Time will tell whether the Gupta business model is able to survive the tenure of President Zuma.
When, in 1993, the Gupta brothers and their families arrived in South Africa from northern India’s state of Uttar Pradesh, the country was experiencing the dawn of democracy. Sanctions were being lifted, tourism went into a continuous boom, the world was in love with Mandela’s country. Not only the idealists celebrated. Traffickers of all kinds relished the opening of what was already a long and porous border. In the land of the free, bootleggers went into overdrive.
For Ajay, Atul and Rajesh “Tony” Gupta, this was a land of opportunity, all right. They would have found that South Africa has a vibrant community of Indian extraction, mainly in and around Durban. They would have found that some of these families were wealthy beyond imagining, but also that all – almost without exception – kept a low profile and tended to focus on low-profile money-making, not least in the retail sector. Haberdashery, textiles, materials and other value-added products being favourites.
|Gupta brothers Atul (far right) and Ajay (to his left) with business partners Duduzane Zuma (far left) and Jagdish Parekh|
But the competition was fierce. The first indentured Indians arrived in South Africa in 1860; some elected to stay after their five-year contract expired. In 1869, the first “passenger” Indians arrived. These immigrants had paid their own way, and were skilled in a number of areas, including trade, teaching, and as artisans.
The Guptas are come-latelys but even so the evidence suggests that they wished to become super-wealthy within a generation. They would further deviate from what can loosely be called local tradition, by venturing into high-profile areas: media, IT, and also the sacred cow of mining.
What would become most noticeable, however, was that the Guptas were guided by only one principle: pure opportunism. The evidence – which has mounted rapidly since President Jacob Zuma was elected president of the ANC in December 2007 – is that the Guptas are truly gifted at exploiting unusual business opportunities, but, at the same time, have little experience or skills in actually running a business on a sustainable basis.
The Guptas run businesses that depend on the favour of politicians and the state – on patronage. The Guptas were absolutely on the money when they decided – many years ago – to back Jacob Zuma. Duduzane Zuma, son of one of Jacob Zuma’s many wives, is the person who has long appeared as most intimately and continuously representing the Zuma family interests in whatever the Guptas do.
As mentioned, the Gupta business model depends on pure opportunism. While it is crassly so – and distinctly unlikeable – it is not what the King Principles call transparent. One of the leading examples goes back to 30 April 2010: the day when Kumba Iron Ore, a subsidiary of Anglo American, renewed its licence for its 78.6% stake in Sishen Iron Ore Company (SIOC), situated in the Northern Cape.
Sishen ranks among the most profitable mines of any kind in the world. (During 2013, when Kumba’s stock price traded around R600-a-share in Johannesburg, its market capitalisation [value] was around R200bn.)
For reasons that may never be known, also on 30 April 2010, ArcelorMittal South Africa (AMSA), which held an undivided stake of 21.4% in Sishen Iron Ore, failed to file an application to renew its licence.
ArcelorMittal had seemingly developed amnesia over something worth nearly R20bn – based on Kumba’s market value. Equally strange, perhaps, was that the Department of Mineral Resources (DMR) immediately awarded the same 21.4% minority stake in Sishen to an entity that had apparently had the foresight to file an application for it.
This entity, Imperial Crown Trading (ICT), was nothing more than a shell company, literally taken off an auditor’s shelf. It would soon emerge that major shareholders in ICT included Jagdish Parekh, a key executive at a number of Gupta entities and, of course, Duduzane Zuma.
At the same time, it emerged that the same Zuma was a significant stakeholder in a consortium which had been named BEE partner in 26% of ArcelorMittal SA, a deal valued at just short of R10bn. It also emerged that Rajesh “Tony” Gupta – who did not fit any definition of BEE – was also a stakeholder.
Meantime, ArcelorMittal had offered Imperial a princely R800m for its apparently newly-acquired 21.4% stake in Sishen – a sensational windfall for a shell entity, with no track record, no mining experience and no directors with any knowledge of mining.
There was a serious stench attaching to the ICT saga. It was not the only case in which it could be inferred that an insider at the DMR had alerted politically favoured “external” parties to massively valuable insider information. Those who knew such information – miraculously or otherwise – were clumsy and amateurish in how it was used. For example, Ezra Thapelo Nkosi, who had been a geologist for 20 years, had never heard of ICT – yet Nkosi’s name and signature appeared several times in the documents that ICT had lodged with the DMR.
