The mining sector has been at the forefront of the four key economic policy priorities of the ANC government: black economic empowerment (BEE); adding value to SA's wealth of resources; development of small and medium-sized enterprises (SMEs); and business expansion into Africa.
Throughout its history, the Industrial Development Corporation (IDC) has always tailored its investment strategies to back state policy priorities. For most of the 1960s, 1970s and 1980s, that meant supporting government's industrialisation strategies in rural areas. The impact has been significant; by backing ventures such as Sasol 2 and 3 and Alusaf, towns like Secunda and Richards Bay have grown into large industrial centres.
Over the past few years the emphasis has changed and with it the strategies of the IDC's mining & resources unit. In SA, government has enacted key policy changes in support of BEE through the mining charter and the broad-based BEE Act. It has also made the beneficiation of raw materials a priority through a range of new and proposed legislation.
"The priority for us has been to first and foremost address the needs of the SA economy," says Abel Malinga, head of the mining & beneficiation unit.
During the past five years, the unit has facilitated investments of more than R3bn in SA alone. The success of these investments is not only measured in terms of financial viability but also what the corporation labels as developmental returns. This encompasses job creation, empowerment, rural development, and other criteria.
The IDC has over the years ventured into geographic regions or backed technologies which private-sector funders have deemed too risky: Sasol's fuel-from-coal technology is a historic example. More recently, the IDC's backing of BHP Billiton's Mozal aluminium smelter in Maputo has spurred economic development in Mozambique.
On the technology front, says Malinga, the group is backing pebble bed modular reactor technology as a future energy source, and funding a torbanite project that could lead to methane gas being developed using coal resources.
"Banks would charge a significant risk premium. Our mandate in funding new technologies makes us a more likely start-up partner for firms in greenfield projects," Malinga says.
He says the unit's evaluation team is one of the strongest in the country, consisting of 17 dealmakers, including geologists, engineers, chartered accountants and economists. "We have a strong deal flow and our investment approvals are consistently in excess of R500m," he adds. In the 2005/2006 financial year, he expects total funding of R700m to be approved, up from R530m in financial 2004/2005. Then more than 9 000 direct jobs were created, a figure which could rise to 10 000 this financial year.
The job spin-off from investments will inevitably rise as the IDC devotes more resources to supporting SMEs and BEE companies. Every IDC-funded project is evaluated based on the need to boost SMEs and BEE entrepreneurs.
The focus areas have been jewellery manufacturing and small-scale mining. "The main objective of these focus areas is to promote jobs and empowerment by encouraging investment in downstream beneficiation and supporting the implementation of the mining charter," says Malinga.
Jewellery has been an IDC focus since 2000, when the unit took over a portfolio of R137m invested in 15 SME mining and jewellery businesses. Since then the exposure has grown to more than R2,5bn. New funding for SME ventures is rising as well. In the 2004/2005 financial year the IDC approved R800m in new funds, creating about 19 400 new jobs. Malinga forecasts that, in the current year, approvals will be R1,1bn, with a large amount being awarded to BEE businesses.
"Though SA is the leading miner of gold, platinum and diamonds, we have added virtually no value to these precious metals. But thanks to new beneficiation policies and legislation that offer the local jewellery industry first rights to quality gems from SA mines, the industry is ready for a major lift-off," says Malinga.
Turning to entrepreneurial mining, Malinga says government's "use-it or lose-it" minerals policy has facilitated greater participation by small miners in the industry. "Now there is access to land which the big mining houses find unviable to exploit. They are being encouraged to sell to BEE firms."
Total funding for these projects is still small, but the corporation is a large backer of the New Africa Mining Fund, which was established two years ago to support SA's junior miners. The IDC's investment is R120m, about a quarter of the fund's total capital base. It has investments in a range of smaller mining ventures, such as Namakwa Diamond and the Somkele anthracite project.
New investments in larger mining and resources projects in SA have been limited - with the exception of BEE ventures - though the dividend and interest flows from established projects such as Mozal, Sasol and BHP Billiton enable the IDC to invest substantial funds in new ventures. These investments provide the cash flow that enables the IDC to fulfil its wider developmental mandate.
"We will only exit these crown jewels' if we believe we can get better returns somewhere else. There is a need to have a strong balanced portfolio and projects like Mozal that deliver good income flows are crucial," he says.
