Implats’ expansion outside Africa looks like a good deal

Moneyweb

Implats’ past overtures outside SA have been nothing to brag about.

Its investment in Zimbabwe a few decades ago was a source of concern whenever Implats faced its shareholders, while the small investment in an exploration project in Canada has attracted little attention from analysts and shareholders over the last 20 years or so.

At first glance, the announcement that it decided to acquire North American Palladium – one of its partners in the Sunday Lake exploration project – did not seem significant.

The smallish mine near Hudson Bay in Canada produced only 262 000 ounces of platinum group metals (PGMs) in its last financial year compared to the 1.3 million ounces that Implats produced in its financial year to June.

However, several aspects of the acquisition of North American Palladium show how important the investment is.

The first clue is in the name: it is a palladium rather than platinum mine.

Palladium accounted for 232 000 ounces of the total 262 000 ounces of PGMs it produced in the year to June.

In a video conference to mining analysts and investors around the globe, Implats chief executive Nico Miller listed the attraction of palladium as the biggest motivation for its interest in North American Palladium.

“The palladium-rich ore body at [its] Lac des Iles mine will improve Implats’ commodity mix to more closely match the current and expected demand of the different platinum group metals,” he said. “It will increase our exposure to the global palladium market and the current strong prices of palladium without increasing the total global supply of palladium.”

Market demand

Implats produces nearly twice as much platinum (1.4 million ounces) as palladium (770 000 ounces). In contrast, the market demand for palladium has increased much faster than that of platinum in recent years.

According to the authoritative Johnson Matthey, market demand for palladium has far exceeded the demand for platinum.

The demand for palladium increased 8% during 2018 to 6.9 million ounces, while the demand for platinum has remained unchanged during the last four years at 6.1 million ounces.

Balance adjustment

While the investment in North American Palladium will add only some 14% to Implats’ total PGM output, it increases the production of the more valuable palladium by more than 30%.

It seems the opportunity came at just the right time for Implats. It had a few good years and built up a bit of cash, repaid a lot of debt earlier than anticipated and accumulated a few billion rands worth of its own shares through buyback programmes.

All this will go towards settling the acquisition price of $758 million (nearly R11.4 billion).

The investment is equal to around 15% of Implats’ current market capitalisation. Overall, it looks like a good deal.

The first clue is in the name: it is a palladium rather than platinum mine.