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Cash generation is so strong at Impala Platinum (Implats) that the company may not need bridging finance in order to complete the $758m purchase of Toronto’s North American Palladium (NAP) it first announced – to much surprise – on 7 October.
The company hasn’t commented on the prospect of avoiding bridging finance, but a banking source says that at current platinum group metal (PGM) prices, Implats is absolutely coining it.
Implats will buy 100% of NAP for cash in three parts, consisting of $288m in existing cash; some $120m from metal prepayment; and the bridging loan worth about $350m. Morgan Stanley was to be asked to arrange it: that might now not be the case.
Bridging finance is normally expensive money, so it would be a good thing for Implats if it doesn’t go that route. It would also be an indication of just how well the company is doing today.
Not only will it add 240 000 ounces of annual palladium production to its platinum mix from the NAP deal, but it will also embark on reinstalling the dividend. And there may be more to come.
Following the announcement of the NAP deal, commentators assumed that put paid to the much-speculated deal between Implats and its next-door neighbour, Royal Bafokeng Platinum (RBPlat). But finweek understands that particular transaction might not be off the table yet either.
“RBPlat is a bit like the NAP deal,” a banking source told finweek. “The company is nearing the end of a capital-intensive expansion and is positioned to do well from PGM pricing,” he said.
Adding RBPlat to Implats’ mix creates a company with 1.5m oz of PGM production annually, and the prospect of edging that up by 300 000 oz more.
Where, though, does this place the Waterberg Platinum joint venture? This is the project in which Implats has a 15% stake, with the option on agreement with the firm’s recently concluded bankable feasibility project of spending a further $165m in order to take 50.01% control.
Sources say investment by Implats in this project is less certain. Embarking on the project could see Implats take palladium production to about 827 000 oz/year by 2022, but the question is whether it makes sense to bring new production into a market that is thriving on the lack of supply.
Greenfields projects are also riskier than buying the existing assets of companies – especially when the capital to develop them has already been sunk.
Still, this is a nice place to be for Implats which, less than two years ago, saw its share price decline to its lowest-ever level.
What a difference the market can make.
The fortune of SA’s PGM sector
finweek has already expounded this year on the health of South Africa’s PGM sector. According to a report by Citi’s Johann Steyn, there are now no companies in the sector in SA producing negative cash flow. Compare this to the 60% of the sector that was loss-making in 2017.
A report by RBC Capital Markets at the beginning of October observed that the improvement in the fortunes of Anglo American Platinum (Amplats) as well as Kumba Iron Ore had also completely rubbed out the need for Anglo American to tackle ‘the SA discount’.
In the past, it was thought the market penalised Anglo for its exposure to the operating, labour and political risk of its SA mines.
Over the years, questions have been asked as to whether it might be better for Anglo to spin off these assets into a separately listed vehicle, or just sell them, as once contemplated by current CEO, Mark Cutifani, during the market downturn between 2013 and 2016.
Not now, however. “In general, we think the current structure, although not ideal, is probably not worth the hassle and disruption of a break-up and provides more important diversification and cash flow benefits,” said Tyler Broda and Marina Calero, analysts for RBC Capital Markets.
Moreover, the improvement in PGM prices – and the impact this has had on Amplats, in which Anglo has an 80% stake – has not been sufficiently “read through” to Anglo shares.
This article originally appeared in the 24 October edition of finweek magazine. Buy and download the magazine here or subscribe to our newsletter here.
