Mineworkers fail to gain in share plans
Few of the employee share ownership schemes established in the mining industry have succeeded, writes Carol Paton
EMPLOYEE share ownership plans (Esops) in the mining industry — viewed five years ago as a way to spread the benefits of empowerment to workers — have all but failed, with minimal benefits flowing to lower-end employees now that the schemes have begun to vest,
writes Carol Paton.
Concluded in the heady days of rising mining stocks, and often linked to narrow black economic empowerment transactions (BEE), Esops are now firmly out of favour with workers, who have seen little or no rise in wealth in all but a couple of examples.
The National Union of Mineworkers now says existing schemes must be restructured and there should be a complete rethink of Esops for the future.
The failures came about for three reasons: share prices did not appreciate as had been expected when the transactions were done, mostly in 2006 and 2007; the deals were in most cases structured with a high proportion of loan shares, which were to be paid for by dividend flows; and thirdly the quantum of shares transferred to workers, together with the debt, made it almost impossible for substantial value to be realised.
Gavin Hartford, CEO of the Esopshop, which advises on these transactions, says the typical structure of a mining industry Esop included a proportion of free shares — usually equal to a quarter or a third of the tranche — together with a larger proportion of loan shares.
The debt on the loan shares would be paid from 50% of the dividends, with the remaining 50% of dividends being paid to workers. After five years, the theory was that the shares would be fully paid, and when the scheme vested, employees would be free to sell all or a portion of them with a good return.
The real story is different. “Esops were mostly done parallel to narrow BEE transactions. Effectively, employees got almost nothing. Sometimes the debt wasn’t retired by the time the scheme vested, so they were cancelled,” says Mr Hartford.
EMPLOYEE share ownership plans (Esops) in the mining industry — viewed five years ago as a way to spread the benefits of empowerment to workers — have all but failed, with minimal benefits flowing to lower-end employees now that the schemes have begun to vest.
Done in the heady days of appreciating mining stocks and often linked to narrow black economic empowerment (BEE) transactions, Esops are now firmly out of favour with workers, who have seen little or no increase in wealth in all but a couple of examples. The National Union of Mineworkers (NUM) now says that existing schemes must be restructured and there should be a complete rethink of Esops for the future.
The failures came about for three reasons: shares prices did not rise as anticipated when the transactions were done, mostly in 2006 and 2007; the deals were in most cases structured with a high proportion of loan shares, which were to be paid for by dividend flows; and thirdly the quantum of shares transferred to workers, together with the debt, made it almost impossible for substantial value to be realised.
Gavin Hartford, CEO of the Esopshop, which advises on these transactions, says the typical structure of a mining industry Esop included a proportion of free shares — usually a quarter or a third of the tranche — with a larger proportion of loan shares. The debt on the loan shares would be paid for from 50% of the dividends, with the remaining 50% of dividends being paid to workers. After five years, the theory was that the shares would be fully paid, and when the scheme vested, employees would be free to sell all or a portion of them with a good return.
The real story of what has happened to employees in Esops is different.
“Esops were mostly done parallel to narrow BEE transactions. Usually 50% of dividends were used to pay debt, so the benefits were very low. Effectively employees got almost nothing. Sometimes the debt wasn’t retired by the time the scheme vested, so they were cancelled,” says Mr Hartford.
Phumzile Langeni, director of corporate advisory group Afropulse, says the headlines announcing Esop deals were misleading. “The headline would say: ‘R1bn deal for employees’, but what was the actual economic value? Because these deals were dependent on share price increases. When the market didn’t perform, workers didn’t realise value.”
The average payout of a scheme was between R3,000 and R7,000 after a five-year holding period, she says.
“If you amortise that over five years that is about R1,000 a year. What is a worker going to be able to do with that?”
If management sees Esops as an incentive for workers to align their goals with the company, then the value of the scheme relative to wages should be considerably more, she says.
NUM general secretary Frans Baleni says these are the reasons behind a recent call by the union’s national executive committee for the restructuring of Esops. Besides the model being a failure for broad-based empowerment, the union has had to deal with a backlash from workers over Esops that did not deliver.
At Xstrata coal mines, for instance, NUM members recently went on an unprotected strike after the Esop failed to pay out because, they argued, the company had made profit.
At Impala Platinum, where the shares remain below the price when the deal was done, the union trustee on the board had to flee for his life last year, after workers accused him of stealing the payouts that — based on a projection of the share price at that time — the NUM itself had once anticipated.
“Esops need to be structured differently so that they empower workers and they benefit. To link these to dividend payments alone is a problem. Workers are not interested in shares, they are interested in something in their pocket. Schemes need to be linked to profit,” he says.
An Esop that was restruc- tured in 2011 after union intervention was the AngloGold Ashanti Bokamoso scheme, after the first two tranches vested with no value to beneficiaries.
At the time the transaction was done in 2006, the share price was R320 and by 2011 had not reached the strike price, leaving the deal under water.
In the restructuring, the lapsed shares were reinstated and a floor of R40 for each loan share put in place. A ceiling of R70 a share was put in place to limit the cost to other shareholders. While this provided a guarantee that benefits would flow to employees, it also illustrates the relatively low quantum per employee of the scheme. With 90 loan shares allocated to each worker, the value on vesting will now range between R4,800 and R8,400. (Workers also have 30 free shares, which would vest at the share price).
In the case of the Lonmin scheme, which the company says “significantly benefited a large portion of the workforce” loan shares worth 1.1% were bought by the employees provident with a loan from Lonmin and sold six years later at a profit of R198m. Spread among 26,000 employees, this amounted to benefits of just more than R7,600 for employees who had worked at the company for the full period.
The great exception is Kumba Iron Ore, which, thanks to the rocketing share price, unaffected by the 2008 financial crisis, has paid large dividends twice yearly, and an astonishing R576,045 before tax to permanent employees below management level in December 2011, when the first phase of the scheme vested.
Dividend payments have been handsome too, with — for example — a R14,649 payout for the first six months of this year.
Impala Platinum spokesman Johan Theron points out that the Impala scheme is structured the same way as Kumba’s, but due to the vagaries of the market, its share price is still below where it was when the deal was done in 2006. Had Impala stock rallied in the way that Kumba’s did, on vesting employees would have received payouts of R260,000. Instead, when they sold in July 2011, workers received only R2,000 to R3,000.
Mr Theron says profit-share schemes for workers are more suitable and more effective when it comes to aligning the interests of employees and owners. In Brazil, for instance, profit share with workers has been legislated. But as Esops are also concluded to contribute to empowerment ownership targets, moving to profit share would involve a change in the mining charter and the new codes of good practice.
The general experience in mining is now sending companies and unions back to drawing board. Some companies — such as Lonmin — are in the process of designing new Esops to raise their empowerment credentials. As old schemes vest, many other firms will have to do the same.