Monday, March 1, 2021

Boseto Mine engaged in ‘creative accounting’ ÔÇô Gaolathe

Parliament passed up an opportunity to get free education from one of its own about a trick used by international businessmen who are tearing up Botswana for minerals.

The topic being debated was the recent spate of retrenchments in the mining sector, one being that of Discovery Metals Boseto Copper Mine in Toteng where 400 workers lost their jobs. Taking the floor, the Gaborone Bonnington South MP, Ndaba Gaolathe, told the house that he happened to have had the privilege to go through the financial accounts of Boseto “and I can assure you I am not all that bad when it comes to studying very analytically the financials of any company.” A former CEO at Bifm Private Equity Managers, Gaolathe holds an MBA in Finance from the Wharton School of the University of Pennsylvania and well as a BA in Economics and BS in Mathematics from the George Washington University, both in the United States.┬á

┬áWhat he made of Boseto’s financials was that while they gave the impression that the mine was doing poorly, the opposite was actually the case. He attributed this to “creative accounting” which masked the fact that Boseto has a lot of potential.┬á

“It is a type of mine that I would buy if I was a businessman. I would buy and I would do well. What I am trying to suggest to you Honourable Minister is that you are going to be facing over the next few years an influx of people coming into this country not so much to mine for the long term, but an influx of people coming into this country to do what is called mining arbitrage, people coming in knowing that ÔÇô”

He didn’t go far because the Speaker cut him off at this point. Parliament has some quirky rules: on rising, Gaolathe had indicated that he wanted to ask a question and even though he shared knowledge that one too many in the house don’t have, the Speaker determined that he was debating and wouldn’t let him go farther. Thankfully though, the MP accepted Sunday Standard’s invitation to complete his thoughts and elaborate on his point about mining arbitrage.

The MP defines mining arbitrage as a situation when people come into a country knowing that they have no intention to develop mines. Instead, they want to make a “quick, once-off profit” by establishing a mining business and selling it when conditions are favourable for them to do so. He says that he developed interest in Boseto’s financials a few weeks ago when he learnt of the company’s intention to retrench its workers. He wanted to understand the circumstances of the mining company and sought to develop an insight as to what could be done to avert the bleak possibility of mine workers losing their jobs. In expounding on the modus operandi of mining arbitrage, Gaolathe stated the following: “Companies adopt accounting practices to achieve different objectives. In some cases, companies seek to overstate their financial position in order to be in a state to find new investors more easily or secure additional funding with little effort. At times, companies may creatively account to minimise tax obligations or even to minimise potential demands from internal stakeholders such as workers or minority shareholders.”

What is even more worrisome, the MP added, is that there is a possibility that some other companies (other than Boseto) may have seized “the opportunity to start and exit almost immediately once it is possible to sell the company at a much higher price than set-up costs.”

“Yes, it is conceivable that some mining companies are in it for the arbitrage,” Gaolathe says.

Mining arbitrage is something that Botswana may have to live with for a long time to come. The MP says that is not possible to completely eliminate arbitrage, partly because the practice is not always harmful.

“There are people or entities that are exceptional at taking risk and starting up new companies – in this case mining companies – from scratch, and they do it well. However, such companies or people may be poor at growing and sustaining already operational companies – or mines. So there are situations where companies that are exceptional establish new mines from scratch, hand them over to another company (at a profit), which company may never have been able to start a new mine, but is quite good at managing an existing one.┬á Every economy needs both types of companies to generate new opportunities but also need them to grow existing sectors.┬á Where such start-up specialist companies are able to initiate such a mine or venture and sell it without compromising the interests of other stakeholders such as workers and the communities where they are mining, then this could be a potentially progressive scenario as well,” Gaolathe says.

However, arbitrage is harmful when it is pursued in excess and at the expense of stakeholders such as employees. 

“It is also harmful if it compromises the potential for investors to pursue intermediate- to long-term mining activity in which there is a wider range of benefits including the up-skilling of workers, transfer of skills as well as enhancement of high-paying employment opportunities, higher living standards for the community and other socio-economic benefits,” the MP says.

From where he stands, it is hard to say whether the government has the expertise to detect harmful arbitrage.

“What is certain is that the current governance system for the mining sector or mining regulation is not configured to detect such fraud even if the expertise was there, nor is there is any orientation or inclination in government to do so,” the MP says.

According to the Minister of Minerals, Energy and Water Resources, Kitso Mokaila, government’s remedial action to this problem will be to take shareholding in viable mining projects ÔÇô which the Minerals Act provides for.

“This is exactly why we have set up the Mineral Development Company of Botswana; so that we can acquire shares into every mine that we find viable to go into, because you want to have your own people inside … That is why we have set up the Mineral Development Company … to be our inside people,” Mokaila said.

Dismissing the idea that there is any “laxity in the law”, the minister said that Botswana’s mining laws are “probably the best in the world.”

┬á“I think if you go and get Frazer Institute who assess countries in terms of laws and regulation, Botswana is in the top 10, ranking in certain instances in the top three, in terms of regulation. So from that point of view, I think we have done exceptionally well. But business entities are privately owned really and I think in a free market economy as we are, and you are looking at a business there and how they do things. If you are saying that we should then make it our business to go into the businesses, then I am not sure if we would be in the right environment for the investment. Yes there must be checks and balances in everything we do to ensure that we are not ripped off,” he said.

Mokaila told parliament that there investors who are interested in buying Boseto and that he is confident that progress will be made.

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