Clever moves bring sig­nif­i­cant po­ten­tial

Financial Mail - Investors Monthly - - Analysis - Char­lotte Mathews

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.