Northam Platinum loading debt

Higher metals prices an opportunity to reduce exposure to BEE preference shares by 2025

Northam Platinum is loading debt onto its balance sheet, taking advantage of markedly higher prices for the metals it mines, to reduce its exposure to an expensive preference share falling due in May 2025.

Northam Platinum is loading debt onto its balance sheet, taking advantage of markedly higher prices for the metals it mines to reduce its exposure to an expensive preference share instrument falling due in 2025.

In an empowerment deal in 2015, Northam put in place a complicated structure of preference shares held by newly created Zambezi Platinum. Every rand it spends now buying back the preference shares reduces the break-even price on the instrument and reduces its exposure to Zambezi’s liability.

The preference shares will have an estimated liability value of R23.6bn, which will be backed by the investment Zambezi holds in Northam through its 160-million shares in the platinum miner.

Any shortfall between the investment held in Northam and the preference share liability has been guaranteed by Northam, which can elect to redeem any shortfall with its shares and/or cash in a ratio it decides is most suitable.

Northam CEO Paul Dunne and CFO Alet Coetzee hammered the point home at the company’s annual results presentation in August that the best way for the board to deliver value to shareholders is to buy as many of the shares as possible before May 2025.

One of the mechanisms in doing this is to not rely on vastly improved cash flows coming from its Zondereinde and Booysendal mines, but to raise debt in the form of JSE-listed domestic medium-term notes, keeping the net debt to earnings before interest, tax, depreciation and amortisation rate at a comfortable one times ratio.

By the end of June, Northam’s financial year end, the ratio was 1.1 times. Since then platinum prices have ticked up closer to $1,000/oz from the mid-$800 level, further improving the average price for the basket of metals Northam produces.

The higher Northam’s earnings, the more debt it can comfortably take onto its balance sheet and keep that one times ratio intact.

It is using funds from the domestic medium-term notes’ increased debt levels to hoover up the JSE-listed preference shares, having spent R1.6bn to date doing just that, Coetzee told Business Day.

By spending R1.6bn, Northam has reduced the capital and interest due in May 2025 by R3.5bn, cutting the company’s liability due at that time to R20.1bn, she said.

The buying of preference shares has lowered the breakeven price set for the redemption date to R125.87 per Northam share from the R147.43 breakeven target set at the start of the transaction.

According to the transaction terms, if Northam shares were at the break-even level in May 2025 the company would not have to pay anything.

At anything less than the break-even price per Northam share, a mechanism kicks in to determine how much it must pay. Anything over the breakeven price flows directly to the empowerment partners.

“For example, if our share price is R10 in the money or above the break-even price, then R1.6bn will go straight to our empowerment partners, which includes communities, employees and our strategic partners,” Coetzee said.

“We believe our empowerment structure is very powerful, and you can see why we are so excited about this,” she said.

Not only do institutional investors want Northam to keep a moderate amount of debt on its books but they realise buying the preference shares will reduce dilution in May 2025 and reduce cash outflow then.

On Monday, Northam said it had issued a further R500m worth of domestic mediumterm notes, bringing to R2.33bn the amount issued in the R5bn programme.

Northam is well over its capital expenditure hump, with R10.6bn spent over the past five years, which was the low point in the platinum group metals cycle.

Coetzee said that 60% of capital to build the R5.6bn highly mechanised Booysendal South mine and infrastructure had been invested by the end of the 2019 financial year.

By June 2020 this figure would be at 80%, meaning more earnings and more to spend on the preference shares, dividends and buying back ordinary shares.