Northam forges ahead on Booysendal

Allan Seccombe | Tue, 23 Feb 2010 08:51

[miningmx.com] -- NORTHAM will spend R340m on early work at its R3bn Booysendal platinum project ahead of the start of construction in July. The group posted an interim dividend of 20 cents despite a 42% decline in earnings for the period, which was knocked by a stronger rand.

Northam, which had cash and equivalents of R975m and no debt at end-December 2009, will fund initial capital outlays at Booysendal out of its cash reserves. Booysendal is a massive, relatively shallow platinum deposit with a resources of 100 million ounces (oz) of platinum group metals (PGMs) on which Northam's future depends.

The first phase of the project could lift Northam's sales by 130,000 oz of PGMs a year. The second phase will add a further 115,000 oz a year, bringing the Booysendal contribution to Northam to a total of 245,000 oz.

Northam, a R17.5bn company listed on the JSE, currently operates a geologically complex mine which is one of the deepest in the platinum sector.

“Shareholders will be kept informed of further funding arrangements in tandem with the unfolding of the company`s major shareholder`s unbundling strategy,” Northam said in a statement.

Mvelaphanda Resources, a R10.9bn company, owns 63% of Northam and it is weighing the unbundling of its stake in Northam Platinum, divesting of its remaining stake in Gold Fields, and disposing of a 20.7% (fully diluted) holding in Trans Hex, a diamond firm. This would resolve the issue of Mvela's status as a pyramid holding company on the JSE

By Mvela unbundling its stake in Northam a lot of pent up value is expected to be released in the platinum company, possibly leading to a re-rating of the share, with improved liquidity in the shares, increased cash levels and unfettered growth prospects.

Northam’s wholly owned Booysendal prospect is regarded to have received little to no recognition from the market because of perceptions that cash flows from the group are inhibited because holding company Mvela needed the best dividend inflows possible to finance a mountain of debt.

One of the scenarios is that Northam is likely to issue shares to raise the roughly R3.05bn it needs to build the first phase of the Booysendal project. Mvela, which will have disposed of its remaining 39 million Gold Fields shares, could then follow its rights and then unbundle all its Northam shares to its shareholders and dissolve the company.

Mvela has been trickling Gold Fields shares into the market and is now down to around 35 million shares. The average price received is apparently around R112 per share sold. There is no deadline on when the Gold Fields shares must be sold and Mvela is keen to achieve the best possible price it can.

Early this year, Miningmx reported Kazakh resources group Eurasian Natural Resources Corporation (ENRC) was understood to be in discussions regarding a possible bid for Mvela. Mvela spokesman James Wellsted declined to comment on the speculation and said the company's focus was to get rid of the pyramid structure and unlock value for shareholders.

"With mine development now underway and a standalone funding and development solution for Northam not immediately obvious, we speculate that a strategic investor solution may now finally be on the horizon with Aquarius Platinum or ENRC the most obvious partners," Liberum Capital said in a note.

Another analyst said the grade from Booysendal wasn't particularly good and that the proper functioning of the dense media separator (DMS) which would discard 30,000 tonnes per month (tpm) of material from run of mine production of 150,000 tpm.

"The two important things for Booysendal are to get the DMS working properly because if they don't this deposit isn't such a dripping roast. The other thing is to not have an overrun on their R3bn capex," said Leon Esterhuizen from RBC Capital Markets.

Esterhuizen said it would make perfect sense for ferrochrome group ENRC to make a play for Northam.

Looking ahead, Northam said it expects lower production of metals in concentrate for the remainder of its financial year to end-June, but sales revenue should remain flat compared to the first half.

“Should the rand basket price remain at its current levels, earnings in the second half of the financial year are likely to be similar to those of the first half,” it said. Northam’s first half earnings were 42% lower at R216m.

Sales revenue increased eight percent to R1.7bn while total operating costs were up 13% at R1.1bn on the back of higher labour, services and consumable costs.

A one-third improvement in sales volumes to 197,206 oz of PGMs offset a 21% decrease in the rand price for the basket of metals Northam produces as the stronger rand and lower dollar price for platinum group metals weighed on the group.

Northam bought 1,013 kg of PGMs in concentrate from Platmin, the newest producer on the Western Limb. Analysts questioned whether Northam was making any profit on this material. CEO Glyn Lewis said the contribution from nickel, copper and other base metals in the concentrate meant Northam was returning a small profit. Northam is bulking up on material to feed the Heraeus plant in the Eastern Cape.

“At current consensus metal prices, the group is cash positive at an operating level, has no debt and should be able to commence with the development of Booysendal from internal retentions,” it said.