Implats: not just an also-ran
Amplats and Sibanye have been the PGM poster children of late. But it may be time to give Implats another look
ý Of all the SA mining companies grappling with the Covid-19 crisis, Impala Platinum (Implats) has had one of the more interesting rides.
It started with the bizarre arrest of its Rustenburg CEO, Mark Munroe, just a few weeks into lockdown when, in mid-april, he called for miners to return to work.
A month later, a cluster of Covid-19 infections was detected at Impala’s Marula operations in Limpopo, prompting the group to shut down its operations.
“Notwithstanding some of the negative publicity that occurred, in reality the company has been credited for doing outstanding work,” says Implats CEO Nico Muller.
Of Impala’s 58,500 employees, about 80% have now returned to work. Meanwhile, Implats has conducted over 1.6-million screening tests, and performed 4,430 Covid tests – that’s a ratio of 9.48% of working employees and much higher than SA’S testing rate of 2.64%.
That has come at a cost: R188m to date, on top of about six weeks of production lost.
“That probably equates to 350,000 ounces, and at the Implats basket price that we get today, which is probably R28,000, that equates to R9.5bn,” says Muller.
But Implats’s geographic diversity has helped: the Zimplats operations in Zimbabwe, which contribute a third to Impala’s overall production, have continued to run at full production.
So, in the main, has its Lac des Iles mine in Canada, though a decision was taken to close it after a “mini-outbreak” — of 25 confirmed cases and one death — in April.
Luckily, Implats had built up excess inventory of more than 300,000 ounces, which it processed through its smelters and refineries.
Ironically, the Covid drama is perhaps the only buzz that Implats has had for some time.
Market observers say there’s been little to no excitement over
Impala recently, despite it being among the largest platinum group metal
(PGM) producers in the world.
While Implats shares have surged, along with those of its
SA peers in the past
18 months (the stock has gained 229% since January 2019), there’s been much more hype over Anglo American Platinum which, after a painful restructuring, is printing money thanks to its lucrative Mogalakwena open-pit mine in Limpopo.
On the other end of the spectrum is Sibanyestillwater, which, though saddled with debt, has been a favourite stock pick and is among 2019’s top-performing precious metal stocks.
“For some reason the market hasn’t liked [Impala] relative to other platinum shares,” says René Hochreiter, consulting mining analyst at Noah Capital Markets and Sieberana Research. “That’s why it shows up near the top of our value schedule.” 450 400 350 300 250 200 150 100 50
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It wasn’t always that way.
At the end of the 1990s and in the early 2000s, with Steve Kearney as CEO, Implats become a low-cost, efficient miner and one of the greatest mining investments SA has ever seen.
Peter Major, director of mining at Mergence Corporate Solutions, says it was a phoenix-like rise. “Investors dream about finding 10-baggers. Impala was a 40-bagger — in dollars,” he says. But that’s a distant memory now.
Impala went on to throw away a lot of its profits on properties it didn’t use and bad investments such as Barplats, a platinum junior which Implats sold just as metal prices began to rally.
“The company began acquiring assets it didn’t need or couldn’t fix, often at or near the top of the cycle”, says Major. “By 2015 and definitely by 2017/2018 Impala had fallen so much, almost everyone had written the company off.”
Yet he says Impala had, and still has, a good enough asset base — better than Lonmin’s — to see it recover and, one day maybe, restore it to its former glory.
Muller, who became CEO in 2017, thinks it is on its way. He cites Impala’s diverse asset base, as well as “operational effectiveness”.
“We were able to very effectively turn Marula around,” he says. “We’ve seen the operation go from strength to strength. And I think similarly at Rustenburg,” he says.
The Rustenburg business was in a predicament in 2017 and a number of shafts were earmarked for closure. Muller concedes the higher metal price helped, but says there have also been “phenomenal” improvements in production, as well as cost cuts.
Implats has also begun increasing its exposure to low-cost, shallow mechanised operations, which have reduced operating risk.
Buying North American Palladium was part of this move. The company mines low-cost palladium from its Lac des
Iles operation in Canada, and Implats paid
R11.4bn for the asset late last year. Muller says the decision was based on
“well-refined market intelligence”. Still, the deal raised eyebrows.
“At the time we
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bought the asset, the market was critical, because there were concerns that maybe we bought it at the top of the palladium market,” says Muller. “But if I just look at the commodity price performance, it has surprised the market to the upside.”
When Implats first made its offer in October last year, palladium was trading at around $1,650 an ounce, moving up to $1,900 when the deal was closed in December.
Though palladium prices dropped over Covid concerns in March, they’ve since recovered to trade above $1,960 an ounce this week.
Major, who slated the acquisition at the time, says it now looks like a “stunning deal” – so long as palladium stays above $1,400 an ounce. “Metal prices can save everything. They can make bad decisions look great.”
Hochreiter, meanwhile, has previously said the only people he expects will make money out of the deal are the investment bankers. He’s wary on palladium’s prospects, as new, greener, vehicles steal market share from the petrol car, for which palladium, particularly, is used.
But Muller says Implats stands firm on its decision.
“We are very happy that we have it. We believe the palladium price will continue to perform well and the asset will generate sufficient returns for our shareholders.”
At home, Implats looks to have chickened out on the Waterberg joint venture with Platmuller,
Index
PGM Basket
inum Group Metals.
Last month, it opted not to exercise a right to extend its 15% interest in the project to
50.01%.
“Here’s the thing,” says Muller. “We love the asset. It ticks all the right boxes. It’s got the right metal mix, it’s a shallow deposit, it can be mechanised. It’s the exact kind of asset that we are aspiring to as a company.”
But if Impala had exercised its rights it would have had to stump up money to fund the project’s development. That means years of money spent before any return is made.
Muller notes that, for the first time, the PGM industry is questioning if there will be demand in 10 to 15 years because of electrical vehicles and the like.
“You have to have a confident position in the long term and I think it will serve our purpose if we give the technology evolution a year or two to play itself out so there is greater certainty about the long-term demand for the metals associated with that,” he says.
“When the stars are aligned, I have no doubt Implats will revisit this position and, at the right time, pull the trigger.”
Arnold van Graan, mining analyst at
Nedbank CIB, believes it’s the right call. “The capex bill is too high for an uncertain market like this,” he says. “And the Waterberg resource is not going anywhere. If market conditions improve they can always take another bite at the cherry.”
But for long-term viability, Hochreiter worries that Implats is not pursuing the project. The lead time could be five to 10 years, due to its remoteness.
JSE platinum index 000 40
however, argues that its balance sheet and shareholder returns are the priority for the moment.
After all, apart from dividends paid in 2013, Implats shareholders have had no cash returns from the company for a decade.
“Historically, the mining industry has been criticised that we continuously invest all the proceeds from our operations back into the ground … [that] we have developed a philosophy of growth at any cost,” Muller says.
He sees the return of dividends as critically important.
“We have to compete. Our investors can choose not to go into mining, they can put their money anywhere,” he says.
Hochreiter cautions that dividends should not be prioritised over growth for too long.
“The priority of mining companies is to ensure the long-term viability of their production or there is nothing left for anyone,” he says. “Shareholders can sell their shares any time they like, but the company has to maintain its viability long after shareholders have left. It is a cardinal sin in mining to cut future replacement of ore reserves.”
By 2015 and definitely by 2017/2018 Impala had fallen so much, almost everyone had written the company off * Based on analysts’ consensus forecast * Based on analysts’ consensus forecast * Based on analysts’ consensus forecast
Source: Bloomberg, Nedbank CIB
temporarily because of Covid-19