07 Apr 2006
About R500 million has gone missing from JCI Limited. This is the news from CEO Peter Gray who today (Friday, 07 April 2006) announced the interim results of a six month forensic investigation at the company.
Gray said that a “sustained and comprehensive failure and manipulation of the company’s internal administrative, financial and management control over many years” had concealed a large number of suspect transactions.
However, the major misappropriations included R266 million in JCI shares issued for worthless transactions, payments of some R200 million to former directors and officers, and R40 million of misappropriated WAL shares belonging to JCI.
The group’s “token treasury”, Consolidated Mining Management Services (CMMS) had processed cash and shares worth almost R3 billion in the three and a half years to September 2005. Most of the revenue came from share sale transactions, some of which were illegitimate, and a significant portion of the proceeds were misspent or misappropriated.
Almost R600 million was, however, used legitimately to fund the JCI’s investment in Western Areas that, in turn, was faced with major development costs of the South Deep mine. Randgold & Exploration (R&E) received R409 million, primarily to fund Western Areas shares bought from Anglo American.
Peter Gray, who was appointed to take over as CEO from the late Brett Kebble at JCI in August last year, said that the “sheer audacity and scope of the fraud at JCI was breathtaking”.
“In fact, hundreds of millions of rands passed through CMMS, including funding for numerous suspect transactions for the benefit of certain directors and a number of related parties,” said Gray. Claims were being formulated against the estate of Brett Kebble and others who had benefited from the misappropriation of assets.
He was commenting following the release of the results of a forensic audit into the affairs of JCI, the restated provisional results for the financial year ended March 2004, the long delayed provisional results for the financial year ended March 2005 and the provisional results for the six months ended September 2005. JCI is currently suspended from the JSE Limited for failing to report the 2005 results.
Gray said that because of reputational problems, the company had difficulty raising debt-finance from financial institutions. In addition, JCI had no cash generating assets. This prompted the former directors to enter into complex financing structures using the assets of both JCI and R&E as collateral. When all else failed, liquid assets were sold without shareholder approval.
“The assets of JCI and related companies were managed in a most cavalier fashion. Almost 600 million JCI ordinary shares were issued for transactions that were without substance. These transactions were often for the benefit of certain directors or third parties. There was an orchestrated campaign of deceit but it was not sustainable and eventually the whole house of cards collapsed.”
Turning to the now infamous “Bookmark” transaction, in which Bookmark was purported to be holding millions of Randgold Resources Limited shares on behalf of JCI and Randgold & Exploration as part of a scrip lending arrangement, Gray said it was a “phantom transaction” created long after the sale of the RRL shares in an attempt to mislead auditors and shareholders.
A forensic report by KPMG Forensics shows that between 2002 and 2005, the previous JCI directors and “related parties” benefited directly and indirectly to the tune of more than R200 million.
“These arose from various transactions conducted through the company that were either irregular or not for fair value,” said Gray.
Almost R60 million had been wasted on expenses related to a legal dispute between Brett Kebble and Mark Wellesley-Wood of Durban Roodepoort Deep (now DRDGold). The company still had to pay a R32,5 million settlement.
He said that while the current JCI directors had not admitted a claim of some R1,1 billion by R&E, they had agreed to a meditation process by a specialist panel to avoid a lengthy and costly court action. Should the recommendations of the mediators not be acceptable to shareholders, the matter would be escalated to arbitration.
Even if JCI were to settle the R&E claim, JCI would have net assets worth almost R1 billion.
Noting that JCI had recently acquired a 59% interest in Matodzi Resources through conversion of its preference shares into ordinary shares, Gray said JCI’s major assets were an effective 52,7% interest in the Letseng Diamond Mine, for which an offer of some R950 million had been received, and 38,3 million WAL shares currently valued at more than R1,7 billion.
Gray reported that JCI’s R120 million property portfolio had already been sold and the proceeds would be used to reduce the outstanding balance of R387 million owed to Investec, the bank that provided a financial million rescue package. A further R200 million of other non-core assets were currently being sold to further reduce the debt.
He was sanguine about the R360 million “profit share” for Investec: “It should be remembered that JCI was on the brink of collapse when they stepped in. There has been a massive turn around in the net asset value and I don’t think we should begrudge Investec their share of the upside.”
The company’s portfolio of mineral rights were shown in the accounts at only nominal value, even though conversion applications had already been submitted to the Department of Minerals and Energy and substantial value could be realised.
The unreviewed provisional results for the financial years ended March 2004 and 2005 and for the six months ended September 2005 would now be subject to audit.
“We will only be in a position to publish an annual report once the administration and financial systems have been fully restored. This is a major task because of all the underlying subsidiaries and shelf companies.”
Turning to the future of the group, he said the outcome of the independent mediation process between JCI and R&E would play a key role.
“In the final analysis the board will make recommendations and the shareholders will make decisions but my personal view is that it would make little sense to have three listed companies where their assets overlap to this extent.”
Speaking on the governance controversy regarding the appointment of himself and financial director, Chris Lamprecht, to the boards of JCI and R&E, Gray said: “The circumstances of our appointment were not normal. The companies were on the point of collapse and we were asked by the major independent shareholders in both companies to help out. I strongly doubt that this mess would have been sorted out as quickly had we not had insight into the affairs of both companies.”
Gray said the overlapping directorships would continue to benefit shareholders while the mediation process was under way.
“Should, however, the companies get into a dispute or go to litigation, Chris and I would be happy to stand down from both boards to avoid any conflict of interest.”
He said that JCI and R&E shareholders would be given the opportunity to vote on the actions of the respective boards at general meetings to be held in due course.
Media statement issued on behalf of JCI Limited by Brian Gibson Issue Management. Contact Brian Gibson (011 880 1510 or 083 253 5988)
About JCI Limited
JCI, formerly Consolidated African Mines Limited, is a mining investment company. Its principal investments are a 24.5% interest in Western Areas Limited (“WAL”), a gold mining company listed on the JSE that holds 50% of one of the largest unexploited gold reserves in the world; an effective interest of 53% in Letseng Diamond (Proprietary) Limited in Lesotho; a property portfolio with an interest in Boschendal (Proprietary) Limited; preference shares in Jaganda (Proprietary) Limited (an indirect investmen