Warren Dick
15 minute read
12 Aug 2016
10:20 am

‘We have not benefitted from the politics of patronage’

Warren Dick

'We have very small exposure to State business; it’s actually a growth opportunity for us,' says Oakbay Investments CEO.

Nazeem Howa and Atul Gupta. Picture: Gallo Images

This interview could not have come at a better time for a company desperate to prove that its success has not been built on the ‘politics of patronage’. Just last week, South African voters made it abundantly clear that they were not happy with the way the ANC was administrating local government. The ruling party’s overall support declined to 53% and in the key metropolitan areas, the ANC lost its majority and may only retain power by cobbling together alliances with its sworn enemies.

It is now plausible that the ANC’s support may fall below 50% in the general election in 2019, which means any business model premised on the politics of patronage would be decidedly vulnerable. So would it make sense to continue investing in the country if this were the case?

Nazeem Howa makes it clear in this interview that the company vehemently denies any of its growth and success can be attributed to special favours as a result of the Guptas’ relationship with the president. “We have been around long enough to survive three presidents,” he told me before we began, and the implications from this interview are that Oakbay will be around long after Jacob Zuma’s tenure as president of the ANC and the country ends. He also points to the fact that two of Oakbay’s biggest investments – Sahara computers and JIC Mining Services – do no business with government at all.

“We are a bunch of executives from disparate backgrounds – legal, IT, media, but with an extreme keenness to understand the businesses we operate in. To what do we owe our success? I think our executives will outwork any other team in the country. We are hands on, and we come with an unconventional approach: we go over, around, or under, to make businesses work. Our shareholder has given us absolute freedom to grow the business, so we are encouraged to grow, and expected to make mistakes in the process.”

WARREN DICK: Good day, I’m the editor of Mineweb.com and joining me on the podcast today is Nazeem Howa, chief executive officer of Oakbay Investments. It’s good to have you with us, Nazeem.

NAZEEM HOWA: Thanks, Warren. Thanks for having me today.

WARREN DICK: We just wanted to touch base around some developments in Oakbay and some of its assets; [we’re] particularly interested in what’s been happening at Optimum, which is still under business rescue. Just give us a bit of an update there as to when that mine will exit business rescue proceedings.

NAZEEM HOWA: We are working very hard with the business rescue practitioners to stabilise the mine, we [have] already moved in the direction of increasing production quite significantly. In the last few months we’ve brought the second dragline into operation, which has given us an additional couple hundred-thousand tons of gold production every month. It’s also added close to 100 jobs to the mine. So we’re really focusing on stabilising the mine, improving its financial position quite significantly.

With the business rescue practitioners we are now also starting to settle some of the creditors and our hope is that in the next month or so we will see it come out of business rescue.

WARREN DICK: Some of the big creditors in that transaction were the banks that were owed some senior debt. As I understand it the banks have been settled when you paid the purchase price for that business?

NAZEEM HOWA: That was, of course, a condition precedent in the deal. So without settling, the banks the deal couldn’t have closed – so they were settled right at deal closure.

WARREN DICK: [What about the] other creditors that you’re dealing with there?

NAZEEM HOWA: You have a lot of your major suppliers, your contractors who would all be owed money and that would date back to August last year.

WARREN DICK: Just in terms of production, you said you’ve brought in the second dragline. Just give some idea as to how much coal that mine is now producing on an annualised basis.

NAZEEM HOWA: On a monthly basis we are doing about 700 000, 750 000 tons out of those activities. Our view is that with existing opportunities, we should be getting closer to 800 000, 850 000 and that will make us a lot happier. So we are driving those kinds of efficiencies with all of our operations on the mine.

WARREN DICK: And most of that coal is being sold into the domestic market?

NAZEEM HOWA: At the moment, yes.

WARREN DICK: One thing we wanted an update on was obviously the question mark around the banks. Some of the commercial banks had issued you with a notice [saying] they were going to terminate the services, what is the update there at the moment? Have those accounts been closed and how are you continuing to operate at this stage?

