Northam tops JP Morgan SA PGM picks as bank says Booysendal will “transform” firm

Macro image of a one ounce Palladium bar

NORTHAM Platinum was being transformed by the development of its Booysendal project, said JP Morgan Cazenove in a report published last week in which it rated the firm its preferred pick of the South African platinum group metal (PGM) producers.

Northam Platinum is due to increase production to about 900,000 ounces of PGMs a year – a doubling at a time when elevated palladium and rhodium prices, and a depreciation of the rand against the dollar, has increased the basket price of PGMs.

Although uninspiring when set against palladium and rhodium, the platinum dollar price has also increased this year. It, however, trades as a significant discount to palladium. Platinum is trading at $893/oz, a $100/oz increase year-to-date. Palladium, however, is trading at $1,823/oz, an increase of more than $500/oz year-to-date.

In its report, JP Morgan also upgraded its two-year price forecast for palladium 27% and 25% higher in 2020 and 2021 to $1,556 and $1,250/oz respectively. It adjusted downwards its forecast for the platinum price which would average $925/oz in 2020 – a 10% decline.

Northam is not especially geared to the palladium price, but it has the opportunity of increasing its exposure to rhodium through the development of its Eland Platinum project. The price of rhodium has increased to about $5,500/oz from about $2,500/oz in May.

“Our top pick among South African PGM miners remains Northam, which we believe is being transformed by the expansion at its Booysendal mine,” said Dominic O’Kane, an analyst for JP Morgan Cazenove.

“We expect this expansion to drive peer-leading earnings growth for Northam, while a substantial inflection in free cash flow should support ongoing purchasing of its preference shares,” he said.

Northam had bought about 23% of the Zambezi Platinum shares for an average price of R74/share. This compares to a current price of R81,21/share.

The repurchase programme is important because Northam Platinum’s ordinary shares back the preference shares on a one-to-one basis. This is following an empowerment deal in which Zambezi Platinum bought a 32% stake in Northam Platinum in about 2015.

The Zambezi preference shares fall due in 2025, but Northam’s healthy cash flow generation, born of an improvement in the PGM basket price, has enabled Northam to buy some of them back before the redemption date falls due.

JP Morgan said it least preferred PGM share was Anglo American Platinum (Amplats) largely on the basis of valuation. The company had the best PGM assets and a robust balance sheet but there were few near-term catalysts to its share price.

O’Kane said the bank was neutral on Impala Platinum (Implats) despite identifying about 20% earnings price per share accretion from its imminent $758m North American Palladium acquisition and 15% to 20% group free cash flow yields. This was because Implats was “… highly leveraged to JP Morgan’s bearish PGM price trajectory”.

Once the purchase of North American Palladium is concluded, Implats will add about 237,461 oz a year in new palladium production from the Canadian firm’s Lac des Iles mine. Implats also has the option of taking a controlling stake in the Waterberg Joint Venture, a palladium project located far north of the Bushveld Complex in South Africa.

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