Northam claims lowest cost position in SA platinum sector

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Paul Dunne, CEO, Northam Platinum

Northam Platinum shares rose more than 4% to around R45.75 in trading on the JSE today after the release of annual results showing a 60% rise in operating profit to R614m and news that the Department of Mineral Resources (DMR) had approved Northam’s acquisition of the Tumela section of Amandelbult from Anglo American Platinum.

Acquisition of Tumela will add 16.7m oz to the platinum group metal (pgm) resources owned by Northam’s adjacent Zondereinde mine increasing its life-of-mine by 10 years to 30 years.

A number of conditions precedent remain outstanding before the deal can be finalised including permission from the DMR for Amplats to dispose of Tumela and the granting of an environmental permit to Northam in terms of the National Environmental Management Act.

Another positive factor was CEO Paul Dunne’s claim that Northam is now the lowest cost producer in the platinum industry which represents a huge turnaround from the situation of a decade ago when Northam was the highest-cost producer in the business.

Northam’s strategic situation has been transformed through development of the new low-cost , mechanised Booysendal mine and improvements in efficiency at the traditionally high cost Zondereinde mine which is the deepest mine in the platinum sector.

The claim to being the lowest cost producer in the platinum sector has been made by various groups at various times and is difficult to confirm because of the different accounting systems used by the individual platinum mining companies.
Queried on this Dunne replied, “We would not claim this if it was not true. You have to standardise the analysis. You take all the revenue generated by any company and divide by the platinum ounces they produce to get a basket revenue price.

“Then you do the same on the cost side but you have to include all costs – and that’s very important because not everybody includes all their costs when they do this calculation – and divide by platinum ounces to get a platinum cost number which is directly comparable across the sector.

“That cost number must include stay-in business capital expenditure. After this latest set of results I don’t think anyone is going to dispute that Northam is the lowest cost producer.”

Turning to the platinum market Dunne repeated his long-held confidence over a recovery in the platinum price based on his conviction that the application of platinum in vehicle autocatalysis would grow not decline.

He added, “combine that with a declining primary production from South Africa which accounts for 80% of the source of this metal and we see an opportunity because of the widening gap between demand and supply. That is why Northam continues to invest.

“It is our considered opinion that platinum production from South Africa will be below 4m oz this year. We peaked in 2006 at around 5.3m oz so that’s a significant decline in primary supply.”

Asked why the platinum price had remained stagnant despite this situation Dunne replied, “there has been a lot of negative sentiment towards platinum. There was the story that recycling would allegedly replace primary platinum production but that has not been the case. Then we had the diesel vehicle debacle which was negative for platinum and that story is still out there.

“The latest one is the battery electric vehicle (BEV) technology story which in our view has been oversold. There’s a role for BEV technology but we just don’t believe the hype around it damaging the platinum industry. “

8 COMMENTS

  1. Dear Fellow Readers,

    As to be expected, I have some comments on the Northam Results :

    OVERVIEW

    1. NHM OCF margins have recovered to 14% ( FY16: 6%) owing mainly to chrome sales on a by-product basis
    2. 4E production increase CAGR=4% over 4 yrs on a constant asset portfolio (Zondereinde & Booysendal) basis during PGM downturn
    3. Realised PGM basket price of R12267/oz is a headwind given operating unit costs = R12343/oz (incl SIB Capex = ± R1024/oz PGM)
    4. Given its strong balance sheet, NHM has the wherewithal to acquire hapless and strategy bereft Lonmin

    ANALYSIS

    Cr production has contributed 13% (FY16 : 6%) to the topline of NHM for FY17. If these where to be tripped out, then the results for FY17 would look markedly different. In fact, the +ve OCF = R981M is largely owing to highly profitable Cr Sales =R925M (Cr processing costs = R37M). So Cr production saved the day! With all due respect to the CEO of NHM, for him not mentioning Cr contribution despite its significant contribution is baffling (perhaps disingenuous!). The aforementioned also attest to the current funk of the PGM industry.

    Operating Costs have increased by 9% y/y whilst the basket price ( R/oz) has increase by 3% y/y. Without Cr sales contribution, the analysis would have revealed something else. Just to drive the point further for NHM, over the period FY14 -FY17 (constant portfolio basis), operating costs have increased CAGR = >6% ; production 4E CAGR= 4% ;4E basket price ( R/oz) decreased CAGR = <- 2% /yr ( In 4E basket $/oz terms CAGR = 11Moz) , it should continue this performance for more than 15 years. IMPRESSIVE !

