[miningmx.com] – NORTHAM Platinum’s empowerment transaction unveiled on October 22 provides the platinum producer with the financial firepower to accompany the obvious appetite of its new CEO, Paul Dunne.
But it’s risky because it’s betting on an assessment that the platinum market is at the bottom of the cycle and that Dunne and his team can grow judiciously, and profitably.
One or two steps wrong, and Dunne, his team, and erstwhile shareholders Coronation Fund Managers and the Public Investment Corporation (PIC) could be in a world of pain.
Northam issued 22% new shares to a BEE entity called the Zambezi Platinum Consortium for R4.6bn to which the PIC added R2bn worth of shares it already held in Northam.
In order to pay for the new shares from Northam, and the existing stake the PIC is selling, the consortium is to issue preference shares to the tune of R6.6bn. The preference shares will be separately listed on the JSE and be underwritten by Coronation Fund Managers and the PIC. (In fact, the PIC is swapping its shares in Northam for preference shares).
This means investors will have the two entry points into Northam: ordinary shares and the preference shares which the Zambezi Platinum Consortium must repay in 10-years time as well as a coupon rate of 3.5% above prime which at the time of the deal announcement was a return of 12.75%.
The choice investors with an interest in the platinum industry will have to make is whether to it’s better to take the embedded return on the preference share or choose direct exposure to Northam which, as part of the BEE deal, has netted itself R4bn for expansion.
The preference shares are largely (but not entirely) risk free because they embed a return. It’s possible then that Northam preference shares may rise and fall with, say, interest rate adjustments made by the South African Reserve Bank.
The yield on the preference shares is quite high if one considers how platinum shares have performed over, say, the last five years: Northam, for instance, is 60% down in that period.
The benefit of owning Northam, however, is that the R4bn it receives in net cash from selling its 22% stake (R600m is fees and other items), will be put towards production expansion either internally or by merger and acquisition.
In fact, Dunne said in an interview with Finweek that the firm could probably increase its financial firepower to R7bn including bank debt.
This means that Northam Platinum could generate considerable capital growth in its share provided it spends the cash well – on properly value accretive transactions – and perhaps more importantly, the platinum price is supportive.
“We take the view that the platinum market is close to a cyclical bottom,’ said Neill Young, an analyst for Coronation Fund Managers. “We think this is a good time for Northam to act as a consolidator,’ he added.
The expectation is that over the next ten years, the platinum price will respond positively to a recovery in the European autocatalyst market, as well as jewellery marketing efforts in places such as China.
Perhaps more importantly still is the view South Africa’s platinum industry has learned from its past mistakes; that discipline in new growth projects is followed; and that high-cost production from ageing shafts is knocked out of the system.
“There’s quite a lot of moving parts in this transaction,’ said Michael Kavanagh, an analyst for Noah Capital. “What’s clear is that Northam is taking a quite tremendous bet on the market.
“It’s also likely that now Northam is closely leveraged to the platinum price such that it will respond sharply to changes in the dollar price of the metal,’ he said.
Said Dunne: “The industry is at a point of inflexion and we would like to participate in the restructuring of the industry. We are positioning ourselves to do that’. Dunne has suggested in the past Northam could double output to one million ounces, a target Young said should not become “a fixation’.
For preference share holders, the risk is that Northam doesn’t deal well in the market, or that the platinum price doesn’t perform as well as either Dunne, Coronation or the PIC expect and it, therefore, cannot fund the BEE consortium to repurchase the preference shares it has issued.
According to Kavanagh this would put incredible pressure on Northam’s balance sheet and may see instead an unbundling of Northam shares instead to preference shareholders which would be highly dilutory.
Said Seten Naidoo, an analyst with Standard Bank Group Securities: “Net, net, we believe these types of deals create significant pressure on companies further down the line, which the market starts pricing into the stock materially ahead of time when the tide turns against producers.
“In our opinion, this would only be value accretive should Northam perform in line with its goals of expanding significantly while having commodity prices in its favour, thereby making the significant burden due in 10 years negligible,’ he said.
A version of this article appeared in Finweek
