Unki deal raises question over Zimplats future

[miningmx.com] – IT’S a cruel world for South African platinum stocks which have been a major component of the R10bn lost in mining production from the spate of industry strikes since August.

Adding insult to injury, the recent empowerment deal between Anglo American Platinum (Amplats) and the Zimbabwean government sees the South African firm take a major haircut in value.

To compound the matter, the expectation is that the structure offered to Amplats will be used as a model for yet-to-be-completed empowerment deals between the Zimbabweans and Impala Platinum (Implats) and Aquarius Platinum.

The irony is that Amplats’ Unki mine and the Mimosa Platinum Mines which is Aquarius Platinum’s asset in Zimbabwe, as well as Implats’ stake in Australian-listed Zimplats, are among the most profitable in their respective portfolios. However, in line with Zimbabwe’s indigenisation policy, the South Africans have to part with control. It’s almost like nationalisation, with a slight twist.

Amplats’ deal, which bears the rubber stamp of Zimbabwe’s government, sees it “sell’ 51% of Unki with 21% going to Zimbabwe’s indigenisation authority – the National Indigenisation and Economic Empowerment Fund – and parcels of 10% each going to Unki employees, the community that lives near the mine, and “strategic equity partners’, as Amplats terms it.

The selling price is $142.8m, equal to R1.24bn, but according to Justin Froneman, a platinum analyst for SBG Securities, this is $90m or R860m lower than the net present value of the mine.

The mine is forecast to produce 65,000 ounces of platinum in the 2012 financial year, but it will ramp up to 100,000 oz by the 2016 calendar year. Since the mine is low cost, this will present an average gross profit margin of about 45% making it one of Amplats’ highest gross profit margin businesses.

He calculates a net present value of R4.2bn, about 6% of Amplats’s entire value, with about 51% of that worth R2.1bn against the R1.24bn Zimbabwe will pay.

Saviour Kasukuwere, Zimbabwe’s minister for empowerment and indigenisation, told Miningmx in a telephonic interview that he had been highly satisfied by the outcome of negotiations. “They have been very positive. We’re hoping that the Unki discussions form a good basis for the other negotiations,’ he said.

This raises the question as to whether Implats and Aquarius Platinum will, in fact, agree to a similar model, which includes a vendor-finance mechanism. This is the structure in which the buyer repays the cost of the asset through future dividends.

It’s a structure used widely in South African empowerment deals, many of which have encountered difficulties, especially as mineral prices decline putting profits and dividend flow under pressure. Interestingly, the valuation mechanism in the Amplats deal, when applied to the resources owned by Implats and Aquarius Platinum in Zimbabwe, actually converts into a premium for these two companies.

According to Froneman, the $142.8m Zimbabwe will pay for 51% of Amplats’ Unki converts into a per resource ounce value of $16.90. Applied to Implats’ quite enormous 192.3 million oz at its Zimplats assets, a value of $3.2bn is implied versus Zimplats’ market capitalisation of $940m and SBG Securities’ value of $1.8bn. A similar premium is given to Mimosa Platinum Mines.

Implats declined to comment on negotiations so far. “As regards indigenisation, there is nothing to add to what we have said previously i.e. discussions are ongoing,’ said Implats investor relations manager, Bob Gilmour.

But it’s worth remembering that Implats has said in the past that it will not agree to vendor-finance the Zimbabwe government’s stake, and that the government will be diluted if it doesn’t contribute its share of capital when required, and assuming it has the shares in the first place.

Kasukuwere believes finalisation is close. “We met Implats last week and we’re meeting again soon. There will be a tie-up as soon as possible,’ he says, adding that deals must “. let us have what is ours’. Included in this statement is that the Zimbabwean government won’t be contributing towards capital expenditure, so there can’t be any dilution.

It’s been two weeks since the Unki deal, however, and no progress on Implats suggesting perhaps there’s no quick solution pending.

“I think the companies are all just toeing the line hoping that at some point in future, the government changes and if they are still there with a hand on the assets, they will have another shot,’ said a UK-based analyst who asked not to be named.
“This is better than allowing the Chinese to come in and spoil the PGM [platinum group metal] market even further,’ he said.

It comes at a bad time for the country’s platinum miners, stressed as they are by poor metal prices, high input costs about which they can do little – such as electricity tariffs – and the prospect of difficult, much-changed labour relations which will also pressure the bottom line.