The timing of the IDC’s squeeze on Kalagadi is a puzzle

Shorn of all the emotive language as well as arguments for special dispensations for a women-owned company and a long and difficult history, the bottom line in the Kalagadi Manganese vs the Industrial Development Corporation (IDC) case is a simple financial fact.

That fact is fundamental to the story: Kalagadi cannot at this stage repay its debt, which stands at about R7.1bn.

Reading the court papers filed on an urgent basis by the IDC, which sought to have Kalagadi put into business rescue, and those from Kalagadi in opposing the move — and then those in its own application to compel the lender to consider its restructuring plans and debt repayment plan — it’s crystal clear that something has gone very badly wrong.

Stripped of the vitriol and acres of arguments and excuses in the voluminous papers, the fundamental point is that Kalagadi could not make the March payment of R241m to the IDC and African Development Bank, which have exposure of R3bn each to the miner.

In a letter to its third lender, Absa, which has R900m exposure to the miner, Kalagadi said in March that it would only be in a position to start debt repayments in two years.

While Kalagadi argues it has a handle on short-term payments to employees, its contract miner and suppliers, it is, by its own admission, unable to meet its debt repayment obligations.

Kalagadi wants its debt restructured as it plots a move away from a contractor mining model to an in-house model. Properly done, this has been a boon for mining companies, stripping out a layer of costs to a third party and allowing mining companies to have tighter control of their own future.

The IDC, however, is not convinced that Kalagadi can do it, based on the documents lodged in court.

Kalagadi has called on the expertise of mining consultants and secured the part-time services of Graham Briggs, the former CEO of Harmony Gold, to bolster its arguments.

Kalagadi executive chair Daphne Mashile-Nkosi, a single-minded, determined leader, has no doubts that inhouse mining is the answer, having placed the blame for the dire financial circumstances squarely on contract miner Murray & Roberts Cementation (MRC).

MRC in turn cites a poorly designed and incomplete mine in the Northern Cape when it arrived on site, requiring it to not only do what it was contracted to do but also complete the infrastructure. That meant it could not meet the production targets Kalagadi had in mind to generate the revenue to repay debt.

In an interview with Business Day, Mashile-Nkosi drew heavily on the history of the IDC’s support for the project and the relationship that was forged with Kalagadi during the difficult times with then 50% shareholder ArcelorMittal, the global steelmaker.

She also hammered home that Kalagadi is a business owned by black women and should be granted some leeway by the IDC as a BEE vehicle that fits the lender’s mandate for development and racial transformation of the economy.

Can it be that the race and gender of those funded by the IDC makes much difference when it comes to handling nonpayment of debt and demanding such vast amounts of money are repaid?

In the IDC’s papers that argument is shot down with the tersely worded point that the lender was merely applying basic business principles after a long history of Kalagadi deferring and restructuring its debt instead of paying it back.

Possibly the most emotive part of Mashile-Nkosi’s defence is her claim that the IDC wishes to effectively depose her from the position of executive chair, making her a non-executive chair, and potentially to remove Kalagadi CEO Thulo Malumise.

It’s clearly stated in an IDC letter from September 2019 and contained in the annexures of Kalagadi’s affidavit that one of the conditions for it to extend its guarantee to underpin the Absa loan was that it wanted Mashile-Nkosi to give up control of Kalagadi.

In listed mining companies, there is often a switch in CEOs and executive leadership when there’s a transition from the exploration and development of a mine to running a steady-state operation. It’s a different skill set.

Mashile-Nkosi could argue that Kalagadi’s mine is still in development because it hasn’t come close to hitting its production targets and that she must retain her driving management style if there’ sa switch to owner mining. She says she’s just raised nearly R190m to inject into Kalagadi, giving it the cash to pay MRC and other operational expenses, keeping the mine in production and making money.

Again, it’s clear that the IDC sees her as an obstacle to fixing the mine and getting solid cash flows to repay its huge debts. Having spent more than a decade in turning an empty bit of land into a producing mine, Mashile-Nkosi might contend she knows this asset well and is best placed to steer it to financial safety.

Like any court case, there are two sides arguing their corner and the truth is somewhere in between. This promises to be a humdinger of a court case. It will be interesting to see if the IDC unveils all its rationale to extend this amount of debt to Kalagadi and, to date, its willingness to accommodate the miner to the extent it has over recent years.

If hard-nosed “business principles” are now being cited as the reason for playing tough with Kalagadi, why not sooner? Why now? Why the urgency? This inability to make the first instalment on debt repayments has been coming for a while.

The IDC, with its 20% stake in Kalagadi and two members on the board, would have had full insight into the financial meltdown in the company and its operational problems.

As Mashile-Nkosi so plaintively said in the interview: “I don’t understand it.”