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Cash tsunami for Impala Platinum
Brendan Ryan
Posted: Tue, 22 Apr 2008
[miningmx.com] -- Impala Platinum (Implats) is generating “massive” quantities of cash that cannot justifiably be accumulated in terms of the currently-disclosed business plan.
That’s the view of JP Morgan analysts Steve Shepherd, Allan Cooke and Jon Bergtheil in a research report which raises their six-month price target for Implats to R423 a share.
The previous price target was R407 while Implats shares currently sit at R338 compared with a 12-month high of R368.
Implats’ cash flow will be boosted this year by the R6bn it is to receive from the sale of its 8,4% stake in listed Aquarius Platinum and 20% stake in unlisted Aquarius Platinum South Africa.
According to the JP Morgan report, the sale will boost Implats forecast net cash at end-June to R13,8bn from the previous estimate of R8bn.
Looking further out the analysts estimated that Implats
will have net cash of R22,5bn at the end of its 2009 financial year and R29,7bn net cash by the end of financial 2010.
JP Morgan also pointed out Implats CEO David Brown told shareholders in February, at the interim results presentation, that he did not want Implats to have a “lazy” balance sheet and, ideally, wanted to get to a debt:equity ratio of 25%.
According to the research report, if that debt strategy was implemented by the end of June this year then Implats’s surplus cash position would rise to R16bn.
The analysts said Implats management has stated on numerous occasions that, if it has no use for excess cash, it will return it to shareholders and has done so in the past.
They added management has acknowledged cash is being generated “far faster than current plans and policies can allow it be used” but described management is being ”evasive” about what it intends doing with the surplus cash.
JP Morgan said there were a
number of options that Implats could take.
These included; introducing a more generous dividend policy; making an acquisition; accelerating the capital expenditure programme; implementing share buybacks and looking at diversification.
The analysts pointed out going for an acquisition posed some risk for shareholders if Implats went for an “over-priced, big acquisition.”
They
commented; “this can never be ruled out and must be viewed, in our opinion, as the shareholders’ worst nightmare. In the context of Implats and the platinum industry we would view the risk as low since competition issues probably preclude a really big acquisition. “
The analysts added they viewed Brown as a prudent leader unlikely to be a “party to damaging shareholder value.” They believed any further acquisitions by Implats would be small and “designed to bolster the long-term growth possibilities in a more incremental way. That means to us that Implats may look at junior players.”
The analysts felt Brown’s “prudent” approach meant it was unlikely that Implats would shift to a full payout of earnings from its current policy of a 1.7 times dividend cover.
“We would expect a more measured/sustainable approach from him with accumulations periodically being dispersed in the form of special dividends.”
Turning to diversification prospects the JP
Morgan analysts pointed out Implats had gotten involved in nickel projects in the past but subsequently withdrawn from them.
They commented; “Implats is a substantial producer of nickel and has disclosed that increasing the scale of its nickel refinery offers significant cost benefits. We think it may continue to be on the lookout for opportunities in nickel.”
Looking at prospects the analysts said Implats seemed to be back on its delivery track after a minor dip in 2006/2007.
“We rate it as a well-managed company with a strong asset base and clear strategy. The crisis in Zimbabwe has thus far not affected production at Mimosa or Zimplats. Neither has it impacted on the growth projects underway.
“Our analysis suggests the market places little, if any, value on long-term growth in Zimbabwe. We conclude that, in the event of any good news emerging from tortured Zimbabwe, Implats may see a significant re-rating relative to its principal peer,
Anglo Platinum.”
Turning to Aquarius, the analysts said the group remained “resource constrained” although it will get greater cash flow from its subsidiary operations through the purchase of the stakes from Implats.
The analysts commented; “We have respect for the group’s CEO Stuart Murray and his team. As we have said before, if there’s a good deal out there we’d back him to find it.
“Unfortunately, the group’s valuation appears in our view to be discounting much good news and we are unable to factor a multiple into our price target than can justify a rating relative to Aquarius’ peers other than Underweight. We wait and watch.”
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