After tense and unsuccessful talks in London starting on 16 November, Freetown officials called on Octéa, which owes about US$150 million in total, to impose a standstill at Koidu for 90 days, pending a detailed technical and financial assessment. Mining operations continue for now but officials said they feared that short-term actions by the company could endanger the mine’s future (AC Vol 56 No 23, Koidu’s future in the balance).
As the biggest bank in Sierra Leone, Standard Chartered has a particularly close relationship with the government and is under scrutiny for the way in which it spends funds there through a US$50 million credit facility with the CDC. The CDC is a development finance company wholly owned by the British government and the policies of the former Commonwealth Development Corporation are decided in coordination with the UK Department for International Development (AC Vol 51 No 9, CDC goes offshore).
At the same time, Standard Chartered is the biggest lender to Octéa, a wholly-owned subsidiary of Beny Steinmetz Group Resources. The Bank, we understand, also has exposure to other entities linked to BSGR. Citing client confidentiality, its officials told Africa Confidential they were unwilling to talk about these relationships.
However, AC has seen a letter from Standard Chartered to Octéa dated 5 August 2015 informing the company that it was in default on a $92 million loan from January 2011. Octéa had ‘failed to comply’ with its obligations, the Bank wrote, by missing five consecutive monthly repayment installments, as well as missing a 25 March deadline for payment of the deferred principal amount. BSGR is guarantor of the loan.
The Sierra Leone government, to which Octéa owes payroll and other taxes of more than $13 million, has raised concerns about the company’s solvency. Government officials say they expect Standard Chartered, the company’s biggest creditor, to take a constructive initiative on the Koidu crisis, which is further weakening the economy after a disastrous 18 months of falling growth and growing unemployment.
However, Dag Cramer, who led BSGR’s team in the negotiations with the Freetown government and Standard Chartered, insisted that all substantive issues over Koidu were being resolved: ‘All the creditors are being paid. We have agreed a payment plan with the government as a gesture of our good faith.’ Cramer argued that BSGR’s ‘resilience’ should be recognised: ‘We are the last people standing in Sierra Leone after African Minerals and London Mining … now we need some oxygen.’
At stake is the future of Koidu, the country’s last big mining operation following the collapse of the heavily indebted African Minerals Ltd. and London Mining earlier in the year (see Feature, Chinese inherit law suit & AC Vol 56 No 19, Frank’s fickle fortunes). Both companies claimed they were hit by the ravages of the Ebola epidemic which forced them to stop producing iron ore for export (AC Vol 56 No 13, ‘Lack of focus’ on Ebola). The International Monetary Fund estimates that Sierra Leone now has the world’s fastest shrinking economy.
This latest dispute has taken on regional political overtones. BSGR, owner of debt-laden Octéa, is also embroiled in a legal fight with the Guinea government over ownership of the Simandou iron-ore mine. BSGR’s operations in Guinea are also the subject of criminal investigations by the Swiss and United States governments.
The public dispute over the Sierra Leone mine comes at an awkward time for Standard Chartered, which is undergoing radical restructuring, the dismissal of a quarter of its senior management and redundancies among its 90,000 other staff. With one of the most comprehensive networks of branches throughout Africa and Asia, Standard Chartered is one of the seven biggest lenders in Britain but failed to meet the minimum capital requirements in particularly rigorous stress tests which the Bank of England set last year. It has since bolstered its capital reserves, officials say.
A year ago, Standard Chartered was trying to sell Octéa, on behalf of BSGR, for a price of around $330-400 million, based on its preliminary valuation of the company. The main bidder for Octéa was the New York-based Keffi Group, owned by Jide J. Zeitlin, an American businessman formerly with Goldman Sachs, and Jeffrey Wright, an award-winning US actor with other mining interests in Sierra Leone. Keffi had offered to invest $300 million in the mine, to finance the opening of underground shafts to mine kimberlite diamonds which could extend the life of the mine.
Negotiations between Keffi and BSGR stalled, though, apparently over how to deal with Octéa’s $120 million debt to Standard Chartered and diamond- dealer Tiffany and Company, which had an off-take arrangement with the mine. In a 5 August letter to the Sierra Leone government, Keffi Group reported that negotiations had broken down, adding: ‘BSGR is no longer in control of this situation. The key decision-maker is now Standard Chartered Bank.’
Octéa has three diamond concessions in the country – Koidu, Boroma and Tonguma – and employs more than 900 people. Mines Minister Minkailu Mansaray has sent Octéa several letters warning it that it was in breach of its statutory obligations and that its mining licence would be cancelled.
In the continuing talks, Octéa has so far failed to convince the government it can run Koidu as a going concern or that it has a long-term mining plan in place. That’s why Freetown demanded the standstill. ‘During this period [of 90 days] they should be in a position to supply us with all the details we have requested and make all the relevant payments,’ Mansaray told us after attending the London talks. ‘We agreed that they’re going to provide us with a financial analysis that will indicate their working capital that will show us how they plan to raise revenue.’
Officials at the meetings said that both Standard Chartered Bank and BSGR were taken aback by the hard line adopted by the Sierra Leone government towards them. ‘We went very, very hard – the outcome of the meeting was not friendly because we took them to task,’ said a senior government official. ‘We found the presentation [they offered] to be very inadequate. It lacked a sound financial model, business plan and detailed analysis. It did not give a life of mine plan and there were technical gaps.’
If fully invested in and developed, the three mines could run for another 20 years or more. Yet government officials fear that in the wake of BSGR’s legal woes in neighbouring Guinea, Octéa could choose to mine only one more ‘cut’ at Koidu in the next year – generating some $40 million – and then shut down, owing tens of millions of dollars.
Such concerns were also voiced by Brett Richards, who as Chief Executive Officer of Octéa met government officials in Freetown in August to warn them of the risks facing Koidu. At the meeting, covertly recorded, he told the officials that he wanted to take off his ‘BSGR hat’, adding that: ‘I don’t like the direction the shareholder is taking the business… I don’t want to be part of that solution.’
According to Richards, who has since resigned from Octéa, the company’s solution would be to ‘run it, stop it and run away… In the absence of having investment, this business stops next July,’ he told the minister. He then explained to the government that it should retake control of the Koidu mine, and then open discussions with companies willing to make the capital investment that could extend its life by several years.
Richards said he wanted to do this with Keffi group on behalf of the government himself: ‘So I wanted to brainstorm with yourself, with Chief about trying to come up with a solution,’ Richards told Mansaray, ‘…on how we can lever this to get Keffi these assets, to keep them going concern and to somehow pry my shareholder away from this because the longer it goes on the tougher it’s going to be and the longer it goes on the more difficult it will be to attract somebody.’
Although Richards concedes that he made these remarks, he argues that they were taken out of context; Mansaray insists it was a short meeting, convened expressly at Ruchards’ request. BSGR’s Cramer appears to take a relatively benign view of Richards’ intervention and has taken no legal action against him: ‘Richards walked off the reservation,’ chuckled Cramer. ‘In fact he drove off the reservation so fast that [British racing driver] Lewis Hamilton might have been driving…’ A BSGR spokesman has since told us that the company is considering all options – including legal ones – in relations to Richard’s recorded discussions with the Sierra Leone government.
Keffi Group spelt out a remarkably similar assessment to Richards in its August letter to Sierra Leone Finance Minister Kaifala Marah: ‘As best we know, the only serious alternative to a sale to the Keffi Group is for Standard Chartered or BSGR to simply harvest the cash from Cut 3 at Koidu – which net of expenses might equate to US$20 to US$40 million. The problem with this alternative is that it would result in a dead mine at Koidu by this time next year. The local community and the national government would be left with substantial liabilities and no ongoing employment.’ Standard Chartered, BSGR’s bankers, refused to comment on these assertions.
Such risks have concentrated government minds and officials said they were not addressed in an 87-page ‘study update’ which Octéa presented at last month’s London talks. Octéa has not produced the technical details previously requested by government and offered no investment plan to develop the other concessions.
‘The bank [Standard Chartered] and the company [Octéa] accepted that they have not done their homework properly… we gave them a standstill for three months, during which period they should be in a position to supply us with the information we requested,’ said the official. ‘But from all indications… they will not be able to provide it.’
BSGR and the Sierra Leone government were to release a joint statement after November’s talks announcing the 90-day standstill but could not agree on the text or indeed, on what they had agreed on. The government had wanted to set out clearly that Octéa had promised to make all statutory payments as they fell due and pay off arrears on all taxes and tariffs owed to government within four weeks of 18 November.
Standard Chartered then proposed a line stating that it would commission an independent project manager to represent Octéa’s creditors and provide detailed reports of progress over the 90 days. Octéa favoured a blander, more upbeat version avoiding all reference to creditors and speaking about the ratification of the agreement made in London.
Beyond the 90-day standstill, there is a little on offer currently to resolve the crisis. Even if BSGR were willing again to try to sell Octéa, the company’s $150 million debt could still prove a stumbling block. Some prospective buyers have offered to buy the debt at a deep discount but Cramer says they are not living ‘in the real world’. He says that any sale would have involved the buyer taking on the entire Octéa liabilities. With neither government nor Octéa able to agree on a solution in this game of nerves, it seems both sides are looking again to Standard Chartered Bank to take the initiative.
© Africa Confidential 2015