Northam CEO sees rhodium, palladium prices continuing their strong run this year

Paul Dunne, CEO, Northam Platinum

Higher rand prices for its basket of PGMs and rising volumes from its growth projects helped Northam Platinum to generate R695.8 million of free cash in the six months to December.

Normalised headline earnings more than trebled to R1.88 billion from R533 million in the same period in 2018.

Strong gains in palladium and rhodium prices over the past two months bode well for Northam’s full year profitability. CEO Paul Dunne said the market deficit in rhodium, 90% of which is sourced from SA, was rising by about 20% a year as a result of legislation requiring lower NOx emissions from autocatalysts in Europe, China and India. The palladium price is also expected to continue rising from its current level of about $2 650/oz. “We can see a three in front of that number,” he said.

Platinum makes up about 60% of Northam’s sales basket but contributes about 30.8% of total revenue. Dunne said since rhodium production depended on palladium, and palladium on platinum production, it was inevitable that “platinum will have its day”. There is currently research under way on substituting platinum for palladium in autocatalysts but there was no easy technical solution, since palladium performs better at higher temperatures.

Northam did not declare a cash dividend. Instead, it is using spare cash to buy back the Zambezi preference shares that it issued in an empowerment and financing transaction five years ago. The Zambezi prefs, each of which is backed by one Northam share, are convertible to Northam shares in 2025. By end-December, Northam had boosted its holding of Zambezi prefs to 22.9% from 2.6% at end-June 2019.

Dunne told a media and analysts presentation in Johannesburg on Friday that when Northam held 50% of the Zambezi prefs the structure would be completely de-risked. In rough numbers, if Northam’s revenue for financial 2020 rose to R50 000/equivalent refined platinum ounce (from R39 864/oz in the first half) on higher prices, and costs were held around R25 000/Pt oz, accompanied by rising volumes, significant cash would be generated, well above the capital requirements of the business. “That would enable us to make large inroads in a short time into buying the prefs and then take other cash allocation decisions,” he said.

The group mined 306 738oz of equivalent refined 4E PGMs from its own operations in the six months to December, including a contribution of 15 921oz from the Eland Platinum Mine, which was restarted in June 2019. The mining plan for Eland, which has a relatively high proportion of rhodium in its prill split, is currently being revised after the recent conditional purchase of the adjacent Maroelabult Mine.

The US recycling operations made an operating loss of R9 million. These operations is still treating small batches of salvaged catalytic converters at the Zondereinde metallurgical facilities on a trial basis.

Capex was R1.4 billion, of which R1.2 billion was expansionary. A total of R2.7 billion will be spent in the year to June. In the next six months the focus of Northam’s project execution will be Eland Platinum and the Western extension at Zondereinde.

Dunne said Eskom’s inability to supply reliable energy was a major risk factor, both for Northam and for the broader South African economy. Northam can generate about 11MW of emergency power from diesel at Zondereinde. But its approximately 100MW of electricity consumption is too small to justify the costs of building a large-scale solar PV plant, as some other miners are planning. It needs government policy to be unlocked, he said.

Northam’s shares are currently trading at R121.43, close to the 12-month peak of R128.90.