[Federal Register Volume 62, Number 39 (Thursday, February 27, 1997)]
[Notices]
[Pages 9006-9009]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4860]


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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22524; International Release No. 
1057; 812-10278]


Randgold and Exploration Company Limited, Inc.; Notice of 
Application

February 21, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANT: Randgold and Exploration Company Limited, Inc.

RELEVANT ACT SECTIONS: Applicant seeks an order under sections 2(b) (9) 
and 3(b) (2) of the Act, or alternatively, under section 6(c) granting 
an exemption from all provisions of the Act.

SUMMARY OF APPLICATION: Applicant seeks an order declaring that it 
controls certain companies, notwithstanding that it owns less than 25% 
of the voting securities of these companies, and declaring that 
applicant is primarily engaged in a business other than that of 
investing, reinvesting, owning, holding, or trading in securities. In 
the alternative, applicant seeks an order exempting it from all 
provisions of the Act.

FILING DATES: The application was filed on July 26, 1996, and amended 
on November 12, 1996.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on March 18, 1997, 
and should be accompanied by proof of service on the applicant, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicant, 5 Press Avenue, Johannesburg 2025, P.O. Box 82291, 
Southdale 2135, South Africa.

FOR FURTHER INFORMATION CONTACT: Mary Kay Frech, Branch Chief, at (202) 
942-0564 (Division of Investment Management, Office of Investment 
Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The application may be obtained for a fee from the SEC's 
Public Reference Branch.

Applicant's Representations

    1. Applicant, a South African corporation, is a foreign private 
issuer whose common shares are listed on the Johannesburg Stock 
Exchange. Applicant is engaged in the gold mining and exploration 
business in Africa. Applicant has a current market capitalization of 
over R985 million (US $229 million) and reported net earnings of R35 
million (US $8 million) for the last four fiscal quarters ended June 
30, 1996. Applicant, together with its direct subsidiaries, has over 
160 employees worldwide and just over 40,000 employees worldwide if 
employees of the Controlled Companies (as hereinafter defined) are 
included. Substantially all of its employees are engaged in applicant's 
business of gold mining and exploration. Applicant and its Controlled 
Companies produce more

[[Page 9007]]

