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Moneyweb interview with Gold Fields Deputy Chair Rick Menell - Moneyweb

Friday, 16 October 2015

WARREN DICK: Good day, I’m Warren Dick, the editor of and joining me on the podcast today is Rick Menell. He’s the Chairman of Credit Suisse Securities, Johannesburg and he’s an Advisor to the group globally. Good to have you with us, Rick.

RICK MENELL: Thanks Warren.

WARREN DICK: Tell us a little bit about your role, you’ve been involved with Credit Suisse for the better part of almost five years now. What’s your job and what’s your involvement with the Group both here in Johannesburg and obviously as an Advisor to the group globally?

RICK MENELL: Credit Suisse has a long history in South Africa but the major commitment was made five years ago to build a bigger establishment that would start to build a business, a long-term sustainable business and it’s based on Credit Suisse’s very strong international equities franchise, it’s very strong investment banking skills, its fixed income and advisory work, and its private bank which is one of the three big private banks of the world, and all of those are represented here in Johannesburg and all of them linked very closely with colleagues internationally.

WARREN DICK: You’ve mentioned that there’s a very keen interest internationally in what’s happening in Africa. Through the banks eyes what do you see taking place and where are the opportunities for the bank in Africa generally?

RICK MENELL: We’ve been watching the economic development in Africa very closely and looking for opportunities to assist with the building of the modern Africa and at the moment we see three main opportunities.

One is really around the very well established private sector in South Africa where there is a lot of capital raising transactions, obviously waxing and waning with the state of our economy, but very much operating in a first world way, but offering a very useful platform, not the only platform but a very useful platform for operations in Africa for a number of multi-national clients that we have and a number of private clients, wealthy individuals who like to invest in Africa.

So South Africa is a place to do business and a place to look at other opportunities in Africa is an area where we’ve got a lot of work. Then more broadly in Africa, you know the continent is urbanizing rapidly, the population is growing rapidly, there are many economies in Africa but 10 countries represent 80% of the economic activity in the continent and there’s a burgeoning demand for the things that you need for a new population working in cities, with a cash economy, including, you know, service for consumption in retail, telecommunications, financial services, physical infrastructure, you need to house millions of people moving into town and what we’re seeing is an early opportunity which we’re addressing largely from Johannesburg, London and other offices elsewhere in the world to assist in the financing of Africa’s infrastructure build.

We’re doing that, by finding very often partnerships between private sector clients of the bank who want to get involved in building low income housing, or roads or railways or fishing facilities and assisting them in forming partnerships with government in joint public private partnerships and then finding clever ways to structure the funding so we can access the hundreds of millions of dollars needed to go ahead and build and agreed projects, and really good examples of that have been an almost $900m railways financing in Ethiopia which was Deal of the Year last year and one of its kind, low income housing with a Brazilian client who wanted to join a public sector housing programme in Ghana, which again was supported by government, by legislation and by guarantee.

So overall, I mean, on the structured finance side, Credit Suisse has raised over $3bn in the last three years for African infrastructure, and that is in a way that has accessed funds would not be easily accessed otherwise, but all for projects that generate revenue as a part of the building of the continent.

And on the private banking side, we’ve got clients all over the world who are very interested in investing in Africa’s growth story early. We’re seeing a trajectory that is not going to reverse, it may slow at times but it’s certainly going in one direction over the next generations. The demographics, you know the initiative and innovation and energy of the continent make it inevitable that Africa will grow and pass the threshold and become really, a series of very vibrant economies, with big demand and this is of interest to our private investors around the world and obviously to the multi-nationals that we serve around the world and we are trying to help people get positions through relationships that we’re starting to build.

WARREN DICK: The involvement of the high net worth private clients of Credit Suisse, of the bank is very interesting. What is the vehicle for that on the continent? We know it’s a very under-developed public market that we have, so accessing some of the economic opportunities on the continent is sometimes difficult through the limited prism of the public market, so what is the vehicle the bank uses to allow their high net worth clients to access some of those opportunities?

RICK MENELL: Well, while we wait for the development of domestic capital markets, debt and equity markets which will enable local savings to be accumulated and then invested in the countries. The risk money, the equity funding that is going into Africa is largely coming through private equity investment.

That often involves a partnership to be formed between a long term partnerships generally, between an investor, either a corporate or an individual or a family office of a wealthy family, with a family business in Africa, you know, most of the businesses in Africa, certainly those that are consumer facing, are family businesses.

And they’ve all grown and they are growing with the economy, they are often reaching a point where they need capital, and some strategic input and that’s a good point for them to find a partner. But as you say, the capital markets both inside South Africa but also outside Africa for African countries are not that well developed yet. They’ve got ways to go and it’s the early private money that’s coming in at this stage, but obviously that will evolve over time as it has everywhere else.

WARREN DICK: You’ve discussed…you’ve mentioned that on the other side of the opportunities obviously doing some of the large scale funding to obviously a continent that’s very capital hungry, but there’s not a lot of capital. You talked about public private partnerships and investing with or alongside two governments, sovereigns, can you just tell us a little bit more around what that entails?

RICK MENELL: Well, government will have a priority project that it would like to promote but no means to do it, it won’t have either the management teams or the capital to push it ahead. In Ghana there was a long saga about building much needed low income housing around Accra which is desperately in need of housing and one round was aborted because there were question marks about process challenges – by the opposition and so forth. And so they started again and they did it wisely, they got bilateral support from the parties in parliament, a consensus, a process that was open and transparent, which we all need these days to do business, and there was a bidding process and people from all over the world put their hands up to say we want to come and build your houses. One of them was a client of Credit Suisse and we assisted them in forging the partnership with government that provided the credit support through legislative law that was passed to ensure the arrangements were embedded in the law and protected.

