NORTHAM Platinum had overcome doubts about its ability to buy back shares in Zambezi Platinum for value after securing about 23% of the company’s stock since August.
“There was scepticism that we wouldn’t get the preference shareholders to sell shares without paying a big premium,” said Paul Dunne, CEO of Northam Platinum. “But we think shareholders sold because they also have ordinary shares in Northam.”
Zambezi Platinum shares have been bought for an average of R74/share which compares to a current price of R79.50/share.
Dunne said the strategy of buying Zambezi shares had significantly de-risked the company’s balance sheet which enabled it to complete a R1.35bn capital placement this week, raised at 2.5% above three-month ZAR-JIBAR, equivalent to about 9.5%.
Northam believed that if it bought about half of the Zambezi preference shares it would have completely de-risked the black economic empowerment funding structure of 2015/16 in which it raised net R4bn by selling shares to then newly created Zambezi Platinum.
The shares were then backed by Northam Platinum shares on a one-to-one basis and listed on the Johannesburg Stock Exchange as convertible preference shares. Zambezi Platinum, owned by black shareholding groups, originally had a 32% stake in Northam.
The Zambezi preference shares fall due in 2025, but this year’s healthy cash flow generation born of strong platinum group metal (PGM) basket prices, has enabled Northam to buy some of them back before the redemption date falls due.
About half of Northam’s 400 to 500,000 ounce a year production is exposed to the platinum market but it still has significant exposure to palladium and rhodium, the latter proving the metal of the moment. Spot rhodium is just about $5,500/oz from about $2,500/oz in May.
“Every $1,000/oz improvement in the rhodium price is the equivalent of R500m in free cash flow for Northam,” said Dunne who has made a point of diverting free cash into the purchase or Zambezi preference shares.
Rhodium is only mined from UG2 ore to which Northam is heavily exposed and any thrifting opportunities in the metal’s application in autocatalysts is with palladium. Availability of palladium is also restricted sending the price of metal 60% higher this year.
The rhodium market is worth about 1.1 million oz annually compared to about 8.4 million oz for platinum and 10.4 million oz to palladium (and 134 million oz for gold!), according to a report earlier this year by Morgan Stanley analysts, Chris Nicholson and Brian Morgan.
Rhodium is also sold under contract and is thinly traded which combines with its relatively concentrated ownership structure into an illiquid market. This has been reflected in previous spikes to $10,000/oz in 2008 before falling back to $600/oz in 2016. Dunne said, however, rhodium was being influenced differently this time around.
“There were physical conditions to the previous rhodium price increase (lock up) whereas now there is a demand pull,” he said.