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

Financial Mail - - MONEY&INVESTING - Lisa Steyn steynl@busi­nesslive.co.zal

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

Nico Muller: ‘Phe­nom­e­nal’ im­prove­ments in pro­duc­tion

Im­plats

Marula mine: Had to be closed

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