Northam Platinum buys R1bn worth of Zambezi preference shares from Govt.’s PIC

NORTHAM Platinum has bought additional Zambezi Platinum preference shares to the tune of just over R1bn, the company said today.

The shares were sold by South Africa’s Public Investment Corporation (PIC), the state-owned asset management company. A total of 13,7 million preference shares were bought taking its total purchase of shares to 19.4 million, equal to 12.1% of all Zambezi Platinum preference shares in issue.

Northam said it would fund the purchase from cash resources. Northam ended its 2019 financial year with a cash balance of just over R950m. However, the company is considered to be highly cash generative.

Including sales from current inventories, the company could generate free cash flow of about R5bn which could be used to buy up to 43% of Zambezi Platinum preference shares, said RMB Morgan Stanley in a report on August 26.

“Zambezi’s structure presents a very compelling and powerful way for Northam to return value to shareholders through the purchase of the Zambezi preference shares,” said Paul Dunne, CEO of Northam Platinum in an announcement.

Northam said the transaction would reduce the preference share dividend expense and Northam’s potential finance exposure under a guarantee it provided to holders of Zambezi Platinum preference shares.

Should Zambezi elect to redeem the Zambezi preference shares through a distribution of ordinary shares in Northam held by Zambezi, then the redemption of the Zambezi preference shares held by Northam will result in reducing the number of Northam shares in issue, the company said.

Dunne previously defended the repurchase of Zambezi preference shares rather than paying out cash to shareholders, as with other cash flush mining firms lately. “Each Zambezi pref is backed up by ordinary share on a one-for-one basis,” he said.

“If Northam buys a pref it is effectively buying back an ordinary share by proxy. If you reduce the number of shares in issue you increase the earnings per share and the  market will do its job on the share price.

“If we buy a considerable chunk of the pref stock I think it would be very well received by the market. I have no doubt that will lead to ordinary share price performance – all other things being equal,” said Dunne.

Northam Platinum raised R4.2bn in 2016 when it sold a 31.4% stake in the business to Zambezi Platinum which subscribed for preference shares. The preference shares, which are listed on the Johannesburg Stock Exchange, were secured with ordinary shares in Northam Platinum.

Northam Platinum paid Zambezi Platinum R400m upfront in compensation for a lock-in on the stake in the company for 10 years (to 2026), but it does have the option of buying back for shares or cash the preference shares.