than 50 metric tons (1.6 million ounces) of gold per year, making 
Randgold one of the world's top ten gold producers.
    2. Applicant has four direct subsidiaries (the ``Direct 
Subsidiaries''), each of which is engaged in the gold mining and 
exploration businesses: Randgold Resources Limited, a majority-owned 
(90%) subsidiary, TGME, majority-owned (75%) subsidiary, First 
Westgold, a fully-owned subsidiary, and Rand Mines Windhoek, a fully-
owned subsidiary. Applicant also has substantial assets (the ``Direct 
Assets'') owned directly or by a fully-owned subsidiary consisting 
primarily of mineral rights located in southern Africa. The Direct 
Subsidiaries and Direct Assets as a group account for approximately 45% 
of applicant's total assets.
    3. Applicant also has a cash position of R86 million (US $19 
million), and R123 million (US $27 million) held in short-term 
commercial instruments in South Africa, accounting for 7% and 10% of 
applicant's total assets, respectively.\1\ Applicant's short-term 
investments are comprised of short-term commercial instruments for 
which a highly liquid market exists.
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    \1\ Applicant states that such large cash and liquid investment 
positions are customary for South African gold mining companies 
because it is deemed imprudent within the industry to finance 
exploration and new mines through debt and, consequently, such 
expenditures are funded through cash or equity.
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    4. Applicant also owns minority interests in eight companies, 
either directly or through fully-owned subsidiaries, all of which are 
engaged in the gold mining business: Blyvooruitzicht (10.5% common and 
11.1% of outstanding options), D.R.D. (23.1% common and 21.6% 
preferred, giving 23% of the total voting control of D.R.D., and 16.5% 
of outstanding options), Harmony (18.1% common), E.R.P.M. (14.7% 
common), Grootvlei (19.8% common), Stilfontein (10% common), 
Buffelsfontein (6.8% common), and West Wits (3.5% common, 40.3% 
preferred, and 40.3% of the outstanding options). Through Harmony, 
applicant also owns 25% of the common stock of Unisel, and through a 
fully-owned subsidiary (Rand Mines Windhoek), owns a 10% interest in a 
joint venture named Navachab. Unisel and Navachab also are engaged in 
the gold mining business. Unisel (but not Navachab), along with the 
eight companies referred to above in which applicant owns a minority 
interest, are referred to herein as the ``Controlled Companies.'' To 
its knowledge, applicant is the largest stockholder of each of the 
Controlled Companies.\2\
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    \2\ While applicant believes it is the largest shareholder of 
each of the Controlled Companies, it cannot be certain because most 
shareholdings are held by nominees and local law does not require 
disclosure of ultimate beneficial ownership of large holdings.
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    5. Applicant has the direct or indirect power to appoint all of the 
directors of the Controlled Companies. At the instance of applicant, 
each Controlled Company has in place a board of directors made up of 
ten individuals, with each director serving a staggered three year 
term. For each Controlled Company's board, applicant selects eight 
directors, seven of whom are ``inside'' directors of applicant's board 
of directors and one of whom is an ``outside'' director of applicant's 
board of directors. Each Controlled Company also has two members of its 
own management team that sit on its board, both of whom are hired and 
selected by applicant.
    6. Applicant has entered into service agreements with each of the 
Controlled Companies, each with substantially similar terms pursuant to 
which applicant derived R26 million during the last four fiscal 
quarters (27% of total revenues). Under the agreements, applicant 
provides specialized strategic, managerial, financial, information 
systems, legal, secretarial, and human resources services to the 
Controlled Companies. Previously, such services were provided to the 
Controlled Companies under management agreements with applicant that 
required payments based upon a percentage of gold sales, capital 
expenditures, and other items regardless of the actual cost of services 
provided by applicant. The new service agreements set prices for the 
services to be rendered by applicant based upon their actual cost. 
Amounts due under the service agreements are paid in cash. Applicant 
and the Controlled Companies entered into the new arrangement in order 
to provide operational and financial flexibility to the Controlled 
Companies to the belief that this will allow each Controlled Company to 
maximize efficiency and profits rather than to reduce ultimate control 
by applicant.
    7. Dividends generally are not paid on the shares of the Controlled 
Companies. Applicant has received an aggregate of R3 million (US 
$666,000) in dividends from shares of the Controlled Companies in the 
last four fiscal quarters.
    8. Applicant also has minority interests in three additional 
companies which applicant does not control. These interests in the 
aggregate total less than 3% of applicant's total assets.

Applicant's Legal Analysis

    1. Applicant seeks an order under section 3(b)(2) of the Act 
declaring that it is primarily engaged in a business or businesses 
other than that of investing, reinvesting, owning, holding, or trading 
in securities and, therefore, is not an investment company as defined 
in the Act. Applicant also seeks an order under section 2(a)(9) 
declaring that it controls the Controlled Companies even though it owns 
less than 25% of their voting securities. In the alternative, applicant 
seeks an order under section 6(c) of the Act exempting it from all 
provisions of the Act.
    2. Under section 3(a)(3) of the Act, an issuer is an investment 
company if it ``is engaged or proposes to engage in the business of 
investing, reinvesting, owning, holding, or trading in securities, and 
owns or proposes to acquire investment securities having a value 
exceeding 40% of the value of such issuer's total assets (exclusive of 
Government securities and cash items) on an unconsolidated basis.'' 
Section 3(a) defines ``investment securities'' to include all 
securities except Government securities, securities issued by 
employees' securities companies, and securities issued by majority-
owned subsidiaries of the owner which are not investment companies. 
Applicant assumes for purposes of the application that its short-term 
investments are investment securities under section 3(a)(3) of the Act. 
Under this assumption, approximately 52% of applicant's total assets 
(exclusive of cash) are, or could be, deemed to be investment 
securities. Accordingly, applicant may be deemed to be an investment 
company within the meaning of section 3(a)(3).
    3. Section 3(b)(2) provides that, notwithstanding section 3(a)(3), 
the Commission may issue an order declaring an issuer to be primarily 
engaged in a business or businesses other than that of investing, 
reinvesting, owning, holding, or trading in securities either directly, 
through majority-owned subsidiaries, or through controlled companies 
conducting similar types of businesses. Applicant believes that it 
meets the requirements of section 3(b)(2) because it is primarily 
engaged in the business of a natural resources group focused on gold, 
through its wholly-owned or majority-owned subsidiaries, or through 
companies which it controls. Because applicant owns less than 25% of 
the voting securities of the Controlled Companies, however, a 
determination under section

