Arnot Opco on Friday launched a spirited fightback against an attempt by Wescoal Mining to have it placed under business rescue. Salungano Group, which owns Wescoal Mining, two weeks ago launched an application for the business
rescue of Arnot.
Salungano, which owns a 50% stake in Arnot through Wescoal, said it had no option but to make the application at the high court. The Arnot coal mine, previously owned by Exxaro, was the surrounding community’s main source of income for four decades and its closure in 2015 dealt a heavy blow to the community in Mpumalanga.
However, eight former Exxaro employees decided to revive the mine. They formed a company, Innovators Resources (IR), using their retrenchment packages and pension payouts as seed capital for the mine.
To assist its former employees, Exxaro donated all its mining and office equipment at Arnot to IR. The employees then partnered with Salungano. This saw Arnot revived, with Wescoal holding a 50% share and IR a 25% share. The 1 029 retrenched Exxaro employees received a 25% share in Arnot.
IR and the retrenched Exxaro workers then formed an entity called InvestCo, which holds 50% of Arnot.
Robinson Ramaite, the CEO of Salungano Group, told the court that two board meetings that took place in February and March this year showed the depth of Arnot’s financial problems. It is at these meetings, Ramaite said in the application, that the management accounts of the business were tabled. “The accounts indicated assets in the amount of R41 686 218 and current liabilities of R297 201 739,” the affidavit reads in part.
Ramaite said the situation was worsened by the trade payables, obligations to pay for goods or services, in an amount of R157-million, with more than 55% of that owing for more than three months.
“Consequently, it became clear that Arnot Opco was in a state of illiquidity and would not be able to discharge its short-term obligations when they fell due,” Ramaite said, adding that attempts to solve its liquidity challenges proved futile.
However, Paul Kasongo,the CEO of IR, who is opposing the application, said Salungano had acted in bad faith. “Now that a coal supply agreement has been concluded with Eskom; coal prices are at record highs and the Arnot mine is taking off, Wescoal has sought to use business rescue as a means to hijack
Opco and deprive InvestCo of its share of the Arnot mine despite InvestCo having contributed the mine asset to the transaction on the understanding that the parties would work together to restore it to production and share the benefits,” he said in an affidavit argued before court on Friday.
“Wescoal hopes to achieve this hostile takeover by accelerating the value of its claims of R45 650 0 00 pursuant to the working capital facility and R46 709 945 pursuant to the management agreement in the business rescue process.”
Arnot makes most of its money from supplying coal to Eskom’s Arnot power station in Mpumalanga. The company received R797-million from Eskom between March 2020 and November 2021.
The rift between Arnot’s shareholders was also precipitated by a damning report by SNG Grant Thornton released in February. The audit firm found numerous breaches in good corporate governance and accused several executives of having improperly benefitted from the company’s purse.
SNG Grant Thornton also found numerous contracts were mismanaged and placed the company at great risk.
Arnot director Mxolisi Hoboyi has since approached the court to declare the appointment of SNG Grant Thornton and its terms of reference unlawful as he claims the appointment should have been sanctioned by the board.
A series of emails between Ramaite and Kasongo, dating back to January, shows a deteriorating relationship between the partners.
- 18 January – email from Ramaite to Arnot
In this email, Ramaite acknowledges receipt of a memorandum prepared at the executive team of Arnot dated December 28, detailing working capital funding request of R25.2 million from shareholders.
Ramaite used the opportunity to remind Arnot that Wescoal had injected R120-million
into the mine. This is made up of R75-million share subscription, R25-million working capital facility, which is repayable, and a further R20-million in working capital facility between August and October last year – this too is repayable.
“The financial distress and liquidity issues faced by the company (Arnot) are as a result of financial mismanagement and misappropriation of funds,” Ramaite writes. He goes on to detail a whistleblower complaint that certain Arnot directors have been involved in a related party transaction without disclosing such to the board.
Ramaite then informs Arnot that Wescoal will not extend any further funding unless there is a “broad overhaul of the board of directors and key senior members of the management team”.
- 17 March – email from Ramaite to directors of Arnot InvestCo
Ramaite demands that all the directors of Arnot, including Wescoal’s representatives be removed and be replaced with independent non-executive directors “with a proven track record of experience in good governance practices and in the mining industry”.
He also calls for recommendations contained in the SNG report to be implemented “without delay”.
Ramiate then pledges that Wescoal will procure and provide funding of a maximum of R45-million for the period April to July 2022.
- 30 March – email from Kasongo to Ramaite
Kasongo starts off by acknowledging the “non-negotiable” conditions laid out by Ramaite. He says Ramaite’s proposal to have the Arnot directors replaced is baseless. “… we believe it is premature at this stage to comment on this condition and would
appreciate for Wescoal to provide us with reasons for seeking the removal of directors…”
Kasongo also said Hoboyi had launched proceedings to set aside the appointment of SNG, and their recommendations, and they should wait for the finalisation of legal proceedings.
- 14 July – email from Ramaite to Kasongo
Ramaite proposes that Salungano provide a shareholder loan of up to R150-million to Arnot. He says the loan will be for:
- R50-million surety facility to secure a bond for land purchase from Eskom
- And that R100-million would be to fund working capital and to partially settle historic debt.
- 20 July – Kasongo replies to the proposal from Ramaite
In the letter, Innovators told Ramaite that Salungano’s proposal did not comply with provisions of clause 11 of the shareholders agreement.
- 25 July – Ramaite to Kasongo and Arnot
Ramaite told the parties that Salungano had taken the decision to declare a dispute in terms of the provisions of the shareholder agreement.
“While we regret having to follow this route, the urgency of the matters at hand requires us to act swiftly to ensure the survival of Arnot Opco.”
Kasongo has asked the court to dismiss Salungano’s application, but should it agree with Salungano, it requested the appointment of a joint business rescue practitioner.
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