For its part, there was no question that the DMR was backing the Imperial camp. After taking legal advice, Anglo subsidiary Kumba applied for the contested 21.4% stake in Sishen. The clear reaction was recorded in a letter dated 24 January 2011, in which DMR director-general Sandile Nogxina described Kumba’s papers as “premature” and as having been filed in an “irregular, misleading and fraudulent manner”.
Given the DMR’s stance, Kumba had no choice but to resort to the courts. It was hardly a surprise that Kumba won case after case, including that heard in the Supreme Court of Appeal. The DMR, government and Imperial took the matter to the Constitutional Court, and lost there as well. Judgment was handed down in December 2013. The DMR was directed to award the 21.4% stake in Sishen to Kumba. One of the biggest would-be heists in South African history had been laid waste.
Given the ICT debacle, cynics may well argue that the Guptas lack subtlety. As recently related (nose197), during a meeting with Vryheid Revival Mines (VRM) at Vryheid in KwaZulu-Natal in February 2010, potential “BEE” suitors Atul and Tony Gupta, Ravindra Nath (finance director of Sahara, a Gupta entity), and Duduzane Zuma appeared, supported by a collection of bodyguards, several police officers, the head of the Vryheid police station, and the mining ministry’s regional manager: mineral regulation, for KZN, Nqobile Njoko.
VRM, aware that the Guptas did not qualify under BEE rules, and alarmed by the number of Gupta-sponsored Indian immigrants arriving in Vryheid, resisted the Guptas’ advances.
The Gupta style remains crass and reckless. They are unable, or unwilling, to play by normal rules. Their deals are executed with impunity. Their use of people in high places has become legendary. Judging by recent reports, nothing has changed in the past half-dozen years: on 7 March the news agency Bloomberg reported that Duduzane Zuma (the same) had acquired a hefty chunk of the Guptas’ coal entity, Tegeta, just weeks before the Guptas announced the purchase by Tegeta of Optimum Coal from Glencore.
In December, during final negotiations for the deal, mines minister Mosebenzi Zwane travelled to Switzerland and met Glencore CEO Ivan Glasenberg. The minister said that his mission was to “save” jobs. Maybe. But he was also giving his stamp of approval to the sale of Optimum Coal by Glencore to Tegeta. On 20 November 2015, about half the shares in Tegeta, according to Bloomberg, had been transferred to Mabengela Investments, a company part-owned by Duduzane Zuma. Oakbay, a Gupta company listed in Johannesburg, owns 34.5% of Tegeta.
During 2011 and 2012, Glencore had paid $783m to buy a controlling stake in Optimum. It would buy further parcels of shares, spending more than R12bn in all. In the end, Glencore was so happy to get rid of Optimum that it paid billions of rand extra for the privilege. Tegeta (the Gupta entity) bought Optimum for $136m. But these proceeds were to be used “to pay Optimum’s R2.55bn ($160m) debt”.
For the Guptas – and Duduzane Zuma – everything now hinges on what Eskom is prepared to pay for coal supplied by Optimum. The assumption is that Eskom will be prepared to pay a great deal more than what it was willing to pay Optimum while still owned by Glencore.
Glencore was also expected to eliminate the balance of Optimum’s debt. Since Optimum changed hands, finance minister Pravin Gordhan has announced that the Treasury will be investigating the terms of Eskom’s coal contracts. This was seen as a clear move to ensure that the “Gupta contract” is not abnormal. There was a strong sense – even at a public level – that the Eskom supply contract, under which Glencore had suffered losses running into hundreds of millions of rand, had been or was about to be replaced by something massively inflated to the benefit of the Guptas.
It is arguable, however, that the high-watermark for the Guptas’ taste for hopeless acquisitions was set by the Dominion (since renamed “Shiva”) uranium deposit, near Klerksdorp. An extensive and professional feasibility study on Dominion was published on 13 September 1996, by the then Gold and Uranium Division Geology Department of Anglo American Corporation of South Africa. It concluded decisively that despite the size of the deposit, it could not be mined economically.
A decade later, a very different assessment of Dominion was provided by Johannesburg-based SRK Consulting in its “independent technical report” published in October 2006, and as endorsed by the board of directors at Uranium One (previously Aflease). In no time, Uranium One CEO Neal Froneman was advertising widely that Dominion would be able to produce uranium oxide at a cash cost of around $18.00 a pound (at a time when the global spot price was headed for $100 a pound, and beyond).
To cut a long story short, Froneman’s promises were a very bad case of pork pie (Mark Twain once said that “a mine is a hole in the ground with a liar standing next to it”). In November 2008, Uranium One announced that its erstwhile flagship, the Dominion mine in South Africa, was effectively closed. Uranium One wrote down mineral interests, plant and equipment to the tune of $1.8bn on Dominion, which had been attributed with a “salvage value” of $50.5m.
