SA PGM earnings to “underwhelm” as price retraction, cost inflation and capex hit home

EARNINGS from South Africa’s platinum group metal (PGM) companies may prove disappointing owing to a retraction in the average PGM basket price in the second half of the year, according to JP Morgan Cazenove.

The bank’s analyst Dominic O’Kane said in a note this week that merger and acquisition as well as growth orientated capex spend would also contribute to “underwhelming” capital distributions.

South Africa’s PGM miners have produced stellar results in the past 12 months. In September, Impala Platinum (Implats) said it would pay out half of R38.3bn in record free cash flow after announcing best ever earnings. Similarly, Anglo American Platinum announced at its interim results in July that it would pay an R175 per share interim dividend equal to 100% of the record interim headline earnings.

According to JP Morgan, cost inflation which has been identified by mining companies across all markets would also crimp earnings and would be exacerbated in South Africa by power load shedding during the fourth quarter and possibly the current  quarter.

However, PGM prices would rebound providing investors with a strong risk/reward opportunity. “Global vehicle inventories are at unprecedented lows; a bullish signal for a rebound in production in 2022,” O’Kane said.

“This should typically translate into a strong restocking of PGMs and price inflation for rhodium and palladium. The timing of this PGM demand & price rebound is contingent on the de-risking of Omicron and auto supply chains,” he said.

In a report initiating coverage of Royal Bafokeng Platinum (RBPlat), UBS analysts took a different view saying that there was “further downside risk” to the PGM market in the medium term.

“From a medium-term perspective, we see further downside risk to the PGM basket price, as our above-consensus view on electric vehicle (EV) penetration and dominance of battery EVs vs hybrids sees the palladium market move from a structural deficit to structural and growing surplus over the medium term,” the bank said.

Commenting on RBPlat, it said the moves for its shares by Northam Platinum and Implats would provide an underpin to the company’s share price. “We believe the interest shown in RBPlat from Implats’ firm offer and Northam’s recent acquisitions should continue to be share-price supportive and largely negate our bearish PGM price outlook.”

Shares in RBPlat have gained about 60% since October.

On October 27, Implats issued a cautionary statement saying it was involved in takeover talks with RBPlat. Then, on November 9, Northam Platinum unveiled a deal with RBPlat shareholder Royal Bafokeng Holdings to buy a 32.8% stake in the company.

Northam has since increased its stake in RBPlat to 34.95% with an option to extend this further to 38.27%. Implats meanwhile has proceeded with a mandatory offer for all outstanding RBPlat shares after buying 35% of the company.