Clever moves bring significant potential
Sibanye Gold and Northam have made very different acquisitions of platinum group metals (PGM) assets in North America to expand and diversify their businesses amid an extended downturn in platinum prices.
Sibanye paid US$2.2bn, financed by debt and an equity issue, to buy the Stillwater PGM mines and projects. Northam is paying $10.7m in cash for the premises and recycling assets of A-1 Specialized Services, a Pennsylvania-
based PGM recycler that collapsed after an extended dispute over a $201m payment due to Impala Platinum.
The price difference reflects the fact that as an underground miner, Stillwater has a great deal more infrastructure than A-1 and that profit margins on mining are considerably higher than they are for recycling. Stillwater produced more than 500,000 oz of PGMs last year from its two mines in Montana, and also has growth projects.
Northam is making a lowcost entry into a market with significant potential. Johnson Matthey forecasts that the North American PGM recycling market will grow to 2.4m oz by 2024 from autocatalyst recycling alone. There are now four major recyclers, and Northam CEO Paul Dunne believes there is room for a fifth.
He says getting a foothold in North America is not only about entering the recycling business but also because it will bring Northam closer to the automotive manufacturers.
The market favours Northam’s shares over Sibanye Gold’s at this stage. Northam’s shares have added 10% in a weak market to R46 over the past year while Sibanye’s more than halved to R17 from R43. Among 14 analysts surveyed by Bloomberg, eight rate Northam shares a “buy”, with a target price of about R46.
The A1 deal is one of several canny acquisitions that Northam has made in the past two years, on top of a significant capital expenditure programme at its Booysendal and Zondereinde mines.
Neill Young, a fund manager at Coronation Fund Managers, says Northam is the firm’s biggest holding in the platinum sector. Coronation invests with a long-term horizon and is prepared to be patient.
The investment case for Northam is that it has a good deep-level asset in Zondereinde that is high cost, but comes with high revenues due to the good grades it mines; it is growing low-cost mechanised production at Booysendal, has a strong balance sheet and has been proactive in opportunistically consolidating assets in the sector at a point which Coronation thinks is close to the bottom. Credit must go to Dunne and his team for this. The A1 transaction is another example of an opportunistic purchase of assets being bought out of a liquidation, Young says.
Platinum miners extract ore which is a mix of different PGM elements, mainly platinum, palladium, chrome and gold. While platinum prices have fallen from $1,720/oz in late 2012 and shed 5% this year alone to a current level of $939/oz, palladium has risen from $657/oz to $889/oz in the same period, with a 30% surge this year. Chrome prices doubled last year.
The outlook for prices is mixed. Platinum prices have been hit again by recent moves by European politicians to impose future bans on internal combustion engines. Advances in both platinum and palladium may be curbed by dollar strength, Heraeus Precious Metals says in its mid-July market report.
Young says recent financial results from companies such as Anglo American Platinum and Royal Bafokeng Platinum show miners are still under pressure because platinum remains a significant part of their basket and the rand has maintained strength against the dollar. More than half of the industry is cash-flow negative.
Northam’s Zondereinde mine will be cash-flow negative at current prices without chrome, but with chrome revenues will probably be cashflow positive. Its Booysendal will be cash-flow positive at current prices, but Northam will continue to spend capex on ramping up new modules, Young says.