    RATIONALE FOR LONMIN ACQUISITION

    I have commented before that Lonmin is aimless and bereft of any strategy to cope in the current PGM environment. However, Lonmin has some assets , which if appropriate actions are adopted, can make a contribution to whomever at the appropriate time ( now and in future). If NHM and RBPlat were to form a JV for purposes of acquiring Lonmin, it will be a match made in heaven. RBPlat will improve its price realisation (currently ± 65-70% ) by using Lonmin downstream processing assets for its considerable resource ( > 50Moz). Furthermore, it will get itself from underneath the thumb of AngloPlat. For NHM, RBPlat will provide the sought-after BEE partner and have a credible partner capable of cutting a cheque should the need arise. The NHM/RBPlat JV will then restructure and rebase Lonmin production accordingly to adjust, for optimal value ( read NPV), to prevailing market conditions given that they will be commanding some ± 400Moz PGE resource , with integrated latent production capacity of > 2,5Moz/yr PGM.

    CONCLUSIONS

    Good Asset ( Zondereinde) and prudent balance sheet management have been key to Northam success. The downstream processing has ensured that the PGM price realisation was optimal. The PGM market downturn has presented once-in-lifetime opportunity for this miner to really build its platform and scale by acquiring Lonmin. It should be bold and cease the moment instead of piecemeal acquisitions. Production growth targets of Cr= 1Mt/y & PGM =1Moz/yr by 2020 , market permitting , will require significant spending outlay IF NOT acquired at this moment. As for being the lowest cost producer, the NHM CEO must analyse his peers results and he will discover that some of their production are at < ±R8000/oz PGM for 1Moz/yr PGM ( which is 2x NHM production). At R12300/oz operating costs, he has a longway to go before making such outlandish claims.

    • Goldspeculator,
      I look at Paul Dunne’s progress since leaving Implats under inexplicable circumstances. He has surely turned Northam around. Implats must be missing him.
      Thank you for your invaluable insights Goldspeculator. I would like to read more of your comments and insights. How do i follow you?

      • Dear Anonymous,

        You can follow me here on miningmx.

        I don’t doubt Mr Dunne’s abilities or question Northam’s progress. I am complimentary about the mining assets. My point is lets attribute reasons for performance factually NOT make unfounded claims. If unfounded claims are perpetuated it tends to lower the credibility of those involved.

        Regards

        • Dear Goldspeculator
          You definitely have some serious insight in the production profile and financial position of Mining Companies.
          I would love to see your opinion on Sibanye, the self proclaimed South African champion.
          – Their gold mines are marginal at best. The profitable areas have been mined out years ago. Current retrenchments are only the beginning.
          – On the platinum side.
          They bought the Aquarius assets which were effectively run by Jean Nel, etc. We all know that Aquarius owned no assets with any life of mine. their only “asset” was the pool and share agreement with Anglo.
          The Rustenburg operations themselves are also not the golden goose they hoped it to be. The good areas have also been mined out years ago.

          Do you think Sibanye regrets investing in SA platinum.
          I might be wrong but taking into account the Sibanye executives track record, I foresee an exit not far in the future

          • Dear Jack,

            There is nothing marginal about the SBGL core gold mines , namely Kloof, Driefontein and Beatrix. Like any mines, they age BUT these are still relatively strong CF generators. I estimate that at current Au price of R550K/kg, these assets are capable of generating OCF = ±R8Billion/yr , if given adequate management attention.

            The platinum industry is currently in a funk and as such its difficult , for the layman, to separate the “wheat from the chaff”. But as for me , the good assets ( Mogalakwena etc) are really delivering for their owners. The Aquarius deal was bad for SBGL shareholders. Its stink is still showing up in the numbers with each quarterly numbers. I mean SBGL paid $294M (±R4Billion in 2015) for 2P = 5,5Moz ( R+R =14Moz) with attr. PGM Prod = 350Koz/yr with FY15 OCF= $18M BUT CAPEX = $23M , so -ve FCF = -$5M. AQP’s own directors thought they were worth $130M-$220M. I thought at best AQP EV = $130M, with Equity = $70M. They had done a rights offer prior to the deal as well, so times were tough for them. So Froneman was a God-send more so with pending bonds to be paid. SBGL shareholders are still holding the stinking bag from that deal.

            The Rustenburg deal was meant to assuage such pain by offering some R+R plus infrastructure with ops. So this element is still playing out but i dont believe the R800M/ yr synergies story. The current TCC costs reductions are across the industry , even AngloPlat claims to be reducing costs. TCC are decreasing due to decreasing input costs across the PGM industry NOT because of Robert van Niekerk et al efforts.

            I dont believe SBGL are regretting the forage into the PGM industry, as yet. But i think they arrived too early for the party so “they need to sip their cocktails slowly lest they pass out before the main event”.

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