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18 october 2012

Diamond mining companies in Africa except for Angola’s Endiama have been struggling to boost their bottom lines amid accusations of poor management and the weak gems market.

One firm that quickly comes to mind is South Africa’s Alexkor, which had for some time operating in the red.

The SA state diamond company, which had its marine mining rights pooled with the Richtersveld Mining Company (RMC)’s land mining rights to form the Alexkor RMC joint venture in April 2011, recently reported that it had incurred a loss of R16.7-million ($2 million) for the 2011/12 financial year.

“We anticipate that the Alexkor RMC JV will continue to incur losses for at least the next three years as we enter into a phase of exploration,” said Alexkor chairperson Reginald Tafara Muzariri.

“No meaningful exploration has been conducted at the Alexander Bay operations since 2003 due to the land claim instituted by the Richtersveld community, which also led to land mining operations being significantly curtailed whilst the matter was being resolved.”

Alexkor’s acting chief executive Berno Lategan said the material items contributing to the loss included the derecognition of their assets to the value of R7.8 million (R3.8 million for consolidation purposes).

Alexkor also forfeited 49 percent of its profits due to the establishment of the joint venture resulting in a consequent loss in profits of R7.1 million, while a bad debt arising from the Alexander Bay residents’ non- payment of rent and electricity bills amounted to R2.2 million.

“This points to a potential social problem that will require assistance from provincial authorities to resolve. Alexkor and the Alexkor RMC JV have initiated discussions in this regard,” he said.

It should also be pointed out that the state-owned diamond miner had been recording losses prior to the JV.

Alexkor incurred losses between 2005 and 2009 despite being allocated R130 million ($19,5million) in state financial assistance in 2008/09 and R168 million ($25.3 million) in the three years preceding that.

It also recorded an operational loss of R6 million ($904,000) for the year to end-March (2010), although a reduction of R20.6 million ($3.1 million) on the loss incurred in 2009.

However, due to non-cash items, including environmental liability, depreciation and the reduction of a post-retirement medical aid liability of R45.1 million ($6.8 million), the operating loss became a net after-tax profit of R36.1 million ($5.4 million).

Analysts dismissed the profit then as “meager” saying that it would be swallowed immediately by Alexkor’s debt repayment on its massive accumulated losses, which stood at R275 million ($41.4 million).

Muzariri was somewhat honest with the reasons that had been hurting the diamond miner.

He said like many other state-owned enterprises, Alexkor had legacy issues pertaining to post-retirement pension and medical aid obligations.

Muzariri said another significant liability related to environmental rehabilitation obligations, while the global economic woes coupled with the often unstable diamond prices were also contributing to the poor performance of the company.

The anticipated global recovery has not materialised and whilst there was a small uptick in prices during the 2011/12 financial year, prices have still not recovered to pre-2008 price levels,” he said.

 “The establishment of the Alexkor RMC JV introduces a layer of complexity and cost to Alexkor that must be borne without a revenue base in the short to medium term.”

Meanwhile, Lategan said due to Alexkor’s position of not generating any income, management had to implement stringent cost-cutting procedures to ensure its solvency and commercial survival with limited cash resources.

He also noted that the company required significant funding support to secure the investment opportunities it was pursuing.

Alexkor, he said, had commenced the process of engaging with the Department of Public Enterprises to establish the most appropriate funding model, including exploring funding from development finance and commercial bank funding institutions to secure a profitable, self-sustainable future with minimal state support.

Alexkor submitted a medium-term expenditure framework (MTEF) application for R550 million in 2011 and only R350 million was approved by the National Treasury.

“This amount has been earmarked for the settlement of the costs for the right of occupation of residential properties, taxes (VAT and CGT), environmental and post-retirement liabilities,” he said.

History had shown that Alexkor continue to incur losses despite cash injections from the Treasury.

However, with the JV there are high chances that the diamond company would exorcise the demon of the past.

We shall be indeed be keeping an eagle eye on Alexkor as the new blood recently injected seek to take the company to unfamiliar territories of profit making.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished