COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 09/LM/Feb11
In the matter between:
Lexshell 826 Investments (Pty) Ltd Acquiring
Firm
And
Umcebo Mining (Pty) Ltd Target
Firms
Mopani Coal (Pty) Ltd
Panel : Yasmin Carrim (Presiding Member)
Andreas Wessels (Tribunal Member)
Medi Mokuena (Tribunal Member)
Heard on : 02 June 2011
Order issued on : 02 June 2011
Reasons issued on : 04 August 2011
Reasons for Decision
APPROVAL
1] On 02 June 2011 the Competition Tribunal (“Tribunal”) unconditionally
approved the transaction involving inter alia Lexshell 826 Investments (Pty)
Ltd, Umcebo Mining (Pty) Ltd and Mopani Coal (Pty) Ltd. The reasons for
approval of this transaction follow below.
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PARTIES TO THE TRANSACTION
2] The primary acquiring firm is Lexshell 826 Investments (Pty) Ltd (“SPV”), a
private company incorporated in terms of the company laws of South Africa.
SPV is a special purpose vehicle established for purposes of this transaction.
The shareholding in SPV is held as follows:
• Lexshell 827 Investments (Pty) Ltd (“BEECo”), an empowerment
company incorporated in accordance with the company laws of
South Africa, has a 50.1% shareholding interest in SPV;
Dremalo BV (“Dremalo”), a private company incorporated in accordance with
the company laws of the Netherlands, has a 29.441% shareholding interest in
SPV. Dremalo is a wholly-owned indirect subsidiary of Glencore International
AG (“Glencore”). Glencore inter alia has a 34.4% shareholding interest in
Xstrata Plc (“Xstrata”)1 and a 70% shareholding interest in Shanduka Coal (Pty)
Ltd (“Shanduka”); and
Moxitorque Investments (Pty) Ltd (“SmitCo”), a private company incorporated in
accordance with the company laws of South Africa, has a 20.459%
shareholding interest in SPV.
3] BEECo, Glencore and SmitCo are the other acquiring firms (see description
of transaction in paragraph 6 below).
The primary target firms in the Umcebo acquisition (see description of
transaction in paragraph 6 below) are (i) Umcebo Mining (Pty) Ltd (“Umcebo”);
and (ii) Mopani Coal (Pty) Ltd (“Mopani”). Both Umcebo and Mopani are private
companies incorporated in terms of the company laws of South Africa. The
shareholding in Umcebo is as follows: Umcebo Holdings (Pty) Ltd - 50.1%;
Mopani - 44.9%; Scaup Holdings Ltd (BVI) - 2.75%; and AMCIC-AMCI Umcebo
JV (Mauritius) Ltd - 2.25%.
The other target firms are Inyanga Trading 35 (Pty) Ltd (“Inyanga”) and Jicama
81 (Pty) Ltd (“Jicama”) (see description of transaction in paragraph 6 below).
According to the merging parties Umcebo, Inyanga and Jicama historically have
effectively operated as a group. Any reference below to Umcebo will refer
effectively operated as a group. Any reference below to Umcebo will refer
collectively to the activities and operations of these three firms.
DESCRIPTION OF THE TRANSACTION
4] The proposed transaction involves a number of composite transactions in
terms of which a number of firms which pre-merger directly or indirectly holds
shares in Umcebo have negotiated sales agreements with the acquiring
firms. The merging parties submitted that this composite transaction consists
1 According to the merging parties it is not clear whether or not Glencore has de facto control of Xstrata
through its shareholding. The Commission considered the activities of Xstrata in its competition
analysis.
2
of three inter-related and interdependent components:
i) first, SPV intends to acquire a 55.1% shareholding interest in Umcebo
and a 100% shareholding interest in Mopani. Given Mopani’s pre-
merger interest in Umcebo (see paragraph 4 above), this acquisition
therefore will effectively give SPV a 100% shareholding interest in
Umcebo (“Umcebo acquisition”);
second, Dremalo and SmitCo intend to acquire respective shareholding
interests of 29.5% and 20.5% in Inyanga, a subsidiary of Umcebo; and
third, Dremalo and SmitCo intend to acquire respective shareholding interests
of 20.65% and 14.35% in Jicama, also a subsidiary of Umcebo.
RATIONALE FOR TRANSACTION
5] For the acquiring firms the rationale is that the proposed transaction will inter
alia secure access to resources in the Mpumalanga coal fields, which enjoys
an established infrastructure for the transportation of export quality thermal
coal. They furthermore submit that the transaction raises the potential for
financial and operational synergies.
6] Umcebo submitted that this transaction will provide it with financial,
operational, balance sheet and administrative flexibility.
BACKGROUND
7] We provide some background information below regarding the Richards Bay
Coal Terminal (RBCT) in order to contextualise the activities of the merging
parties relating to the export of coal from South Africa as well as a complaint
that the Competition Commission (“Commission”) received from a black-
owned junior coal mine, Endulwini Resources Ltd, which relates to inter alia
limited access to the RBCT for the export of coal (see paragraphs 24 to 35
below).
The majority of coal exports from South Africa are shipped from the RBCT,
which is the single largest coal export terminal in the world. It opened in 1976
and has grown with several upgrades into a 24-hour operation with a design
capacity of 91 million tons of coal per annum since its “Phase V” expansion of
2010.2
capacity of 91 million tons of coal per annum since its “Phase V” expansion of
2010.2
The major international mining companies have export allocation rights in
regard to the RBCT. The major shareholders in the RBCT are Anglo Operations
Ltd, BHP Billiton Energy Coal South Africa Ltd and Extrata SA (Pty) Ltd. The
other shareholders, holding the balance of the export allocations, include
2 See www.rbct.co.za.
3
Optinum Coal Holdings (Pty) Ltd, Total Coal South Africa (Pty) Ltd, Sasol
Mining (Pty) Ltd, Kangra Coal (Pty) Ltd, Exxaro Coal (Pty) Ltd and Koornfontein
Mines (Pty) Ltd.
Recent expansions of the RBCT’s capacity have however resulted in certain
junior South African coal mining firms also obtaining export allocations. More
specifically, as stated above, the RBCT’s Phase V expansion project increased
the port’s export capacity to 91 million tonnes of coal per annum. As a result of
these expansions the following additional export allocations have been granted:
i) an allocation of four million tonnes per annum of coal export
capacity has been made to 18 BEE coal producers for a
minimum three-year period (“the Quattro Scheme”). At the end of
each year the past performance is reviewed and the next three-
year period is considered. The Quattro scheme was agreed to by
the RBCT to broaden use of the terminal by non-member, BEE
coal producers following criticism that it was restricting access to
the coal export markets. These quotas are made available on a
commercial basis without any entitlements to shareholding in the
RBCT; and
in terms of the Phase V expansion project an allocation of 19 million tonnes of
coal per annum have been made to BEE coal mining firms. This scheme is
intended to give these firms shareholding in the RBCT.
8] Current rail and loading capacity constraints however restrict the ability of
these BEE firms to make full use of their allocations at this time. South
Africa’s national utility, Transnet, provides the railway services linking the
coal mines to the port. The merging parties submitted that there at present
exists a mismatch between the capacity of the RBCT to load coal onto
vessels and the capacity of Transnet Freight Rail (TFR) to transport coal
from the coal mines to the port. They submitted that the rail capacity at
present is only approximately 63 million tonnes of coal per annum.
ACTIVITIES OF MERGING PARTIES
Acquiring group
ACTIVITIES OF MERGING PARTIES
Acquiring group
9] SPV, BEECo and SmitCo do not currently have any business operations.
Glencore is a trader in coal in South Africa and, more specifically, purchases
thermal coal from a number of South African thermal coal producers.
The other firms within the acquiring group whose activities are relevant for
purposes of the competition assessment of this transaction are Shanduka and
Xstrata. Xstrata comprises of five major businesses which are housed in
various entities, namely a coal, copper, zinc, alloys and nickel business. Of
relevance to this transaction is its coal business which is involved in the mining
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of thermal and coking coal in South Africa, Australia and Colombia as well as in
an exploration project in Canada. Shanduka, through various subsidiaries,
operates a number of coal mines. Shanduka also has a coal export allocation at
the RBCT under the Quattro allocation (see paragraph 12 above).
Target firms
10] Umcebo operates three thermal coal mines, namely Klippan, Middelkraal
and Kleinfontein as well as two stand-alone coal beneficiation plants at
Strathrae and Doornrug (a coal crushing and wash plant). All these mines
are situated in the Mpumalanga province of South Africa.
According to the merging parties’ submissions, Umcebo will have a total export
allocation of 1.5 million tonnes of coal at the RBCT once the TFR network
achieves a capacity of 91 million tonnes per annum (see paragraphs 10 to 13
above). This allocation includes a one million tonne allocation in favour of
Umcebo through the RBCT Phase V expansion projection.
COMPETITION ANALYSIS
Horizontal overlap
11] The merging parties’ activities overlap in respect of the mining and sale of
thermal coal. Thermal coal is used in power generation and also has certain
industrial uses, for example as an energy input in the cement production
process.
12] In line with previous Tribunal decisions 3 we distinguish several relevant coal
markets: first, a delineation of bituminous coal from other types of coal; and
second, a delineation between two types of bituminous coal, namely thermal
and metallurgical coal. 4 The broad bituminous thermal coal market can be
further divided into three separate relevant product markets, namely:5
(i) the export market i.e. bituminous thermal coal exported by South
African producers (mainly to the Atlantic Basin and the Pacific Rim);
(ii) the “tied” domestic market i.e. bituminous thermal coal sold to two
domestic customers namely Eskom and Sasol; and
(iii) the residual domestic market i.e. the sale of bituminous thermal coal
(iii) the residual domestic market i.e. the sale of bituminous thermal coal
to domestic companies other than Eskom and Sasol, for example
3 See the large merger involving Optimum Coal Holdings (Pty) Ltd, Optimum Koornfontein Investments
(Pty) Ltd and Main Street 431 (Pty) Ltd, Twin Cities Trading 39 (Pty) Ltd and Dunrose Trading 191 (Pty)
Ltd, case no. 86/LM/Dec09.
4 See, for example, the large merger involving Anglo South Africa Capital (Pty) Ltd and Arnot North
Mining Business and Additional Reserves, Case no. 44/LM/May05.
5 See, for example, the large merger between Lexshell 668 Investments (Pty) Ltd and Wakefield
Investments (Pty) Ltd, Case no. 82/LM/Oct06.
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cement companies and smaller coal mines requiring coal for market
blending.
13] Regarding the relevant geographic market, the Commission did not deem it
necessary to come to a definite conclusion in respect of the above-
mentioned domestic thermal coal product markets, i.e. whether they are
national or regional in geographic scope since the merging parties will
continue to face competition from significant competitors whose mines are
located within relatively close vicinity of the merging parties’ thermal coal
mines (also see paragraph 22 below). We concur with this approach of the
Commission to the delineation of the relevant geographic market.
14] With regard to market shares, the merging parties’ combined post merger
national market shares in the various relevant product markets are as
follows:
i) export market – less than 20%;
“tied” domestic market – less than 10%6; and
residual domestic market – less than 20%.
15] The competitors of the merging parties in all three relevant product markets
are large well-established companies such as Anglo Coal, Exxaro Coal and
BHP Billiton. From a potential regional geographic market perspective,
according to the Commission’s findings the proposed deal still is unlikely to
raise competition concerns since the coal mines owned by Anglo Coal,
Exxaro, BHP Billiton and Optimum Coal are located with a 50 to 80 km
radius of the merging parties’ coal mines in Mpumalanga.
Vertical assessment
16] There is a vertical relationship between the merging parties since Umcebo
supplies Glencore and Xstrata with thermal coal. The Commission however
found that given the number of other producers of thermal coal in South
Africa, including significant players such as BHP Billiton, Exxaro, Anglo Coal
and Optimum Coal, the proposed deal raises no significant input foreclosure
concerns. The Commission further found that given the relatively low
concerns. The Commission further found that given the relatively low
volumes of thermal coal purchases of Glencore and Xstrata in terms of the
6 Sasol’s coal production is excluded from this market share analysis since it uses the coal internally
within Sasol.
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overall size of the market(s) in question, the proposed transaction is unlikely
to give rise to any significant customer foreclosure concerns. We therefore
do not discuss these vertical issues any further in these reasons.
Third party complaint from Endulwini
17] The Commission received a complaint in regard to the proposed deal from
Endulwini Resources Ltd (“Endulwini”), a black-owned junior mine. 7
However, no other third party raised any concerns in regard to the proposed
merger.
Endulwini’s concerns raised with the Commission include:
i) that the proposed merger will remove an effective competitor from the
market and will also negatively impact Endulwini’s competitiveness as a
junior mine as well as that of other junior mines. Endulwini therefore was
of the view that it or one of the other junior mines should rather acquire
Umcebo or its assets;
allegations of restrictive practices under sections 4 and 5 of the Competition
Act, 1998 (Act No. 89 of 1998, as amended) (“the Act”) involving Glencore and
a number of complicit participants in various agreements. Endulwini therefore
requested the Commission to launch an investigation into various Glencore
agreements, including off-take, marketing, financing and joint venture
agreements; and
very restrictive access to the RBCT, which is problematic for junior coal miners
seeking to export their product to the international coal markets.
18] Mr S. Nodwele8 of Endulwini made further submissions in regard to its
concerns at the hearing. Its main concern related to the export of coal.
19] On the issue of access Endulwini submitted that junior coal miners producing
export coal face difficulties regarding the exportation of their coal at the
RBCT since the terminal has generally been controlled by the “ previously
white-owned” large mining entities. We were further informed that in order to
allow junior black coal miners to export their coal, the (former) Department of
allow junior black coal miners to export their coal, the (former) Department of
Minerals and Energy set up the Coal Industry Task Team (“CITT”) to oversee
the Quattro scheme.9 Endulwini submitted that its concerns specifically
relate to Glencore acquiring Umcebo’s allocation in the RBCT Quattro
7 See letter including annexures at pages 1058 to 1067 of the record.
8 The Head of Legal at Endulwini.
9 The CITT is chaired by the Department of Mineral Resources and comprises coal industry
stakeholders such as TFR, the RBCT, Transnet National Ports Authority (TNPA) and BEE junior coal
producers.
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scheme. This situation, according to Endulwini, is undesirable as the
acquisition will lead to one less black mining firm being able to export its coal
which goes against economic transformation in the country. Mr Nodwele
argued that it is incumbent on the CITT to consider the issue of a change in
ownership of RBCT allocations made specifically to emerging black coal
miners in order to enhance their share in the South African coal export
market. Mr Nodwele further submitted that Glencore could never be viewed
as an “emerging” black coal mining firm.
20] The Tribunal enquired whether there are any conditions attached to the
RBCT export allocations to BEE firms that relate to the transfer to a third
party of these allocations. Mr Nodwele stated that to its knowledge the
allocations to BEE coal miners cannot be transferred to a third party without
the consent of the CITT. Mr Nodwele in this regard stated “... that allocation
belongs to the CITT, they are the custodians of that allocation, so for you to
enter into a transaction which sees the passing of that ownership and I put
ownership in brackets because it is not ownership, you are merely—because
of your profile as a black junior coal miner you are afforded an opportunity to
pass coal through the RBCT and you just cannot simply sign it away, it is not
yours to sign away hence there is a CITT allocations committee which looks
at these types of things .” Mr Nodwele further informed us that Endulwini will
formally take up this issue with the CITT.
Merging parties’ response
21] In response to Endulwini, the merging parties submitted that this acquisition
is not intended to take out an empowerment shareholder as has been
suggested by Endulwini but merely replaces one set of empowerment
shareholders with another since the controlling shareholder in the scheme is
an empowerment shareholder. They alleged that the deal therefore is not
an empowerment shareholder. They alleged that the deal therefore is not
detrimental to the interests of empowerment. The merging parties further
alleged that the export coal market is not the only opportunity available for a
junior coal miner and suggested that a number of junior coal miners have
entered the coal markets over the last few years. In addition the merging
parties indicated that in the 2010 RBCT Phase V expansion, empowerment
companies, through a competitive bidding process, were given priority in the
allocation of export capacity so as to increase their participation in the export
market. On the issue of Glencore’s off-take agreements, the merging parties
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averred that these agreements are standard supplier/customer
arrangements which do not in any way restrict or inhibit the development of
junior coal miners.
Commission’s response
22] The Commission responded to Endulwini’s concerns in its
recommendation10 and at the hearing. In regard to the competition-related
issues the Commission concluded that the change in market structure as a
result of the transaction under consideration is not significant in any of the
affected coal markets and that it is therefore unlikely that the instant merger
would significantly alter the competitive landscape of these markets.
23] In regard to the alleged restrictive practices, the Commission found that the
off-take agreements in question are not brought to existence as a result of
this merger. The Commission further indicated that the issues raised by
Endulwini in regard to the alleged anti-competitive off-take agreements as
well as limited access to the RBCT will be highlighted to its Enforcement and
Exemptions Division. The Commission at the hearing however indicated that
it did not contact the CITT in regard to the issues raised by Endulwini.11
24] The Commission further indicated that the proposed deal does not raise any
significant public interest issues in terms of the Act.
Conclusion
25] The concerns raised by Endulwini in respect of the alleged contraventions of
sections 4 and 5 of the Act do not appear to be merger-specific, i.e. they are
not related to the instant transaction. Endulwini may consider lodging a
formal complaint with the Commission regarding these concerns in the
prescribed format.
26] We note that Endulwini contemplates taking up with the CITT the issue of the
possible transfer, following the proposed transaction, of Umcebo’s export
allocation at the RBCT to the acquiring firms (see paragraph 28 above).
10 See pages 20 and 21 of the Commission’s recommendation.
11 Transcript page 22.
9
27] In regard to the limited coal export capacity at the RBCT and access by BEE
firms thereto, we suggest that the Commission in its advocacy role should in
a broader competition context engage with the relevant Government
department and/or the CITT. The Commission may be able to advise the
relevant structures in regard to the potential effects on (future) competition in
the coal export market associated with the allocation of RBCT export
capacity quotas and relevant conditions placed on such allocations.
28] From a horizontal and vertical competition perspective we conclude that the
proposed transaction is unlikely to substantially prevent or lessen
competition in the relevant markets.
29] From a coordinated effects perspective, there is no evidence that this merger
would increase the likelihood of coordination in any of the relevant markets
or that there is existing coordination in any of these markets. We however
find that the pricing analysis performed by the Commission, which considers
only limited pricing data relating to the export and spot market coal prices of
only Umcebo and Shanduka, is too limited to come to any meaningful
conclusions in regard to potential coordinated conduct or the
closeness/effectiveness of competition between the merging parties.12
PUBLIC INTEREST
30] The merging parties submitted to the Commission that this transaction will
not have any effect on employment and that no retrenchments will result
from it. On the contrary, they submitted that the proposed transaction will
generate employment since Umcebo will have the financial and operational
support it requires to initiate the projects it intends undertaking.13
31] The Commission however received a complaint alleging that Shanduka
retrenched employees in preparation of the instant transaction. It appears
that in the last 24 months some 380 retrenchments took place within the
that in the last 24 months some 380 retrenchments took place within the
acquiring group at the Lakeside, Springlake and Leeuwfontein mines. The
12 The Commission suggested that this limited price analysis shows that the merging parties’ coal
producing firms are not effective competitors. There is however no reliable evidence to support such a
conclusion.
13 See page 9 of the record.
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Commission’s investigation however confirmed that these retrenchments
were the result of the closure of these mines which were no longer
economically viable to operate. The Commission therefore concluded that
these retrenchments are not linked to the proposed transaction and therefore
are not merger-specific. We have no reason not to accept this conclusion.
32] The proposed deal raises no other significant public interest issues.
CONCLUSION
33] We conclude that there is no evidence that the proposed transaction is likely
to result in a substantial lessening or prevention of competition in any of the
affected markets. In addition, there are no significant public interest issues
arising from this transaction. We accordingly approve the transaction
unconditionally.
04 August 2011
____________________
Andreas Wessels DATE
Yasmin Carrim and Medi Mokuena concurring
Tribunal researcher: Ipeleng Selaledi
For the merging parties: Adv D Unterhalter SC instructed by
WerksmansInc.
For the Commission: Thabelo Ravhugoni
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