On 14 April 2010, the Guptas used their Oakbay vehicle to acquire Dominion, apparently for the equivalent of $37m, and renamed it Shiva. Whether the Guptas paid a cent for the privilege is another question. It is evident that most if not all of the acquisition was funded by the SA Industrial Development Corporation (IDC).
When Oakbay was listed in Johannesburg in 2014, IDC loans to Oakbay amounted to R399m. Of this, R257m was capitalised interest – interest which Oakbay had not paid – and was converted into equity (shares) in Oakbay upon its listing. Yes, the Guptas had failed to pay a cent of interest – which rapidly built up to R257m.
Until Oakbay (essentially the Guptas) settles the balance of its debt with the IDC – deadlined for 31 October 2018 – the IDC continues to own Oakbay. The IDC has a mortgage bond over Shiva of R250m, a general bond over Shiva’s moveable assets to the tune of R250m, Shiva’s mining rights (valued, heaven knows how, at a mind-boggling R600m), along with Shiva’s debtors, insurance policies and cash.
While Oakbay displays a market capitalisation (value) of about R15bn, it is what’s known as a “vanity listing”. The stock is illiquid (it hardly ever trades) and it is easy for interested parties (mainly the Guptas) to exert influence over the price of the stock. The sad truth is that Shiva continues to rank as one of the biggest duds in global mining. Uranium is one of the world’s least popular and most readily available products.
At Shiva, the problems are legion. The plant is inappropriate and needs to be reconfigured, at a cost of billions of rand. Who will pay for this? Even then, long-time industry experts familiar with the deposit say costs at the putative mine are unlikely to be less than $60 a pound – about twice the current world spot price for uranium. It can be said that uranium would need to trade sustainably above $100 a pound for Shiva to ever make sense as an operating mine.
If Oakbay were ever to attempt to raise capital on the JSE, there is no doubt the mission would be aborted long before it could do so. The tragedy, however, lies in President Jacob Zuma’s ongoing insistence that South Africa should acquire a fleet of nuclear power stations. This, in a country which has among the world’s highest per capita coal reserves, lots of wind and sunshine – and one of the world’s highest-cost non-operating uranium mines – Shiva.
If it is even vaguely possible that a single family is holding an entire nation hostage over unaffordable future power projects, then it is possibly no wonder that there have been some calls for the Guptas to leave the country.
The family’s media interests, which include The New Age newspaper and the ANN7 television station, have benefited widely from advertising and sponsorship from parastatals such as Eskom and, indeed, government departments. The New Age is in wide circulation on SAA, the perennial loss-making state airline. The Gupta media interests are patently biased and are not taken seriously.
The family’s sense of how far it can push the limits of public perception has not been what it may have been. In April 2013, more than 200 foreigners – guests of the Guptas – touched down in various aircraft at the military’s Air Force Base Waterkloof in Pretoria, provoking outrage that a private wedding could be used as an excuse for such privilege, when the country has international airports capable of adequately serving civilian aircraft of any size or configuration from all around the world.
The Gupta-Duduzane Zuma tentacles extend into part-ownership of VR Laser Services, which purported to enter into a joint venture in Hong Kong with South African parastatal Denel. In response to a row kicked up by the DA, public enterprises minister Lynne Brown declared the deal void, in that various provisions of the Public Finance Management Act had been violated.
The tendency of the Guptas to stray into security-related areas – be it uranium and defence and so on – raises questions over which Gupta deals have not surfaced in the public domain. These questions possibly link to the status of the IT business the Guptas run under the “Sahara” banner.
On the face of it Sahara appears to be rather vanilla – as a distributor of hardware for the likes of LG, Sony, Toshiba, HP, Genius and Lexmark. Sahara also offers software services, but this is a highly competitive market where established players can be difficult to dislodge.
The big question here is the extent to which the government and parastatals hand business to this Gupta entity. It is unlikely that Sahara is anything more than just another player in an overplayed IT market.
Time will tell whether the Gupta business model is sufficiently robust to survive the tenure of President Jacob Zuma.
The good news is that the Guptas have stimulated a desire among a growing number of South Africans for the truth to be known, and for transparency to prevail. The family’s ostentatious compound in Saxonwold, Johannesburg, and the incessant resistance to the family being awarded a licence to land helicopters in a residential suburb have been noticed.
South Africa, indeed, owes the Guptas a big thank-you for reminding us how democracy can go badly haywire. So far, the courts, the Treasury and other interested parties have done good work.
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