What was supposed to be an exemplary employee equity model where workers used their own money to acquire a 50% stake to save a mine that was going to close and retrench has instead turned into a nightmare.
Arnot OpCo was created in 2019 and was seen as a beacon of hope after Exxaro's coal supply agreement to Eskom’s Arnot Power Station ended in 2015.
A deal was struck in 2019 by which Exxaro transferred Arnot colliery's movable and immovable assets and mining rights to the new company. Eight former employees used part of their retirement savings to form an investment vehicle, Arnot InvestCo, which partnered with junior miner Wescoal Mining, a subsidiary of the Salungano Group, in a 50-50 joint venture.
Through this agreement, Arnot OpCo was born. Wescoal took a 50% stake while the eight employees received a 25% share, with the remaining 25% allocated to 1,029 miners.
At the time the deal was hailed as “ground-breaking and first-of-its-kind transaction in South African mining history and a transaction that will benefit former employees of Arnot and the community at large”.
In 2021 Eskom and the company entered into a 10-year agreement for the supply of 2-million tonnes of coal to Arnot Power Station. However, since beginning production in 2022, the colliery has consistently missed targets.
The relationship between Arnot InvestCo and Wescoal has since soured amid cross-accusations of financial mismanagement and failure to fulfil funding commitments.
In October 2022, the Salungano Group applied successfully to have the South Gauteng High Court place Arnot OpCo into business rescue. It promised that business operations would continue, including the supply contract with Eskom.
A forensic report by SizweNtsalubaGobodo (SNG) Grant Thornton in 2022 found that a deep rot had set in, with procurement processes flouted by Arnot OpCo management. Some executives were found to have unduly benefited from the shift allowances system, others had entered into contracts without requisite board approvals, and some service providers started work without valid contacts.
Salungano — which recently had its shares suspended by the JSE for failure to publish results — argued in court that Arnot OpCo was blurring the lines between rehabilitation and re-establishment of the mine. Arnot OpCo in turn has accused Wescoal of refusing to comply with funding obligations for the business and attempting to hijack the joint venture.
Arnot OpCo is in the red, owing creditors R339.5m.
Eskom confirmed this week that its Arnot Power Station was still being supplied by Arnot mine, but said the company was not meeting the terms of the contract.
Asked what would happen if the business rescue process did not succeed, Eskom said it would “have to procure this coal from other suppliers which may have its own unknown implications [for Arno OpCo]".
Mxolisi Hoboyi, one of the eight former employees who founded Innovators Resources — the investment arm holding a 25% stake in the company — said the business must be rescued to fulfil the dream of former employees.
“All we wanted was for the historic transformation of the mining industry to materialise.”
He said at the time they considered Wescoal the perfect partner as the affected employees had no technical expertise in coal mining.
“We wanted to partner with a black-owned and JSE-listed company for the joint venture. Wescoal brought R70m of equity to buy their 50%, whereas the assets that were given to us by Exxaro were not less than R300m.”
As much as it was an absolute highlight at the time that jobs were saved and a new worker co-operative model was established, it is now a very sad day that if failed and workers and their families are again victims and are confronted with uncertainty and poverty
— Gideon du Plessis, general secretary, Solidarity
However, Hoboyi said in the end Arnot InvestCo realised it was not aligned strategically with Wescoal.
“Our mistake was to think Wescoal shared the same strategy with us of transforming the mining industry. We were naive.”
Hoboyi said the worker co-management model would have succeeded had Wescoal not demanded workers cede 51% of Arnot OpCo when Wescoal ran into financial difficulties two years ago.
“Our relationship broke down when they [Wescoal] started to have financial problems. They wanted to consolidate Arnot in their books. They wanted an additional 1% in Arnot so they could be a 51% owner, and when they own 51% of Arnot they can go to the bank with Arnot’s assets and restructure their debt.
“When we said no, we are not going to waive our pre-emptive right, they cannot use their Arnot shares to restructure their debt, they then came with a hostile takeover of Arnot, putting allegations that [money was misused] and money was stolen. Their strategy was to ensure we are vulnerable.”
In its business rescue application Wescoal said Arnot OpCo had under-delivered to Eskom by 1.6Mt. It said without intervention, including aggresive ramp-up and increasing the number of sections mined, “the under-delivery trajectory has worsened”, further exposing the company to potential penalties by Eskom.
Attempts for comment from Salungano were unsuccessful.
Mkhombo proposed a disposal process to rescue Arnot OpCo, with creditors voting to accept a R435m offer from Ndalamo Resources comprising R70m to settle creditors’ claims, pre and post business rescue, and R365m as post-commencement funding.
But some creditors have balked at this, arguing the Ndalamo offer is insufficient.
Gideon du Plessis, Solidarity’s general secretary, said Arnot OpCo was a good South African story through which workers created a nonracial work environment and there was solidarity among them.
“As much as it was an absolute highlight at the time that jobs were saved and a new worker co-operative model was established, it is now a very sad day that it failed and workers and their families are again victims and are confronted with uncertainty and poverty. It will nevertheless be a complete failure if lessons cannot be learned from this.”
Du Plessis said the worker co-management model had been a plus for the industry.
“As part of the transition process in mining, the employee management model is the ultimate solution. The sad reality is that it may not be easy now to go and find another case study and make it work. The success will only increase if the department of mineral resources & energy and a solid and well-established company can form a partnership with the employee management to steer the ship through troubled waters,” he said.
Nathi Shabangu, spokesperson for the department, said Arnot should not be allowed to fail.
“Our hope was that the initiative would succeed and ensure our communities get the benefits of the mineral endowment on our shores. We need to ensure all efforts are in place to ensure Arnot OpCo succeeds.”
Hoboyi said the former employees want Wescoal out. “We are pushing for a forced sale so that they [Salungano] can walk away from Arnot.”
An investment analyst who spoke on condition of anonymity said it was disappointing that Arnot OpCo was struggling given its worker ownership model.
“When you see what would have potentially been a flagship transaction for employee ownership fail, it is a bit disappointing. The key reason why some advocate for lower ownership by workers is because they say workers are not going to put down capital. Obviously, they do not have money and their transactions have higher financial gearing. That financial gearing should be tolerated and should be guaranteed”.
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