearly that will impact positively on the cash balances going forward. In addition to that I think the earnings profile - the cash generation nature of the group - has changed quite considerably over the last four or five years relative to when that original dividend cover was set. So what I’m saying is that I think it appropriate that the company revisits the dividend cover – I didn’t necessarily say it’s changed, but certainly I think it’s very appropriate that we revisit that dividend cover to see if it’s still applicable in light of the new earnings levels that we are seeing. I think coupled with that we are seeing a very strong pricing environment for platinum group metals (PGMs) over the next four to five years, so certainly the outlook remains very positive as well. So it’s putting all those factors together, and revisiting all those factors in light of the dividend policy we have now.

Lindsay Williams:

Platinum is $1,155 an ounce, and palladium is $322.50 an ounce — are you still bullish about the PGM basket?

David Brown:

Absolutely. The outlook still remains very bullish, particularly for palladium. As you can see the palladium issue is really legislatively driven - that’s the auto catalyst industry, particularly diesel - and that looks very positive going forward.

Lindsay Williams:

Last time we spoke you were in Zimbabwe — any further developments?

David Brown:

The positive development is the agreement reached in June 2006 – certainly some of our requirements, which was ensuring greater security of tenure over the mineral rights we kept - they’re keeping their end of the deal, and certainly are encompassing all those other additional mineral rights in the special mining lease regime — so we’re quite happy with that.