HANRÉ Roussouw, CFO of Royal Bafokeng Platinum (RBPlat), knows a thing or two about dividend disappointment.
As a former portfolio manager for Investec Asset Management, he recalls the train-smash that was the mining sector in 2015/16.
One by one, the world’s mining majors dropped the notion of ‘the progressive dividend’, a belief that payouts could be sustained on the ever-green double-digit growth of China.
“That kind of thing breaks so much trust,” said Rossouw of how investor’s responded to that particular mining industry crisis. It could be argued that investor trust was only truly won back last year, and only after mining firms bore down on billions of dollars in debt, a painful process of restructuring.
And then came Covid-19.
In the current environment, where uncertainty is the watchword, it doesn’t make sense to invest in long-lead projects or incur heavy capital costs.
It’s for this reason that he thinks the 10% of cash flow dividend policy adopted at the beginning of RBPlat’s 2020 financial year in March is the best route. He disagrees that as a policy it marks the company out for undue conservatism at a time when buckets of money is being dished out by other mining firms.
“We chose 10% as a bare minimum. We’ve gone for sustainability. Come hell or high water we will always pay that. We can increase the proportion of cash paid out to 20% or 30% and if there’s surplus we can also declare a special dividend. We aren’t boxed in,” he said.
The expectation raised by RBPlat is, in fact, that it’ll exceed the 10% payout ratio. The company’s R12bn Styldrift expansion, having been completed last year, is currently in ramp up mode and – for the first time ever – made a contribution to interim earnings (it made an EBITDA contribution in the previous reporting period).
Some 45 days lost to the Covid-19 national lockdown called by the South African government in March and then the failure of Anglo American Platinum’s refining facilities which buys RBPlat’s concentrate production, has also created some capital build up of R3.3bn yet to flow through to the balance sheet which ended the six months with R1.5bn in cash and about R700m in net cash, a R1.2bn period-on-period turnaround.
“We’re looking for a really good dividend then,” said Arnold van Graan, an analyst for Nedbank Securities. Rossouw managed a sheepish grin in reply. Said Rossouw: “We’ve come out of some difficulties; we’re coming out of project mode to cash return mode.”
RBPlat may look at “small optimisations” it could make to the way it operates such as an expansion of its concentrator facilities or to get more volume from Styldrift by accessing the shaft held in Maseve, a mine acquired from Platinum Group Metals in 2018, principally to access its concentrator capacity. These are not big ticket capital projects, but they may widen the margin.
Set against this is the volatility in the platinum group metal markets. Platinum, once the revenue staple, comprised only 28% of revenue in the six months period compared to 41.3% in the first half of 2019.
It has been overtaken by both palladium and rhodium, previously a small constituent of the PGM family but with a track-record for suddenly lurching into massive deficit, as it has now against tightening emission standards in China. Rhodium’s role in the production of autocatalysts, therefore, have presented it with a key role.
Who knows where the PGM market is heading in the long-term? How will electric vehicles change demand for metals primarily set up to supply traditional combustion engines. “That’s why the approach is to make hay now,” said Rossouw.