[[Page 9008]]

2(a)(9) that applicant controls the Controlled Companies is a 
prerequisite to the ultimate determination of applicant's investment 
company status.
    4. Section 2(a)(9) defines ``control'' as the power to exercise a 
controlling influence over the management or policies of a company. 
That section creates a presumption that owners of 25% or less of a 
company's voting securities do not control such company. This 
presumption may be rebutted by evidence of control.
    5. Applicant argues that a finding of control under section 2(a)(9) 
is warranted for the following reasons:
    a. Applicant has complete control over the nomination process for 
each of the Controlled Companies' board of directors. Each board meets 
four times per year, and one of ``applicant's directors'' chairs all 
meetings of these boards. Decisions made by the board of directors of 
each Controlled Company generally require a majority vote.
    b. Each Controlled Company also has a monthly ``management 
meeting'' at which at least three of ``applicant's directors'' are 
present, one of whom is responsible for chairing the meeting.
    c. Applicant's control over the Controlled Companies is 
demonstrated by its practice of causing these companies to acquire 
contiguous mines and/or mineral rights to integrate with a given 
Controlled Company's operations. These acquisitions are negotiated by 
applicant on behalf of the acquiring Controlled Company and it directs 
the due diligence efforts. Applicant also negotiates and approves all 
major supply agreements for the Controlled Companies.
    d. Applicant also requires the Controlled Companies to submit 
annual strategic plans in its prescribed format for applicant's 
approval, as well as detailed monthly management reports. At least 
weekly, management of the Controlled Companies and officers of 
applicant hold discussions regarding the status of various affairs at 
the Controlled Companies and miscellaneous operational issues.
    6. Applicant states that its hands-on involvement in the affairs of 
the Controlled Companies is consistent with the background, training, 
experience and expertise of applicant's officers and directors in the 
gold, natural resources and related sectors. Applicant believes that it 
has effective control of the Controlled Companies' management, strategy 
and operations. Applicant asserts that its structure reflects, among 
other things, the manner in which South African gold mining companies 
tend to spread risk, as well as the laws and business customs of South 
Africa. Accordingly, applicant believes that it controls the Controlled 
Companies within the meaning of section 2(a)(9) of the Act.
    7. In determining whether applicant is ``primarily engaged'' in a 
non-investment company business under section 3(b)(2), the Commission 
considers the following factors: (a) the issuer's historical 
development; (b) its public representations or policy; (c) the 
activities of its officers and directors; (d) the nature of its present 
assets; and (e) the sources of its present income.\3\
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    \3\ Tonopah Mining Company of Nevada, 26 S.E.C. 426, 427 (1947).
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    a. Historical Development. Applicant is the successor to a line of 
companies that have been in existence since 1893 and that had their 
origin in the operation of gold mines. Historically, applicant managed 
its business much the same as most South African gold holding companies 
did, i.e., through detailed and extremely strict management contracts. 
Applicant terminated these agreements in favor of the less restrictive 
serviced agreement arrangement described above. Applicant believes ( 
and has already seen initial positive results) that the new arrangement 
will allow each Controlled Company to become more efficient and 
maximize its profits. Applicant asserts that today it exercises the 
same effective control over all of its constituent companies through 
representation on the Controlled Companies' boards of directors or 
cross-directorships as it has in the past. Applicant also argues that 
its relatively large holdings of short-term investment securities is a 
standard practice in the industry because it is deemed too speculative 
to take on debt to finance exploration activities. For example, the use 
of gold properties as collateral for any loan makes the value of such 
collateral dependent upon the price of gold, which in turn makes such 
loans difficult and expensive to obtain.
    b. Public Representations of Policy. Applicant states that it does 
not hold itself out as an ``investment company'' within the meaning of 
the Act, and has never been a registered investment company (or subject 
to any analogous regulatory scheme). Applicant has consistently held 
itself out as a gold mining and exploration business in all its 
communications with shareholders and the public.
    c. Activities of Officers and Directors. Applicant states that its 
management, on the whole, spends substantially all of its time actively 
involved in the gold mining and exploration business. Of applicant's 
fourteen directors, only one director, the Finance Director, spends any 
meaningful amount of time (less than 5%) monitoring applicant's 
securities holdings and cash management activities. The bulk of such 
duties consists of supervising the activities of an outside investment 
bank which has been entrusted with investing applicant's cash. Each of 
applicant's executive directors has substantial experience in 
applicant's gold mining and exploration business, rather than any 
background in investing or portfolio management. Applicant is 
represented by its directors and officers of all of the boards of 
directors of the Direct Subsidiaries and Controlled Companies. In those 
companies, applicant's directors and officers dominate management's 
strategic decision making and play a leading role in other essential 
operational functions.
    d. Nature of Assets. As of June 30, 1996, applicant had total 
assets of R1211 (US $282 million).\4\ For purposes of analysis under 
section 3(b)(2), 45% of applicant's total assets were operating assets 
attributable to its Direct Subsidiaries and Direct Assets, and 35% of 
applicant's total assets were attributed to its Controlled 
Companies.\5\
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    \4\ The methods used in the valuation of applicant's assets were 
in accordance with section 2(a)(41) under the Act.
    \5\ The remaining 20% of total assets are made up of 7% in cash 
and cash equivalents, 10% in short-term investments, and 3% in 
traditional investment securities.
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    e. Sources of Income. In applicant's four fiscal quarters ending 
June 30, 1996, applicant derived approximately 14% of its revenues and 
4% of its net income from its Direct Subsidiaries, Direct Assets, 
service agreements and other operations.\6\ Revenues from the service 
agreements alone accounted for 7.7% of its revenues and 3.6% of its net 
income over such period. In the same period, applicant derived 
approximately 68% of its revenues and 23% of its net income from 
Controlled Companies. In that same period, applicant derived 18% of its 
revenues and 69% of its net income from extraordinary items, including 
cancellation of the management agreements and the sale of shares of 
Controlled Companies.\7\ The expected effect of the cancellation of the

