Zimplats sideshow

[miningmx.com] — FOR ALL the international attention on negotiations
between Zimbabwe’s government and Impala Platinum (Implats), one can’t escape
the sneaking suspicion that it’s all a bit of a sideshow for the Implats share price.

This is the question of it having to comply with Zimbabwe’s indigenisation laws,
which demand that foreign companies part with 51% of Zimbabwe assets they own.

A sideshow because although Zimplats, currently 87% owned by Implats, represents
the only real production growth it possesses, there’s zero value credited to that
growth in Implats’s share price. Second, not much attention has been given to the
bilateral agreement between South Africa and Zimbabwe, which sets down in crystal
clear language that expropriation is not allowed.

The Zimbabwean government could never ask Implats to sell control of its mines
without paying for it.

Yet, let’s give Implats CEO, David Brown, his due. The guy has been under enormous
pressure from Saviour Kasukuwere, the minister responsible for indigenisation, who
earlier this month issued an ultimatum to comply with the laws or clear off. Brown’s
settlement with Kasukuwere, which was announced last week, is an “in principle’ pact
that not only asks of the Zimbabweans to compensate Implats for an earlier $153m
indigenisation deal, but additionally makes the Zimbabwean government a
contributory shareholder.

As per the bilateral agreement, there’s no free-carry; so if Zimplats presses ahead
with its $1bn third phase expansion, $310m of that needs to be supplied by the
Zimbabwean government. (Bear in mind, the “in principle’ deal is structured such that
31% of Zimplats is sold to the government, with the 20% balance going to an
employee share programme and to the local Zimplats community on a vendor-financed
basis.)

For Implats shareholders, there’s now only upside, analysts say. Ascribing zero value
to Zimplats, Implats should be trading at about R176/share, according to two
analysts consulted by Finweek. Given the share price at the time of writing is
about R160.50/share, the market has been way too negative on the stock.

“We believe that the market is ascribing limited value to the company’s Zimbabwean
asset base and that Zimplats offers Impala an opportunity to cement its position in
the lower half of the industry cost curve,’ wrote Barclays Capital (Barcap) analyst
Andrew Byrne.

He also says investors would prefer Zimbabwe’s platinum fields to SA’s eastern limb
of the Bushveld Complex. That’s an interesting thing to say considering Zimplats’s
reserves comprise about 40% of Implats’s total reserve base.

Even if the market starts to acknowledge there’s value even in Implats’s reduced
stake in Zimplats, there’s further value-unlock years hence.

According to Justin Froneman, an analyst at SBG Securities, a future expansion of
Zimplats – 1m ounces/year of production has been spoken of – has not been captured
either in the share price and would give Implats a kicker.

Ultimately, more clarity is needed from the Zimbabwean government on how it
intends to value Zimplats’s assets and whether it will compensate it to the tune of
$153m for the previous indigenisation deal consummated back in 2006. Also, whether
the Zimbabwean government is actually able to follow its capital rights.

The noises from Kasukuwere are promising. He told Finweek a joint
committee, which will have Vunani Capital as a kind of arbiter, will commence sifting
through the valuation issues post-haste.

He also said planned royalty increases on Zimplats might be reconsidered now that
the Zimbabwean government stands to be a major shareholder.

More pertinent to the Implats share price in the short term is the extent to which the
group can recover from its damaging six-week strike at its key Rustenburg mine and
whether the Department of Mineral Resources will continue with quite the same
zealous enthusiasm for safety stoppages, known in the industry as Section 54s, and
applied with such abandon that it’s making mining areas affected more dangerous.

– Finweek