Northam Holdings defends balance sheet amid R10.7bn cash outflow in last six months

Paul Dunne, CEO, Northam Platinum

NORTHAM Holdings said today interim earnings could be as much as 65% higher as platinum group metal (PGM) prices offset a significant uplift in unit costs.

In a detailed trading statement, the company also defended its balance sheet which is being worked hard but was not under strain, it argued. The company is scheduled to report its numbers on March 31 (next Thursday).

Among the cost pressures affecting Northam was disruption caused by “regional community unrest”, as well as fatalities at its Zondereinde mine.

Impala Platinum (Implats) last month reported similar concerns regarding community disruption. Its CEO Nico Muller put the unrest down to the continued consequences of Covid which led to “elevated absenteeism and heightened community dissatisfaction and lawlessness”.

Northam’s unit costs increased 18.6% to R32,814 per ounce. The increase was also a result of flat year-on-year production of 351,359 4E oz. Inflation played an important factor as well with consumables such as chemicals and diesel proving more costly while the electricity tariff from Eskom rose. Northam’s wage bill also grew as it employed more people amid its expansion in annual production to a million oz of 4E.

Set against this was another period of strong PGM pricing. The average US dollar basket price increased 22.5% to $2,647/oz 4E. The outcome was earnings before interest, tax, depreciation and amortisation (EBITDA) of R6.4bn, some 19.1% higher year-on-year.

Basic interim earnings would be 55.9% to 65.9% higher or 935 to 995 cents a share. Headline earnings would be 931 to 991.5 cents per share. Shares in Northam 4.4% lower in Johannesburg mid-morning trade. On a year to date basis the stock is 16% higher.

Balance sheet pressure

The six month period was high on action from a corporate perspective for Northam. It wrapped up its previous black economic empowerment transaction buying back 30% of its shares and announced a new one as well as a structural change in which Northam Platinum shares were swapped for shares in a new parent company, Northam Holdings.

But the highlight was Northam’s purchase of a 34.9% stake in Royal Bafokeng Platinum (RBPlat), the majority of which was from Royal Bafokeng Holdings (RBH) in a cash and shares deal. The transaction stymied Implats’ 100% takeover plans for RBPlat, previously announced but also threw the spotlight on Northam’s financial firepower.

The group said today that it could live with net debt to EBITDA ratio of 1:1 compared to which the ratio as of December 31 was 0.81 on a 12-month rolling basis.

All in all, Northam reported a R10.7bn cash outflow as a result of its corporate manouevres of which the cash portion of its RBH offer was R4.1bn while the share buy-back accounted for R6.6bn. This took net debt to R14.3bn excluding some R5.7bn representing the deferred portion of the RBPlat shares acquisition.

Adding pressure to the balance sheet was a capital build up at the firm’s Zondereinde mine following the rebuild from May to September of Furnace 1. Some 380,000 oz were sitting in inventory as of December 31 with a market price of around R18.7bn.

Northam said the release of inventory as well as the receipt of a dividend from RBPlat and sustained high PGM prices would “normalise” the balance sheet by calendar year-end. The introduction of a second precious metals refiner had also disrupted refined production.

Northam has kept its own counsel on the acquisition of a stake in RBPlat, but it said today that the investment provided “inherent optionality” and a complementary metal mix with a higher relative platinum contribution which “fits well within the broader Northam basket”. It added: “The RBPlat assets are young, shallow, well capitalised and occupy a stratetically important position in the Western Bushveld”.