Implats vs. Sibanye: who did the better palladium deal, part II.

Implats CEO Nico Muller

IMPALA Platinum’s (Implats’) bid to buy North American Palladium (NAP) is the second time a South African platinum group metal (PGM) company has sought growth in a district other than the Bushveld Complex where most of the world’s PGMs are to be found.

The first transaction was Sibanye-Stillwater’s bid for Stillwater Mining in 2016, a R30bn deal that included a R10bn rights offer. Naturally, Implats’ R10.4bn bid for NAP has drawn inevitable comparisons. But which is the better deal?

According to a report by Bank of America Merrill Lynch (BoAML), the main benefits of Implats’ deal is that NAP’s Lac des Iles mine is more of a pure palladium play (93%) whereas the Stillwater mine has more platinum content (78% Pd).

However, Stillwater is a larger operation – it has a steady state target of 850,000 2E ounces a year compared to the 255,000 oz in palladium envisaged at Lac des Iles – and Stillwater also has lower all-in sustaining costs (AISC) at steady-state of some $575/oz compared to $622/oz at Lac des Iles.

Stillwater has more reserves, a far superior reserve grade and better mine to market options with more processing infrastructure in owning a smelter, base metal refinery and recycling facility, said the bank.

There’s also the question of market timing. Sibanye called the market perfectly on Stillwater buying the operation whilst the palladium was in the foothills of price acceleration that saw it gain $1,000/oz. Implats’ has arguably bought at the tippy-top of the market.

But …

Implats isn’t envisaging the use of shares as Sibanye had to do for Stillwater (though it might dip into treasury shares to part refinance a bridging facility that gives effect to the initial cash offer.

Implats is also arguing that buying NAP will assist it in the resumption of dividend payments whereas Sibanye’s Stillwater deal brought the curtain down on dividends (and are yet to be resumed).

It might be, however, that both companies will benefit from the prolonged bull market in PGMs, palladium especially. Implats may certainly need that given the fact Lac des Iles has not been a powerhouse cash generator in the past.

“Over its c.25 year history, North American Palladium has not been a profitable and cash generative mine. In our view, this means that palladium prices need to remain relatively high in order for this investment by Impala to pay-off,” said BoAML.

That might well be the case.

In a report by SFA Oxford analyst, the palladium market is forecast to remain in deficit until 2025 at least. It also believes the palladium price will exceed $1,710/oz in 2020 and with the potential to reach $1,900/oz in 2021 (making 2019’s record $1,700/oz price a mere South Col equivalent in an Everest-type ascent).

SFA Oxford also notes that in lock-step with the improvement in the palladium price, Implats’ production bias improves towards palladium. Based on current plans in terms of the restructuring of its Rustenburg operations, the inclusion of Lac des Iles could lift palladium production to 850,000 oz in 2020 from 650,000 oz in 2018 (and 560,000 oz as Rustenburg is restructured and excluding the NAP deal).

The UK research house also countered Noah Capital research which said that on a per resource ounce basis, Implats’ bid for NAP ($214/reserve oz 3E) was far more expensive than Sibanye’s purchase of Stillwater Mining ($100/oz).

On an enterprise value (EV) basis the NAP acquisition equates to $197/reserve oz, much closer to the value of the Stillwater acquisition of an estimated $135/reserve oz. And using an EV to EBITDA ratio, NAP presents 4.3x against an EV/EBITDA for Stillwater at the time of the acquisition of 21.1x.

6 COMMENTS

  1. Here we go again :
    “On an enterprise value (EV) basis the NAP acquisition equates to $197/reserve oz, much closer to the value of the Stillwater acquisition of an estimated $135/reserve oz. And using an EV to EBITDA ratio, NAP presents 4.3x against an EV/EBITDA for Stillwater at the time of the acquisition of 21.1x”

    Whilst i believe both deals are rancid from a shareholder perspective …… this EV/2Poz analysis is extremely misleading. It ignores the RANK VALUE and RESERVES PROFITABILITY pertaining to each deal. If there is a lesson, I learned from the mining dealmaking mania of 2006 – 2010 , its that EV/2Poz should NOT be a basis of a deal.

    RANK VALUE ( RV)

    The deal RV is an all-in costs of doing a deal. This is how its financed (costs, composition and tenure) of such a deal before shareholders start receiving its benefits. SGL deal Rank Value is still increasing , and its now $3,3Bn whilst only $117 cash have come-out of Stillwater ops to date ending June 2019. RV is ballooning with each day …. Streaming deals have since been concluded to further dilute such deal benefit to shareholders. SGL paid for the deal with DEBT , and later shares issuances to pay a fraction of such debt , NOT cash from its balance sheet. THATS ONE WHOLLY MESS! ….. MCap of SGL is $4,4Bn, and it was $2,4bn before the deal…

    RESERVES PROFITABILITY

    This is what drives the returns of the deal, i refer you to a transaction for Barrick Australian assets that GFI. Although GFI paid what was deemed dear on an EV/2Poz basis of $300/oz , GFI has since realised some FCF= $820M from these assets because they were operating at high FCF margins of ±35%. They were low-cost mines , in A$ terms, BUT lacked the scale that Barrick preferred hence their sale to GFI. Furthermore , Barrick had pressing Balance sheet issues. So clearly , the GFI/Barrick deal brought all manner of benefits including enabling GFI to shed SGL gold assets , without impairing its Invested Capital materially. If these Aussie assets were NOT highly profitable, then they would have bogged GFI down by restricting Balance sheet flexibility.

    If readers need more information, i will elucidate with historical financial and production performance data.

    Truly yours ,
    GS

  2. Welcome back Mr Goldspeculator, you have been absent for some time and your analysis has been missed.

    Please do provide further analysis / more detail on the transaction based on historical data. Furthermore, do you believe the acquisition of NAP puts to bed the prospect of Impala acquiring RBPlat and/or developing Waterberg project?

    In the PGM space, which company would you invest in? I quite like Northam as they’re low on the cost curve (Booysendal) and I’m keen to take a punt on Sibanye (the acquisition of Stillwater is in the price so only upside from hereon?).

    Regards,
    Alex ([email protected])

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