Impala Platinum Holdings Limited (IMPUY)

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Implats opts to expand footprint outside Africa


Invests R11bn in ‘mining-friendly’ Canada, a country with reliable and cheap electricity.

Adriaan Kruger / 10 October 2019 00:21


Demand for palladium has increased much faster than that of platinum in recent years.



Implats’s past overtures outside South Africa have been nothing to brag about. Its investment in Zimbabwe a few decades ago was a source of concern whenever Implats faced its shareholders, while the small investment in an exploration project in Canada has attracted little attention from analysts and shareholders over the last 20 years or so.

Read: Impala Platinum swings to profit, delays closure of shafts

At first glance, the announcement that it decided to acquire North American Palladium – one of its partners in the Sunday Lake exploration project – did not seem significant. The smallish mine near Hudson Bay in Canada produced only 262 000 ounces of platinum group metals (PGMs) in its last financial year compared to the 1.3 million ounces that Implats produced in its financial year to June 2019.

However, several aspects of the acquisition of North American Palladium show how important the investment is.

The first clue is in the name: it is a palladium rather than platinum mine.

Palladium accounted for 232 000 ounces of the total 262 000 ounces of PGMs it produced in the year to June.

In a video conference to mining analysts and investors around the globe, Implats CEO Nico Miller listed the attraction of palladium as the biggest motivation for its interest in North American Palladium.

“The palladium-rich ore body at [its] Lac des Iles mine will improve Implats’s commodity mix to more closely match the current and expected demand of the different platinum group metals,” he said. “It will increase our exposure to the global palladium market and the current strong prices of palladium without increasing the total global supply of palladium.”

Market demand

Implats produces nearly twice as much platinum (1.4 million ounces) as palladium (770 000 ounces) as South African ore bodies naturally contain more platinum than palladium. In contrast, the market demand for palladium has increased much faster than that of platinum in recent years.

According to the authoritative Johnson Matthey, market demand for palladium has far exceeded the demand for platinum. The demand for palladium increased 8% during 2018 to 6.9 million ounces, while the demand for platinum has remained unchanged during the last four years at 6.1 million ounces.

This is also reflected in world prices. The price of palladium increased sharply over the past year, by 54% from $1 084 per ounce a year ago to the current $1 674 per ounce. Platinum prices increased by only 8% from $826 per ounce to $893 per ounce over the same period. The increase in the price of palladium is even more profound over the last six years.

Balance adjustment

While the investment in North American Palladium will add only some 14% to Implats’s total PGM output, it increases the production of the more valuable palladium by more than 30%.

Miller also pointed out that North American Palladium is a highly mechanised mine, employing only 700 workers. Operating costs are much lower, at an all-in sustainable cost of $781 per ounce compared to Implats’s cost of nearly $1 600 per platinum ounce for its mines in SA.

“The acquisition will go a long way to reposition Implats as a lower-cost producer,” says Miller.

It seems the opportunity came at just the right time for Implats. It had a few good years and built up a bit of cash, repaid a lot of debt earlier than anticipated and accumulated a few billion rands worth of its own shares through buyback programmes – probably at prices way less than the current share price given the sharp increase of more than 285% over the last year.

All this will go towards settling the acquisition price of $758 million, equal to nearly R11.4 billion.

The deal was apparently welcomed by North American Palladium shareholders. The major shareholders were offered a premium of 16% above the weighted average market price, while minority shareholders stand to receive a premium of 23% to the market price.

Of further interest are the other – mostly unmentionable – reasons for the transaction.

When mentioning that Canada is a country friendly to the mining industry, Implats says by implication that SA is not very investor-friendly or welcoming to mining companies.

Years of uncertainty around mining policy, mineral rights, the troublesome Mining Charter, militant unions, political interference, criminal activities and electricity shortages probably all added up to nudge Implats towards Hudson Bay.

SA will effectively miss out on a capital investment of R11 billion if one argues that Implats could have elected to invest in SA instead.

Implats also stated in the announcement of the acquisition that the life of the Lac des Iles mine will be increased from the current nine years to 15 years, which means the directors are open to spending more money offshore, rather than in SA. Implats has limited its capital expenditure in SA during the last few years to reduce its exposure to these higher-cost operations.

Stimulus

In addition, the latest acquisition increases Implats’s interest in the small but important Sunday Lake exploration project, and adds a bit of stimulus to the project as it is only some 60km away from the larger mine.

The investment of R11.4 billion is equal to around 15% of Implats’s current market capitalisation. Overall, it looks like a good deal. The weighted average consideration payable to the majority and minority shareholders in North American Palladium amounts to C$16.71 per share, which represents a price-earnings ratio of 14.9 times compared to Implats’s of 24.4 times.
Implats share up more than 285% in the past year

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https://www.moneyweb.co.za/news/companies-and-deals/implats-opts-to-expand-footprint-outside-africa/