A SHARE that hasn’t been much talked about for its investment prospects is Northam Platinum, according to a recent article in the Financial Mail.
The platinum group metal (PGM) company is embroiled in an increasingly hostile race with Impala Platinum (Implats) for control of Royal Bafokeng Platinum (RBPlat) – a narrative that has been running since November and is set to continue its next chapter at a Competition Tribunal hearing.
But analysts think the company is offering value at the current stage of the market. “Investors who think prices have peaked should probably only consider those companies that can grow volumes sufficiently to offset inflation,” said Adrian Hammond, an analyst for Standard Bank Group Securities in a report. “In PGMs, our analysis suggests that it leaves only one company to consider: Northam.”
Northam is expected to double production from 2020 to about a million oz in 2026. This is a powerful argument for the stock in the context of inflation as higher volumes provide an opportunity for lower unit costs. On this basis, the company is strongly cash generative and according to Hammond could be net debt free within 18 months of taking a controlling stake of RBPlat should it eventually turn out that way.
The company’s net debt as of end-March is unlikely to be reduced much as some R4bn in deferred payments was owing to RBPlat. As a result, dividends have been ruled out. However, a metal inventory unwind owing to furnace interruptions has been forecast to result in a doubling of share earnings in the second half of Northam’s financial year that closed on June 30.
The basket price for PGMs has eased this year off record highs in 2021 but margins for producers are still good.
Asked whether her company was able to outrun inflation, Anglo American Platinum CEO, Natascha Viljoen said: “In the short term, yes.”
“Just when we thought we were out of the woods with the (semi-conductor) chip shortages, the lockdown in China happened. Now there are concerns about inflation on consumer demand, but the prices (of platinum group metals) have withstood all those shocks,” Viljoen added.
“We expect a soft 2022 mid-year reporting season as cost inflation, ongoing risks to production and the 17% decline in the ZAR 6E (six metals in PGM family) PGM basket weigh,” said analysts at RMB Morgan Stanley. “On the upside, sector margins remain healthy and sizeable net cash balances should support capital returns,” it said.