NAZEEM HOWA: We’ve made some alternative arrangements: they are not comfortable arrangements by any stretch of the imagination and they are quite expensive to operate but the banks have, in fact, closed to date. Despite every attempt from our side, we’ve not had a single reason or any qualification or any identification of anything we’ve done wrong. We’ve certainly asked each one of the banks to give us any example of wrongdoing on our side and we are yet to find an answer from them. So it’s a very, very sad state of affairs. I think we have appealed to government in the name of senior ministers, including the Minister of Finance, to say please help us keep these operations going. We’ve not had the kind of response we would have expected.

WARREN DICK: So just no reply in terms of that?

NAZEEM HOWA: We have not had any reply, nothing. We, therefore, don’t have banking facilities with any of the four big banks. But we’ve managed to keep the business running and we’ve managed to keep the jobs going at the moment and hopefully that will continue.

WARREN DICK: How many people does Optimum employ?

NAZEEM HOWA: Optimum is about 3 500, including the contractors. It’s a very big mine, so it’s got quite a lot of people working across the mine. Of course…when we talk [about] Optimum, we are also talking about the Koornfontein Coal Mine, which is about 30 minutes away from Optimum.

WARREN DICK: Just in terms of the business model now, obviously this is a mine that you’ve bought out of business rescue and that was previously owned by Glencore. What is different in the way that you guys are running the mine [so] that (it looks like) it has allowed this mine to exit business rescue and save potentially 3 500 jobs?

NAZEEM HOWA: Warren, we are a very strange bunch of business people: you’ll find us on the ground, you’ll find us filled with coal dust, no matter what role we play in the business. So I think we’ve really gone back to basics, challenging a lot of the paradigms that exist on the mine in terms of the way coal mining is happening there. We’ve changed some of those issues. I think the fundamental change we’ve made is we’ve introduced a growth in the production of coal and that’s the second dragline we’ve brought on, and hopefully in the next two or three months you’ll see a third dragline in operation there. So we’ve really pushed production very, very hard and then to look for markets for that production. Our hope would be in the next few months to open an export line out of the country, as the coal export price has increased quite nicely. So that’s been the big focus in the business.

At the same time we have looked for efficiencies with the business and we have found some savings in some of the contracts, so it’s really a combination of the two factors. But I’ve got to give full credit to the team at Optimum; I think we’ve got a management team that’s come along with us from the old ownership into the new ownership and they are really putting heart and soul into rescuing the mine. They often talk to us about the history of Optimum, it being a wonderful star in the industry and wanting to build that status for the mine. So they’ve really put shoulder to the wheel to increase production.

WARREN DICK: So you’ve kept the same management team that was in place under Glencore’s ownership?

NAZEEM HOWA: We had four or five people who left with Glencore. They were on the Glencore payroll, so they left with Glencore ownership. We’ve introduced one of our executives into the structure, but for the rest we’ve left mainly the Glencore team to run the mine.

WARREN DICK: This is probably one of the biggest projects in terms of business rescue proceedings that we’ve had to date, as a fairly new piece of legislative work. Has business rescue given you the flexibility and the ability to turn this business around and is there anything that we can improve in that legislation that allows businesses that fall on hard times to exit, to see more of those being done successfully?

NAZEEM HOWA: I think we’ve been very lucky in that we’ve had two business rescue practitioners who’ve really had, as a single focus, the need to bring this business out of business rescue. So they’ve really worked as hard as we have in trying to solve the imponderables in the business. I think they have been as creative as we wanted them to be in terms of changing business models. We must remember in terms of business rescue they still run the mine but they’ve been very open to new ideas and new innovations. Of course they have always managed the risk in the business. They’ve been very clear about ‘no, don’t introduce anymore risks’, but they’ve allowed creativity to come into the operations, which has given us the kind of change in performance we’ve seen.

WARREN DICK: Assuming everything continues successfully with Optimum, are there any other opportunities that Oakbay, as the holding company, would look at – either through its listed vehicle or directly in any commodities in the South African space at the moment?

NAZEEM HOWA: We always talk about ourselves as being a gazelle, we really jump in any direction. So we’re always on the hunt for new opportunities and I think that will present itself in the short term. But having caught the bus that is Optimum, I think we spent a lot of time consolidating what we’ve got right now, but our view certainly is that we need to look at some growth opportunities. Our shareholder is very firm in the view that we have to create jobs and has set us some targets for the group to grow jobs and he measures those targets on an annualised basis when we present our annual results. Job creation is one of the key measures that he holds us accountable for and we’re very clear that the only way we are going to meet those job targets is by acquiring new businesses.