And the interests of the government would be long term, you know, the landowner of the property and the company coming in to put money in and the expertise to build the houses efficiently and then structures had to be put in place to protect cash flows, the rents and the other subsidies that went into it so they could repay the debt. This was a $300m or $400m project in the end. A large number of houses were built and it was complicated, and it required in order to get that $300m or $400m from the international debt markets, you needed a lot of protection against risks that people perceived which involved putting together correct legislation and ensuring that there was no dispute about the integrity of the process that could lead it to being unravelled in the future, a role for the nations or its ministry and the private sector for protection of the cash flows and so forth. All of these things were put in place so that in the relatively short period of time that it was a successful venture.

WARREN DICK: Right, you come from a family that has a long and proud history, involved in resources and commodities, and you still sit on the boards of companies including the likes of Sibanye and Gold Fields, obviously resource and gold companies. What’s your current view of the resources market at the moment and is there an opportunity in certain instances to consolidate parts of the industry?

RICK MENELL: I’ve been in the mining industry for nearly 40 years. I love it, I love the range of people involved with it and I love the benefits that it can bring to countries and to people through jobs, taxes, exports and development and South Africa is a great example of all of that, but it’s a very cyclical business and there have been a lot more downs than ups and we’re going into a down that I suspect will last for some time, and basic commodities that we produce which go into building cities and infrastructure are in oversupply at present and there’s a battle going on between if you like suppliers and buyers to settle this down. A lot of the more expensive producers are going to be sacrificed in the process and that’s an inevitable part of the cycle that has been there…through the three cycles that I’ve lived through certainly.

South Africa has got its own particular profile of production, it’s a particular cost metric that is a challenge for the people that run this industry and regulate this industry and that isn’t particularly well fitted for the challenges that we face in a downturn. Our costs are often out of the control of management. A lot of costs were administered, a very high portion of our costs were related to labour in the mature gold mines. We have dependency on increasingly expensive electricity supply and we have to find solutions for that and we have to find a common interest with government, with labour and communities in which we operate in order to succeed weathering the storm and coming out as a healthier and stronger industry. That’s true for South Africa and it’s also true for Africa I think. Africa suffers from a major shortage of infrastructure for the export of bulk commodities both in agriculture and mining and so if you’re going to look at the major mining exercise unless it’s some people like a diamond mine or a gold mine where your product is small and precious and you can fly it out on a helicopter. You need infrastructure, you need road infrastructure, port infrastructure. It could be fertiliser or minerals to the Republic of the Congo, it could be iron ore in West Africa, it could be agricultural products coming out of small farms all over Tanzania and in any case you need transport infrastructure and port infrastructure in order to get it out. And funding that is a real challenge because commodity prices are lower and the revenues are low so I see that there will be some slowing down in the building of resource exporting infrastructure which is frustrating. Offset I think by what we talked about earlier which is this burgeoning urbanisation with the demands of people who increasingly have disposable income to invest and spend on things.

So mining is going to go through a difficult patch. We’ve got some real work to do to reset the rules in South Africa. We’ve not done very well, in my opinion, in the last 10 years. We really need to find each other, the different players in the game, build trust from bases where there’s not been a great deal of trust and find what each of us can get and give to make this work. There are going to have to be things given up by all the players from business, the private sector, shareholders and labour to government if we’re going to have a viable, sustainable industry in South Africa.

WARREN DICK: I think you indicated before the interview you’ll be addressing some of these at the Indaba tomorrow as I understand it, you’re chairing a round table at the Indaba. Just give us some insight as to what the subject is there and what you’re hoping to achieve, perhaps talking to some of these issues that we find ourselves in, in the resource market.

RICK MENELL: Anyone who is listening is welcome to come to the Indaba and then you’ll hear that one of the earlier sessions I think Bernard Swanepoel and the organisers are trying to get different perspectives from government, from the boardroom, where the non-executive directors have to take a long view, from management, to deal with the daily and yearly battle to contain costs and manage people, from labour who have interests to protect for their members and so forth, and the communities. So everyone is having their say and we’re starting off early for the long view from the board. So Cheryl Carolus and Sipho Pityana, Barend Petersen from De Beers, a couple of others are going to join us around the table in the plenary and we’re going to discuss how we see South Africa’s long-term future in mining and try to put substantial issues on the table for discussion.

WARREN DICK: I guess to just round out, I think obviously at the birth of our democracy we were very good at getting people around a table and discussing things and negotiating and agreeing to disagree. Have we lost some of that, is that really what we need to get back to get that trust back between our stakeholders, our key stakeholders?

RICK MENELL: I think after 23 odd years there’s a degree of impatience about progress and about whether there has been enough radical rethinking of the forms of our society to meet our needs and we’re going to get to a very challenging time with burgeoning unemployment, particularly among our youth, that all of us are worried about, deeply worried about. It’s not fine to say that life is tough. Mining is a part of that, so is tourism, so are services, and so is the general pace of the economy and so forth. So the arguments and the debates are becoming if you like more and more heated and more and more important because the challenges are growing with time, not shrinking and I think mining is a big part of one of our pillars of our economy supporting a great deal of secondary and tertiary industry, with resources to provide a great deal of upgrading of our human resource and a large portion of our exports it is a pretty important player. So we need to make sure that it works as well as it can.

WARREN DICK: Great, Rick we’ll have to leave it there. We look forward to hearing more ideas about some of the solutions that we can come to in terms of addressing these massive challenges that we have. But thank you very much for your time.

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