Squeezed by the markets
Implats’s falling share price could have serious implications for Mvela/Northam bid
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