WARREN DICK: So essentially what you are saying is you guys will jump in where you see opportunities. I think Shiva was a mine that you bought, obviously in your listed vehicle, Oakbay Resources, that was on care and maintenance. So it doesn’t really matter [what the] commodity [is] too much, it’s more the opportunity?

NAZEEM HOWA: There are three strategic imperatives facing us as a business right now, within the listed entity it will be the development of the uranium plan. Again, there seems to be a sense among some media that it’s tied to the South African nuclear story. It’s got nothing to do with the South African nuclear story. We have been working for the last year or two on our feasibility studies and certainly we look at an implementation strategy. It is our view that our life of mine will be passed before South Africa is ready for nuclear. So we’re looking at international opportunities around that project. The second one will be the development of an export capacity within our coal mining facilities and I think the price is very encouraging right now. The third one I think, in terms of the media business, would be to develop a free-to-air presence. So those will be the existing imperatives.

What we will look for now is what I would call the ‘immediate imperatives’ that come our way. Just looking around, our history has been that we find distressed assets and we turn them around – that’s what we are best at, that’s what our people are geared for. We are the kind of people who look at an asset from 360 degrees and find the right way to make it work. We’ve shown that with Uranium One when we bought Shiva: we turned something in care and maintenance into something at an operating level now that makes profit and should be a lot more profitable as we go to the next level.

WARREN DICK: You’ve operated largely in South Africa, your businesses. Anything in the continent that you find interesting?

NAZEEM HOWA: At this stage we’ve really maintained our focus on South Africa; I think we’ve got quite a bit going for us right now in South Africa. It’s tough at the moment; I think things are quite tough for us but South Africa has been very good for us. Our shareholder arrived here in 1993. They’ve invested wisely; they’ve created a total of 7500 jobs; they’ve created a diversified business; they are very, very committed to South Africa and I think they would see that there is still huge growth potential in this market for us as a company.

The elephant in the room always is the issue of State capture. Our view is that we are so small in the area of government business that the room for growth is actually huge in that area. It’s easy for people to use that phrase to discourage us in that direction, but it won’t discourage us because any deal or transaction we do will be arm’s length, will be transparent and will be fair to both parties.

WARREN DICK: Just having seen the outcome of the elections last week, where it looks like we are moving into a new era in South African politics, the era of coalitions, and big gains by the DA in some metros… obviously the ANC won a large majority of councils across the country but [in] some of those big metros [it’s] now possible a coalition might see the ANC out of power in those municipalities. What’s your take on the municipal elections? It’s perhaps very interesting for what it could mean for the national elections coming up in 2019 and Oakbay’s investments in South Africa.

NAZEEM HOWA: It’s a question we’ve been faced with very many times; we try and steer clear of politics very clearly. I think it’s not an area we want to be involved in; we’re business people and we want to grow our business. Our only desire is to be faced with opportunities and an environment in which to grow our business. Who is in power is immaterial to us. Whether the DA runs the whole of South Africa or any metropolitan areas is immaterial to us; we will grow our businesses in the right environment. So all our expectations are that we should have a great environment for business to flourish. We have, as a country, a great need to create jobs – that is our primary function, that is as a private business is to create those jobs. That is what we have been held accountable for by our shareholder and all we plead for is give us the environment to grow our business and to create jobs.

WARREN DICK: So [there’s] no difference what municipality you work in…?

NAZEEM HOWA: Absolutely not.

WARREN DICK: …and no view on what would be better for business for you in 2019 when there’s an outside chance that the ANC may not get the majority?

NAZEEM HOWA: A huge myth has been created about our dependency on patronage to grow our business; it really is nothing more than a myth. Anybody who does any kind of investigation will find that we have a minimal – I think we put down to 1% in our last financials, we’ll update it for our next financials – but we are very small in the business of State; very, very small, in fact. It actually is a growth opportunity for us, when we start looking at those numbers. Certainly I think we must take stock of where we can grow. Compared to some of our competitors, we are tiny in the area of doing business with the State.

WARREN DICK: Nazeem, thank you very much for your time, we’ll have to leave it there.

NAZEEM HOWA: Thanks, Warren.

WARREN DICK: That’s Nazeem Howa, the chief executive officer of Oakbay Investments.