Squeezed by the mar­kets

Im­plats’s fall­ing share price could have se­ri­ous im­pli­ca­tions for Mvela/Northam bid

Finweek English Edition - - Companies & Markets - BREN­DAN RYAN

THE COL­LAPSE of the platinum sec­tor is trig­ger­ing in­tense spec­u­la­tion over whether Im­pala Platinum’s (Im­plats) of­fer for Mve­laphanda Re­sources (Mvela) and Northam Platinum will ac­tu­ally go ahead. The crunch also poses prob­lems for Mvela chair­man Lazarus Zim, who owns a 19,3% stake in Mvela through Afripalm Re­sources.

In­dus­try sources reckon the fall in the over­all value of Im­plats’s of­fer – and in par­tic­u­lar the drop in amount payable in cash – is putting Zim un­der in­tense fi­nan­cial pres­sure. That’s flatly de­nied by Zim, who com­ments: “Noth­ing could be fur­ther from the truth. My fund­ing struc­ture is in­tact and in the money. I’m not un­der any pres­sure from my back­ers – Ned­bank Cap­i­tal.” A Ned­bank Cap­i­tal spokesman con­firmed that Zim re­mained “within his covenants”.

Zim bought into Mvela at the beginning of 2007 at a price of R29,20/share, pay­ing R1,2bn for 40m shares – equiv­a­lent to a 19,3% stake in the com­pany.

With Im­plats at R96, the pro­posed of­fer works out to R32,44 per Mvela share, while Mvela was trad­ing at R24,10 on 28 Oc­to­ber and R27/share on 29 Oc­to­ber.

So Zim is still above wa­ter – just – on the of­fer terms. How­ever, the cru­cial is­sue for him is be­lieved to be the 30% por­tion that Im­plats will pay in cash. That could be used to pay down a big chunk of the R1,2bn debt he took on to buy the shares. At R165 per Im­plats share, the 30% cash por­tion would be equiv­a­lent to R16,70 per Mvela share, or around R668m for the 40m shares Zim owns. At R96 per Im­plats share, the cash por­tion drops to R389m for Zim’s stake.

Im­plats is cur­rently car­ry­ing out a due dili­gence on Northam and has un­til endNovem­ber to de­cide whether it wants to make a for­mal of­fer.

Mvela CEO Pine Pien­aar says: “The boards of the three com­pa­nies will de­cide at the end of Novem­ber what makes sense for their share­hold­ers. It’s very dif­fi­cult to make a call un­der cur­rent mar­ket con­di­tions but I’m not neg­a­tive at this stage and I don’t think there’s any need to panic.”

Pien­aar pre­vi­ously told Fin­week (16 Oc­to­ber): “The only ex­e­cu­tion risk I can see on this deal is if share prices get driven down to a point where they’re be­low the dis­counted cash flow (DCF) val­u­a­tion of the com­pa­nies.”

Though Pien­aar wouldn’t pro­vide his DCF num­bers for Mvela and Northam, their share prices are now be­low their DCF val­u­a­tions, de­pend­ing on what platinum group met­als prices are used in the cal­cu­la­tions.

That goes to the heart of the prob­lem. Ac­cord­ing to one an­a­lyst, on cur­rent spot prices (US$800/oz platinum, $170/oz pal­la­dium and $1 590/oz rhodium) the DCF value of Northam (in­clud­ing Booy­sendal) is zero, be­cause it and most of SA’s platinum in­dus­try are los­ing money.

If you as­sume higher prices over the long term – such as platinum at around $1 500/oz – in the be­lief the cur­rent sit­u­a­tion is a short­term aber­ra­tion that must cor­rect, then you come up with a DCF val­u­a­tion for Northam with Booy­sendal at around R47/share.

The see-through value of the Im­plats of­fer is al­ready well be­low that and the price at which Northam is cur­rently trad­ing is even lower.

When Im­plats made the of­fer on 2 Oc­to­ber, its price stood at R165,75/share and the of­fer of 35 shares for ev­ery 100 Northam held worked out to R58 per Northam share.

Im­plats traded at R96 on 28 Oc­to­ber, valu­ing Northam at R33,60/share. But Northam was trad­ing on the JSE that day at just R27,50/share. From Im­plats’s per­spec­tive the is­sue is that the group will be pay­ing out bil­lions of rand for the in­dus­try’s high­est cost platinum pro­ducer for the strate­gic, long-term ben­e­fits to come from de­vel­op­ing Booy­sendal.

Some share­hold­ers might like to see that cash con­served un­der cur­rent mar­ket con­di­tions. One platinum in­dus­try ex­ec­u­tive reck­ons Im­plats’s price would im­me­di­ately jump R30 to R40/share if it walked away from the bid.

Mvela CEO. Pine Pien­aar Mvela chair­man. Lazarus Zim

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