The casualties of October '97
IT's been a bad week for most investors. But none can be more devastated than the black empowerment group which this year acquired control of mining house JCI.
After this week's market, the continued weakness in the JCI share price has cast doubt on the ability of the African Mining Group to repay its part of the R2.9-billion raised to buy control of JCI from Anglo American in February.
The AMG, then led by Mzi Khumalo, had based its funding plans on an expected 5% a year rise in JCI's share price. Bought at R54.50 a JCI share from Anglo American, AMG was counting on a rise to about R69 over five years to break even.
However, since the deal was struck in February JCI's share price has tumbled, hitting a low of less than R20 this week before recovering slightly to close at R20.50 on Friday.
JCI director Brett Kebble confirmed that AMG required compound growth of 5% a year for five years in the JCI share price to meet its obligations to financial institutions.
He said AMG used preference shares to finance its portion of the cost of buying into JCI.
Meanwhile, Khumalo is believed to have dug himself out of potential bankruptcy by merging his interests with that of the Kebble family. He is believed to have borrowed R400-million to finance his share of the JCI deal by offering his 25.2-million shares in Saflife as security. Saflife was used to facilitate the JCI acquisition.
Since then, however, Khumalo has channelled his debt into Consolidated African Mining (CAM), a vehicle established by Kebble and Khumalo to exercise indirect control over JCI.
Saflife owns 30% of JCI, while CAM owns 34% of Saflife. For the purposes of the CAM deal, Khumalo's 25.2-million Saflife shares were valued at 560c each while the Saflife shares CAM bought from other institutions were valued at R22 each.
"Khumalo borrowed the money against the security of the Saflife shares. Below a price of R16.80 a Saflife share Khumalo's liabilities would have exceeded his assets. Brett Kebble gave him the opportunity to get out of debt," one analyst said.
The fortunes of most black empowerment companies mirrored the rest of the market.
Johnnic, which was acquired last year by the National Empowerment Consortium led by Cyril Ramaphosa, closed at R54 on Friday from more than R60 before the turmoil started.
The gradual but substantial losses in the share market pale in comparison to the speed with which bond traders this week made or lost millions in hours.
It is too early to say who won or lost, but it is clear some banks have taken huge losses. One reputedly made a trading loss of R40-million on Tuesday and stories of losses of R5-million to R10-million are not uncommon.
The Bond Exchange monitors its members closely and would act if it felt any of its members were unable to meet commitments. There are rumoured to be some heady individual losses, with one broker dropping R2-million in his personal capacity and another R1.5-million.
Some investors, however, may have experienced stunning windfall profits as bond rates rose beyond their wildest expectations. For example, a November put option on the R150 bought two weeks ago for R2 000 would have been worth more than R40 000 one week later.
However, for most traders it was a case of trying to contain the losses and attempting to trade back into profitability by reading the intraday movements of the market.