Directors of coal producer Arnot OpCo have asked the high court in Johannesburg to dismiss a business rescue application by its joint venture partner Salungano, saying the company had secured R250m in funding to keep afloat and pay its creditors.
JSE-listed Salungano Group (formerly Wescoal), last month approached the court to have the Arnot OpCo mine in Mpumalanga placed in business rescue, citing a liquidity crunch and corporate governance concerns, including the mismanagement of funds.
However, Paul Kasongo — a director at Arnot OpCo — has in responding papers disputed that the mine is in financial distress. He accused Salungano of “unilaterally” refusing to comply with its obligations to fund Arnot OpCo in terms of the memorandum of incorporation.
The joint venture was on paper supposed to be a model for worker-controlled mine ownership.
It was formed in 2015 after Exxaro Resources exited the mine, leaving workers facing retrenchment. Eight former employees opted to revive the mine, forming a company called Innovators Resources, which entered into the Arnot joint venture with Salungano.
Salungano took a 50% stake, Innovators Resources took a 25% stake and retrenched staff — numbering just over 1,000 — held the remaining 25%.
I can confirm that Innovators Resources has already secured R250m from a leading South African bank towards funding Arnot OpCo
— Paul Kasongo, director of Arnot OpCo
But the parties were soon at each other’s throats, with Salungano accusing Arnot OpCo CEO Bontle Aphane — a former Exxaro project engineer — and other directors of flouting corporate governance principles and running the mine into the ground.
A preliminary report by Sizwe Ntsaluba Gobodo (SNG) found that the executives had mismanaged company funds.
It uncovered irregular appointments, questionable salary increases, abuse of the shift allowance system and misuse of rehabilitation funds.
In its court application, Salungano said Arnot OpCo was in financial distress and required a business rescue plan to achieve a turnaround. However, directors of Arnot OpCo have hit back, disputing the allegations in the SNG report.
Kasongo said in the court papers that Arnot OpCo was a new company in the process of transitioning from start-up to full-scale production, and was already supported by stakeholders with significant funds.
“I can confirm that Innovators Resources has already secured R250m from a leading South African bank towards funding Arnot OpCo,” he said. Eskom, which buys the mine’s coal for its Arnot power station, had agreed to fund the mine’s rehabilitation costs.
Kasongo described the business rescue application as an attempt at a hostile takeover.
Salungano knew Arnot OpCo was not in financial distress because it had been forwarded a shareholder funding proposal “as well as a proposal made by [Arnot] InvestCo”.
“Wescoal’s nominated directors serving on Arnot OpCo’s board are also aware of how Arnot OpCo is benefiting from prevailing coal prices and that it can service its debts using these cash flows.”
Kasongo said only two of OpCo’s creditors had taken action against the company. “The majority of creditors have contented themselves with being repaid by Arnot OpCo when cash flows become available to it, as opposed to a protracted and undesirable business rescue or liquidation process.”
He asked that the business rescue application be dismissed with costs.
“Wescoal’s application is made in bad faith with the ulterior purpose of controlling Arnot OpCo and avoiding its contractual obligations with InvestCo and OpCo,” Kasongo said.
But Salungano CEO Robinson Ramaite said in his court application that business rescue was the best option, despite Arnot OpCo having landed an Eskom supply agreement last year.
We believe the company can be rescued, we believe they have good prospects, and we want to put money into the company
— Salungano CEO Robinson Ramaite
He said Arnot Opco was in financial distress due to the blurring of lines between rehabilitation and re-establishment costs and mismanagement.
He alleged that 55% of creditors were not paid within the stipulated 120 days, and while the staff were being paid, salaries were often late.
Ramaite said Arnot OpCo was facing liquidation applications from two creditors for unserviced debt. “There are several others who have intimated that they intend to enforce their rights against Arnot OpCo.”
Ramaite said Eskom had made payments to Arnot OpCo on the understanding that it was a conduit for payments to service providers.
“And those funds are earmarked for service providers — specifically for the rehabilitation of the mine.”
He said business rescue was in the best interests of all creditors and, should it be successful, Salungano would make post-commencement funding available. His company, he said, had committed to making R150m available, and planned to ramp up production at Arnot’s two underground shafts and buy land from Eskom to establish an opencast operation.
“We believe the company can be rescued, we believe they have good prospects, and we want to put money into the company.
“The essence of the problems that the company is facing first requires cash, it does not require talking, people must put in money. Second, they have corporate governance problems that need to be addressed,” Ramaite said.
Arnot OpCo chair Mxolisi Hoboyi told Business Times that it was Salungano’s responsibility to pay creditors as it was the operations manager.
“How then do you say that as the workers we have taken the money in the business when you as Wescoal are managing the business?
“We have a management agreement which includes them being the treasurer. They are the ones releasing the money every month. How do you release the money if you are not convinced that the money is going to the right place?” Hoboyi said.
On Friday the court reserved judgment in the application for business rescue.
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