What I learned from South Africa

In 2006, I took a job as the Chief Financial Officer (CFO) of Palabora Mining Company, a then publicly-listed entity on the Johannesburg Stock Exchange, part of the Rio Tinto Group, the global Anglo-Australian mining company headquartered in the United Kingdom.

Palabora, the only copper mining company in South Africa at the time, was struggling financially during a period when copper prices had reached levels previously unseen, over $7,500 a ton. In a research report published in June 2006 before my arrival, David Pleming, a leading securities analyst, wrote that the company’s management had shown poor judgement in their financial affairs:

“Rio Tinto/Palabora management claim that the rationale for the hedge was a condition of the debt restructuring, even so, it has proved to be an exceptionally poor judgement.”

After doing some due diligence, I concluded that a turnaround was possible, especially given the favorable copper prices at the time. I discovered that indeed the group at Palabora had the talent for a turnaround, except that they lacked a coherent strategy and suffered unhealthy interruptions from Maison Mère (from London). Many financial decisions taken for the company defied prudent and sound financial planning and management strategies.

The company was in such a dire condition that it was unable to attract suitable partners to complete a Black Economic Enterprise (BEE) transaction, to retain its mining license. The company was running out of time. In fact, this was the situation when it was put up for sale, which attracted the current sitting South African President, Cyril Ramaphosa; who showed up in our board room with executives from a since-sold company called Metorex. They were looking for a fire sale.

As I kept thinking about the situation at the company, saddled with huge hedge losses and leverage, depressed share prices, and nearly bankrupt; with London banks -- Royal Bank of Scotland and Barclays practically breathing down our necks, I came up with a model to allow the company to have an equity transaction to be able to fulfill the legal mandate. It was a novel model as it allowed employees, the community, and others to benefit, unlike other BEE transactions at that time. On a British Airways overnight flight from Johannesburg to London, I decided on how to proceed with the economic model. After getting the buy-in from my co-executive director, Keith Marshall, the Chief Executive Officer, we hired a transaction advisor after the necessary approvals to advance the transaction which eventually led to Palabora’s empowerment. Based on excellent teamwork, Palabora would go on to become successful (a complete turnaround) and be sold to a Chinese entity, leading to handsome returns for all shareholders, including the major shareholders – Rio Tinto and Anglo American.

In a seemingly different dimension, I found a very good barber in town. After my second visit to the shop, the barber asked me if he could talk to me after the haircut. As he saw me off, he asked if I would help him get his high school certificate (Matric as it is called in South Africa). He had not been able to complete his schooling due to his dire family circumstances. Between receiving money from me to cover him for time off to study and paying for the necessary fees, he completed his Matric successfully. He then asked me for additional financial assistance to obtain his driver’s license, as he was convinced that knowing how to drive would create better employment opportunities for him. After he obtained the license, he asked for financial assistance to attend the local college, Sir Val Duncan Technical College. ?When my family and I were leaving South Africa, he had successfully completed his engineering certificate from the college and was employed by a major mining services supplier.

From my experiences with the Palabora turnaround and the barber, I learned that South Africa needed and still needs a home-grown cogent strategy and financing plans as a country. Since the end of Apartheid, South Africa has had hardships creating such a plan. The country needs a holistic blueprint that would allow it to leverage all its resources to give employment to the teeming youth, who are caught up in a circle of joblessness and hopelessness. If there is such a plan, it is not working. Call it the “Mandela Plan,” this plan would be similar to what Lee Kwan Yew put in place for Singapore, after its separation from the Federation with Malaysia. As part of the plan, South Africa could send its promising students abroad to learn how others have achieved growth and bring home global best practices, such as Singapore did by sending students to the UK, USA, and Australia. Education should be a big part of this plan, inculcating the best from their own South African cultures as well.

Recent events, especially the riots in the midst of a pandemic, have been shocking to the world.?However, the expansive fiscal and monetary policies currently in place globally due to the pandemic, show that South Africa can produce and promote a growth plan for all its citizens. Now is the time for the country to innovate to expand the economy and improve on operational execution and services delivery. South Africa must deal with the virus of unemployment.

As I once told David Pleming in 2017, the last time I saw him at a waterfront hotel in Cape Town; putting together such a plan and making it work will require all South Africans to pull together. Governing seems to have been left to those who could use more experience and creativity. I may go as far as to say that the international community may have to assist South Africa to embark on this development plan while respecting its sovereignty, just as we helped to end Apartheid. Countries such as China and Germany who have experienced fundamental changes at one time or the other; a revolution and a World War respectively, have had the benefit of outside assistance to propel them forward. South Africa needs help; just as I went in as an expat to solve a turnaround problem and helped finance a young man who needed extra assistance to get on with his life. ??

As I once told a fellow Chartered Financial Analyst (CFA) from South Africa living in the UK; “That given how relatively peacefully Apartheid ended; I won’t bet against South Africa, a country of tremendous natural physical beauty and people, I am convinced that they will get it together, warts and all.”

The writer is the CEO of Capital Hill Ventures, a former CFO of CalPERS, and the author of “What the CFO Wants You to Know.”