The composition of the IDC's SA mining and resources portfolio could change significantly if Canadian group Alcan gives the go-ahead to the proposed Coega aluminium smelter near Port Elizabeth. A decision by the Alcan board is expected over the next few months and is largely dependent on the provision of cheap and reliable power.
The IDC has been intimately involved in the feasibility studies over the past four years and is keen to take up an equity stake of up to 15%. It could also provide loan funding. "We are the frontrunners to partner Alcan because we believe the developmental benefits of this project to the Eastern Cape will be significant," says Malinga.
Over the past two years the IDC has increasingly raised its exposure to large BEE deals, a list headed by the backing of the Incwala group in 2004 when it acquired 18% of Lonplats, the world's third-largest platinum producer. It also supported the Savannah Consortium in buying a stake in Aquarius Platinum.
Its first BEE deal was backing Mvelaphanda's initial 15% acquisition of Gold Fields, but the IDC has since changed its approach and has shied away from supporting BEE ventures that merely seek equity investment. "For us it is crucial that BEE results in real empowerment - that is, the BEE partners must be able to influence the strategy of a company," says Malinga.
Malinga wants to adopt a similar approach in the restructuring of Kumba Resources, that will lead to two separately listed mining groups - one focused on iron ore and the other on coal mining - in each of which the IDC will have a 15% stake.
In the rest of Africa, the IDC's strategies are slightly different to those in SA.
"In SA we have a well-developed mining industry and our focus here is to add value through beneficiation and other projects. In the remainder of Africa, on the other hand, primary mining projects often lack private-sector support and we believe we can play a role in facilitating it," Malinga says.
A focus of the IDC's African foray is ensuring that the ventures source capital goods and services mainly from SA.
"Credit facilities to buyers of SA goods and services facilitate the growing participation of SA industry in continental projects," says Malinga. Over the past five years the IDC has authorised more than US$600m in export credit funding in support of SA exports.
Of this, more than $380m went to the IDC's most successful venture in Africa to date, the Mozal aluminium smelter in Maputo, in which the IDC has 24%. Mozal has not only yielded significant dividend flows but also major development benefits. It is the largest private project investment ever made in the country and created more than 5 000 jobs during the construction phase, 1 200 permanent jobs at the smelter and 2 600 jobs in support industries.
Mozal provided a power boost to the Mozambi can economy by developing its industrial base and enhancing its export potential. More than $800m in foreign exchange is flowing into the country.
Malinga says the IDC will back the expansion of Mozal should BHP Billiton decide to go ahead with the project.
Other projects in Africa include the Chibuluma South copper mine in Zambia, which was successfully commissioned last year. A number of other projects in Africa are at the prefeasibility or feasibility stage:
- The Corridor Sands heavy mineral sands project in southern Mozambique. The IDC has a 10% equity option in the project, which is owned by BHP Billiton, and, if given the go-ahead, will require a total investment of about $700m. The project will include the mining of minerals such as ilmenite, rutile and zircon and a beneficiation complex. The products would be transported by rail to Matola harbour in Maputo.
- Another mineral sands project is the Moma titanium venture in northern Mozambique, where construction should be completed this year. The IDC and Absa Bank are providing loan funding to the project, which is driven by Kenmare Resources and will produce 650 000t of titanium minerals a year.
- The $400m Kolwezi copper and cobalt tailings project in the southern DRC, in which the IDC has secured an option to acquire 10% equity. The venture, owned by Canada's Adastra, ranks among the world's largest resources of primary cobalt and is a substantial source of copper. Malinga says the IDC involvement is geared to ensuring that almost 80% of all goods and services at Kolwezi are sourced from SA suppliers.
The IDC stresses that its involvement in mining and resource projects ranges from the prefeasibility to the implementation stage. "We provide risk capital for feasibility studies as well as competitive debt and project funding during implementation," says Malinga. In larger projects, equity funding is often a key part of its package, though the group seldom takes more than a 25% equity exposure in a venture.
Malinga explains that once funding has been approved, the IDC appoints representatives to the project steering and finance committees during the construction period. Subsequently, the IDC will often appoint nonexecutive directors to the board of a project.
He says that a resources project is supported only if it meets sound environmental criteria.
