Wednesday, January 19

What weakens one PGM miner strengthens the rest

Last week, Royal Bafokeng Platinum (RBPlat) largest shareholder, Royal Bafokeng Holdings, surprised the market by rejecting Impala Platinum (Implats) proposals for a full acquisition of RBPlat, agreeing to sell 32.8% of its stake. (with options to take it up to 33.3%) to Northam Platinum.

Read: Northam overtakes Impala Platinum with R17bn deal with Royal Bafokeng

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Not only that, but Northam Platinum offered 18,050 cents per share (cps), or a 50% premium over the market price of around 12,000 cps.

Given that Implats’ operations in Rustenburg are contiguous with those of RBPlat, the original acquisition made a lot of operational sense. In essence, little would change and Implats would simply run a large collection of mines and shafts in the same area, extracting returns to scale from this position and its existing sunk costs (see map below).

Regional map of the Rustenburg PGM mines around Implats and RBPlat

Source: Impala Platinum

On the other hand, the Northam mines are not next to RBPlat …

So why the surprise deal? And why the huge premium?

Hear: Albertinah Kekana, CEO of Royal Bafokeng Holdings, on the Northam Platinum deal

Pure speculation

What follows is pure speculation, as Northam (and RBPlat) have not discussed the details and reasons for the deal.

First, the reality is that Eskom represents a major impediment to the development of a new platinum group metals (PGM) mine and Waterberg is probably the last potential opportunity for this. If one can get a significant stake in a long-lived PGM mine, this opportunity might be worth seizing, in the same way that Sibanye-Stillwater (code: SSW) turned hard and fast in the acquisition that gave it the upper hand. the second half of his name.

Put another way, if the PGM basket (particularly platinum, which RBPlat has a higher relative weight than Northam) continues to be a key product in the global Green Energy Transition, then there may be years of buoyant PGM basket prices. .

And, in a world where there are almost no major new sources of PGM, you buy that you can when you can.

Second, within a few years, 50% of RBPlats’ concentrates processing could be shifted from Implats to Northam with obvious economic benefits for the latter. Additionally, Northam technical information could add a few percentage points to RBPlats concentrate recoveries. Progressively, these two benefits could generate a substantial increase in the final results of the respective operations.

Third, this transaction is likely to be financially positive. While you should value mines on the basis of net present value, where both groups mine more or less the same underlying commodity, using a price-earnings (PE) ratio can be a relatively easy way to see if a transaction is likely is beneficial to the acquirer.

At 18,050 cps, RBPlats shares have a PE of 6.3x. Since a large part of this deal is Northam issuing shares itself, the PE of Northam shares of 7.7x implies that this deal is in fact beneficial to Northam shareholders (this is even more true when you have take into account the cash element of the agreement). .

In other words, you are issuing 7.7x paper to buy 6.3x paper, or capturing an 18% discount in relative ratings between the market multiples of the script. Using some undilutable cash only enhances this advantage for Northam shareholders.

Finally, and probably less subtly, this deal may starve Implats Rustenburg’s operations of oxygen.

Implats’ operations in Rustenburg are running out of time and already “tax” part of the RBPlats land. Check out Life of Mine (LoM) below for Implats resources, and watch Rustenburg’s ounces drop dramatically over a period of five to seven years (considered very short LoM for a PGM operation).

Profile of Estimated Mine Life in Ounces of Implats (Rustenburg in light blue)

Source: Impala Platinum

In the middle of last year, Implats decided not to exercise its option to take control of the major Waterberg project from Platinum Group Metals (NYSE: PLG). In hindsight, this decision was likely based on the fact that it was reliant on the RBPlats acquisition, especially since it has more than enough cash to do so.

So after the Northam coup, Implats finds itself in a tight corner, with the clock ticking on the viability of its Rustenburg operations.

What will Implats do now?

Will it look to acquire large blocks of shares in RBPlat at an even higher premium from other large RBPlat shareholders to spoil Northam’s long-term plans, or will it start preparing to sell some of its land and assets to RBPlat?

What is apparent is that what was at first glance a strange acquisition by Northam, may in fact have the effect of cornering Implats. And while the deal may make some sense for Northam, it certainly weakens Impala’s operations in Rustenburg significantly.

And, simply put, what makes one PGM miner weaker makes the rest stronger.

Keith McLachlan is Chief Investment Officer at Integral Asset Management.

* Clients of McLachlan and Integral Asset Management own shares in Northam Platinum Holdings.

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