Northam’s back to basics

[] — NORTHAM Platinum’s interim results announcement was more notable for what was glossed over than discussed.

The R22bn abortive takeover proposal from Impala Platinum was dismissed in a few seconds. It was described merely as an unsolicited proposal in which no share swop ratio acceptable to both parties could be agreed. And there was no mention of the difficult underground mining conditions that were a litany at previous Northam briefings.

Pressed by an analyst, Northam CEO Glyn Lewis conceded that the original Northam mine on the western limb of the Bushveld complex, now optimistically known as ‘Zondereinde’ (Endless), will always be a “difficult” mine. But he hoped that expansion westwards – where indications are the resource may extend further than originally thought – will bring more “normal” conditions.

After the briefing, Northam’s projects manager Rene Rautenbach said that during talks with Impala, it was business as usual, especially with respect to progressing the Booysendal project, which is situated on the eastern limb of the bushveld complex.

This is just as well, because even if improved conditions and an extended life enhance the value of Zondereinde, it remains essentially a short-term cash cow; Northam’s long-term future rests totally on a successful development of Booysendal.

So it’s reassuring that the fundamental news at Northam is positive. Lewis also went out of his way to debunk market rumours that Booysendal could cost as much as R8bn to develop. That, he said, was based on an assumption that the mine would entail four portals and be up to 2km deep.

Adoption of a modular schedule, with one portal to mine an initial 120 000 tons per month, has cut this to R2.4bn. Of this capital expenditure, R600m will be spent on surface infrastructure which won’t have to be replicated when two further portals are developed, which are pending market conditions. And peak spending will be about R900m, in each of 2009 and 2010.

Lewis is adamant that Northam is cash positive even in current tough market conditions. Consensus among analysts was that the feasibility study may call for the raising of about R1bn medium-term external finance.

Mechanised mining

More controversial may be the preference for mechanised mining at Booysendal. This has had, to put it mildly, mixed results in South Africa.

Northam is well aware of the risks, especially grade dilution because of the greater width mined, and is looking at ways of ameliorating them. He points out, too, that all the developing projects on the eastern limb have plumped for mechanised mining.

In fairness, Northam has at least one other string to its bow. Lewis asserts that it has a complete mine-to-market capability and aims to leverage its capacity. It can offer a “competitive alternative” to juniors entering the market, a case in point being offtake agreement with Platmin, a Toronto- and London-listed business, that comes into effect on April 1.

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If Platmin fulfils its production ambitions, it could over time contribute around 40% of Northam’s total sales, though obviously at a lower profit per ton. On the other hand, test work for another company, Braemore Resources, to process the “mud” that collects at the bottom of Northam’s plant is going well.

Still, it’s three years before the Booysendal concentrator may be commissioned, and the Platmin contract will build up slowly. So for the foreseeable future, Zondereinde remains the name of the game.

Analysts’ thumbsuck forecasts are that Northam will do well to earn 85c per share in the second half, for a total of 200c/share. This could permit a 28c final dividend for a total of 66c/share (330c/share). The share has plunged from its March 2008 high of 5 900c but the market responded positively to this morning’s news, a 110c rise taking it up to 1 900c.

On these, admittedly highly speculative, assumptions, that’s a forward multiple of 9.5 and yield of 3.5%. There could be value in that, for the brave.