S. African rival to buy North American Palladium for about $1B.

$1-billion deal for North American Palladium

TORONTO • North American Palladium on Monday presented shareholders with a $1 billion buyout proposal from a larger South African rival just as its namesake metal touches record high prices.

Under the deal, Johannesburg-based Impala Platinum Holdings Ltd. will pay private equity firm Brookfield Business Partners $570 million for its 81 per cent stake in the company, or $16 per share.

Meanwhile, it is offering $19.74 per share to minority shareholders of Toronto-based North American Palladium, which the company called a 15 per cent premium on the 30-day weighted average price, but was exactly the price the stock closed at on Friday.

North American Palladium’s main asset is an underground palladium mine in northwestern Ontario and it has been riding a wave of investor excitement around the metal, which is used in catalytic convertors to control vehicle emissions. Even as global auto sales slide, a perceived shift toward tighter emission standards helped palladium prices reach a record US$1,600 per ounce in September — even more expensive than gold.

“There is a fundamental shift in emission standards and emission testing around the world,” Jim Gallagher, chief executive of North American Palladium said last month in a presentation at the Denver Gold Forum. “And it’s creating a step change in consumption of Palladium for catalytic converters.”

He estimated auto sales in China dropped by as much as 10 per cent, but said some automobiles now use 30 per cent more palladium in their catalytic converters to meet new emissions testing standards. The changes have made platinum, once considered a substitute, less viable, Gallagher said.

The upbeat tone of his talk provided a marked change from the past decade when he often talked about “turnaround” plans — its net income only turned positive in 2017 when it posted $36 million for the year.

Through the first half of 2019, the company had $91 million in free cash flows and attracted attention with aggressive returns to shareholders: In March, it introduced a three cent quarterly dividend, which in June was increased to 14 cents and later a special 35 cent dividend was added.

“When I got on the plane here in Toronto, as we’re coming down here, I met an acquaintance of mine, CEO of a gold mine and asked me Jimmy, what the hell are you doing going to a gold conference?” Gallagher recounted at the Denver Gold Forum in September. “I said, we’re going to try and teach the gold miners how to give money back to shareholders.”

According to the stock exchange operator TMX Group Ltd., the company ranked 18th on the TSX in its dividend-adjusted share price appreciation during the past three years, rising from $4.80 in 2016 to $17.80 as of Oct. 1. The share price was up a single cent to close at $19.74 on Monday.

Dave Stewart, an analyst at GMP Securities, wrote that the company was being acquired at a “steep discount” but it is likely a done deal given that Brookfield owns 81 per cent of the stock and only two-thirds of shareholders must approve the purchase.

Stewart calculated the offer implies a 15-per-cent discount to the actual value of North American Palladium.

“Our disappointment stems not only from the implied 15-per-cent discount but also from the timing,” he wrote on Monday, adding that he expected North American Palladium shares to appreciate more as production ramped up during the next year.

Despite a $24.4-million break fee, which rises to $37.7 million after 30 days, he wrote that a superior bid is still possible.

Impala, known as Implats, operates five mines with main operations in South Africa and Zimbabwe. In an investor call on Monday about the proposed buyout, it said in an accompanying presentation that palladium prices should rise further as strains on the current supply worsen.

The combined company would control 13 per cent of global palladium supply, with around 235, 000 ounces per year coming from North American Palladium’s Lac des Iles mine outside Thunder Bay, Ont.

It plans to finance the buy out with a $US350-million bridge loan from JPMorgan, plus cash on hand and expected revenue, and said it should close by late December or early January.

Johann Steyn, an analyst with Citi Velocity, expressed some skepticism, calling it “quite the bet” that a less expensive substitution for palladium would not be discovered, but Implats chief executive Nico Mueller brushed it aside saying that his company had studied the matter.