[[Page 9009]]

management contracts will be to reduce fees from Controlled Companies 
by approximately 56%. Applicant expects, however, a corresponding 
reduction of costs due to the restructuring that occurred. The 
immediate net effect of the change was the payment to applicant of 
termination fees under the agreements, which fees are included in 
extraordinary income as described above. While revenues from 
applicant's Direct Subsidiaries, Direct Assets, service agreements and 
other operations, and dividends from Controlled Companies' stock are a 
substantial portion of applicant's total revenue, they account for a 
significantly smaller portion of applicant's net income. This largely 
reflects (a) the strategy of applicant and its Controlled Companies to 
retain earnings for future operations and growth, rather than to 
distribute earnings to shareholders in the form of dividends, (b) the 
fact that gold sales made directly by applicant are relatively small in 
relation to applicant's total activities, which consist largely of 
exploration properties, and (c) the fact that virtually all of 
applicant's expenses relate to the activities of its Direct 
Subsidiaries and its Direct Assets.
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    \6\ All figures used in the determination of net income are 
based upon equity accounting methods pursuant to which the revenues 
and income of the Controlled Companies are included in applicant's 
revenues and income in proportion to applicant's equity interests in 
such companies.
    \7\ Applicant states that the extraordinary items described 
above were generally not present during the prior two periods ended 
June 30, 1995, and June 30, 1994, and applicant believes that during 
those periods revenues from Direct Subsidiaries, Direct Assets, 
other operations and Controlled Companies would account for the 
majority of applicant's revenues and net income.
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    8. In the alternative to exemptive relief under section 3(b)(2), 
applicant requests an order under section 6(c) exempting applicant from 
all provisions of the Act and the rules and regulations thereunder. 
Section 6(c) authorizes the Commission to issue a conditional or 
unconditional exemption from any provision of the Act or rule 
thereunder if the exemption is ``necessary or appropriate in the public 
interest'' and is ``consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of [the Act].'' 
Applicant states that it was structured for valid economic and legal 
reasons and not with the Act in mind. Consequently, applicant believes 
that it would be inappropriate and detrimental to applicant and its 
shareholders to be treated as an investment company and made subject to 
the Act. Furthermore, applicant believes that it is not the type of 
company and does not engage in the activities the Act was designed to 
regulate. Accordingly, applicant submits that the requested exemption 
is necessary and appropriate in the public interest, is consistent with 
the protection of investors, and is consistent with the purposes of the 
Act.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4860 Filed 2-26-97; 8:45 am]
BILLING CODE 8010-01-M