The IDC navigates tricky pandemic-disrupted investment environment

The Industrial Development Corporation (IDC) is still dealing with some legacy issues, but managed to navigate the tricky Covid-19-disrupted investment environment and reached the end of its financial year on March 31, 2021, with total assets of R143.7 billion (2020: R109.6 billion).

This is a key state-owned entity, providing finance to entrepreneurs engaged in competitive industries, including black-owned and empowered companies, back industrialists, and women-owned, youth-owned and empowered enterprises.

In a press release dated September 28, the IDC announced that it had facilitated R7.4 billion worth of investments into the local economy for the financial year, comprising R6.3 billion from on-balance-sheet funding and R1.1 billion of off-balance-sheet funds managed on behalf of other government entities.

The IDC is on the path to improving its portfolio of clients. CEO Tshokolo ‘TP’ Nchocho affirmed “that while some distressed legacy investments skewed this picture, strategic interventions adopted during the financial year were bearing fruit at distressed large investments and subsidiaries”.

Operational performance

The IDC earned total revenue of R12.5 billion in 2021 (2020: R12.2 billion), earned interest income of R4.6 billion (2020: R4 billion), and paid finance costs of R3.3 billion (2020: R2.7 billion).

It made a loss of R33 million for 2021 (2020: loss of R3.8 billion), and made a comprehensive profit of R25.9 billion (2020: comprehensive loss of R35.1 billion), leading to an increase in reserves from R19.5 billion in 2020 to R45.4 billion in 2021.

The improved performance was on the back of a massive recovery in the value of the investment portfolio of R28.9 billion, with the recovery of the listed portfolio of R27.9 billion leading the way.

In 2020 the listed investment portfolio of the IDC plummeted, which resulted in a negative fair value adjustment on equity instruments of R40.2 billion.

The drop in the 2020 listed share portfolio was “exacerbated by challenges at Sasol’s Lake Charles project”.

While the IDC does not disclose the breakdown of the equity investments, nor the fair value adjustment per equity investment, it informed Moneyweb that it holds shares in “19 listed companies with significant shareholdings, by market value, being in Kumba Iron ore (12.9%), Sasol (8.2%) and BHP (1.1%)”.

“Other notable shareholdings include Hulamin Ltd (29.6%), York Timber Ltd (28.7%) and Merafe Resources Ltd (21.8%).”

The IDC further confirmed that: “The recovery in the listed share portfolio was driven by increases in the share prices of Kumba Iron Ore, BHP Group Plc and Sasol, which collectively accounted for an overall increase in share prices of R27bn in the 2021 Financial Year.”

Performance of subsidiaries

• Small Enterprise Finance Agency (Sefa) operating losses decreased to R325 million (2019/20: R429 million) due to lower impairments of R3.5 million (2019/20: R41 million) on the client book.

• Foskor incurred operating losses of R2.2 billion (2019/20: R1.6 billion) due to increased impairment on the cash-generating unit of R892 million (2019/20: R599 million). The IDC is still on the lookout for a strategic equity partner for Foskor.

• Grinding Media reported an operating profit of R62 million (2019/20: R135 million) due to a decline in sales and in gross margins due to the high cost of imported raw materials.

• Cast Products made operating losses of R251 million (2019/20: R423 million) due to increased production and improved efficiencies

Borrowings

New borrowings amounted to R9 billion for the year.

The IDC sources loan funding mainly from international development agencies, facilities from commercial banks, and bond issuances.

	2021	2020
R million
Foreign loans	7 789	10 370
Domestic loans	30 416	26 989
Third party cash balances *	4 477	3 877
	42 682	41 236

* The IDC manages cash balances on behalf of other institutions such as Sefa and the Department of Trade, Industry and Competition (dtic), which results in loans that are included in the above borrowings to the value of R5.3 million.

Current borrowings are R10 billion (2020: R11.1 billion).

Loans and advances

	2021	2020
R million
Loans and advances	39 450	41 941
Expected credit losses	-13 317	-11 473
Interest in suspense	-628	-1 369
	25 505	29 099

Interest rates range between 0% (mainly shareholder loans) and 22.85%.

Investments in associates

Investment in associates increased from R30.4 billion in 2020 to R32.3 billion in 2021. The equity method of accounting is used to calculate the investment.

Investment in material associates is shown below:

		Holding	2021	2020
		%	R’m	R’m
Eyesizwe	Mining	23	3 234	3 086
Hans Merensky	Investments – timber/manganese	30	2 406	1 693
Kalagadi Manganese	Exploration in manganese	20	4 461	3 365
Karoshoek Solar1	Solar energy	20	1 263	1 348
KaXu Solar One	Solar energy	29	1 141	1 223
Mozal SARL	Produces primary aluminium	24	3 608	4 122
Palaborwa Mining	Mining various metals	20	2 548	2 148
Scaw SA	Steel manufacturer	26	1 352	1 900
Xina Solar One	Solar energy	20	812	1 031
Other	Various		11 442	10 500
			32 267	30 416

The loans receivable of R18.4 billion (2020: R16.6 billion), accumulated equity accounted losses and impairments, and expected credit losses are included in the total exposure amount.

Increase in Kalagadi exposure

Moneyweb observed that the exposure to Kalagadi increased by nearly R1 billion, and asked the IDC if it had lent further funds to Kalagadi Manganese.

The IDC replied that it “has not disbursed additional funds to Kalagadi Manganese in the last financial year”.

It added: “The increase in exposure came about due to the claim on the mining contract guarantee, which formed part of the historical funding package approved for Kalagadi in the financial year ending 31 March 2017.”

The IDC brought an urgent application to place Kalagadi Manganese under business rescue (under case number 10228/2020), which was struck from the roll by Judge Mia in May 2020 because it wasn’t urgent. Kalagadi then brought its own application against the IDC, and the matter was heard by Judge Spilg.

Spilg ruled that the hearing of the business rescue application and the Kalagadi application will be heard at a date still to be decided.

Gauteng and KZN unrest

The National Empowerment Fund (NEF) and the IDC  approved a total of 77 applications for assistance, valued at just over R1 billion, for businesses in KwaZulu-Natal and Gauteng affected by the unrest in July 2021.

Read: Relief funding of over R1bn already approved for unrest-hit firms – Patel

Over half a billion rand (R512 million) has already been disbursed to firms affected by the unrest. The IDC noted that: “This support is critical in restoring key supply chains affected.”

The IDC will benefit from an improving economy.

When the financial statements were signed on July 29, 2021, the value of the listed shares had increased to R61.8 billion.

Listen to Fifi Peters’s interview with CEO TP Nchocho (or read the transcript here):