NORTHAM Platinum ended more than 18 months of high-stakes corporate theatre when it reversed out of a potentially balance sheet-destroying bid for Royal Bafokeng Platinum (RBPlat) in April. Yet instead of leaving shareholders ragged, the company is now the preferred share of the platinum group metals (PGM) sector.
“Compared with peers, Northam is most able to sustain earnings at spot prices and will continue to improve its balance sheet,” says Adrian Hammond, an analyst for SBG Securities. “For these reasons, we reiterate Northam as our top pick.”
Hammond has been a steadfast supporter of Northam’s business case for several months. He rates the firm’s production growth, which has enabled it to increase sales consistently, as a major differentiator. For financial 2024, guidance for Northam’s refined metal sales is as much as 990,000 ounces, against 738,000 oz in financial 2022. In an environment of high cost inflation, and just as palladium and rhodium prices correct, Northam is one of the few PGM companies keeping a rein on costs.
No peer can compete with Northam’s growth. Impala Platinum (Implats), the company that beat Northam to RBPlat, reported cost inflation of 14% in the year to June 2023 and a 5.5% decline in sales. In December, Anglo American Platinum (Amplats) slashed production guidance for this year and next, citing lower grades from its flagship Mogalakwena mine and uncertainty as to how it might be expanded.
Northam’s decision to bail out of its 34.5% stake in RBPlat had benefits. Though it sold at a loss, Northam still walked away with R13bn in cash and shares (since sold). This enabled it to declare a maiden dividend, launch a share buyback programme, and commit to a dividend policy for which investors had been clamouring.
Hammond praises the dividend policy — 25% of headline earnings — and describes Northam’s recent full-year earnings as impressive. The results “set in stone Northam’s shift down the cost curve to best in class”.
So while shareholders may wonder what the 18-month pursuit of RBPlat was about and question Northam CEO Paul Dunne’s assessment of the PGM market when it began, they can’t cavil at the company’s countercyclical investment strategy in its own growth.
Northam also benefits more than any other PGM producer from the recent improvement in the chrome price. According to a recent report by RMB Morgan Stanley, the metal will contribute R4bn-R5.3bn in revenue for financial 2024 at its current spot price. That nearly rivals rhodium, which will contribute R6.5bn at current prices, says the bank, which describes chrome as a “kicker” for PGM miners. Chrome this year will account for 12% of Northam’s top line but 6% for Sibanye-Stillwater, and far less for Implats and Amplats.
The price of chrome, used in the manufacture of stainless steel, has more than doubled over the past three years from $150 a ton to $320. This is partly owing to the depletion in Chinese stocks of the metal. China accounts for 60%-65% of ferrochrome demand, according to CRU, an industry research house. The country buys about 80% of its chrome imports from South Africa. Transnet’s export logistics constraints do not appear to have been an issue.
Dark horse
One PGM company that tends to be overlooked, probably owing to its size, is Tharisa. When chrome becomes an important contributor, however, Tharisa heaves into view. “Chrome will be about two-thirds of our revenue this year, and it gives us a huge kicker because as a percentage of production vs our PGMs, it’s much larger than any other PGM player,” says spokesperson Ilja Graulich.
In addition, roughly a quarter of Tharisa’s production is sold as high-grade speciality chrome, which attracts a premium to standard metallurgical chrome. “Hence our share price has outperformed the others,” says Graulich. Over the past six months, shares in Tharisa are about 20% weaker, compared with 43% and 33% declines for Implats and Amplats. Shares in Northam are 27% weaker over the same period.
Still, there’s no getting away from the fact that 2023 has been a horrible year for PGM miners. Says RMB equity analyst Christopher Nicholson: “While the contribution from chrome is meaningful, we note that PGM sector economics continue to look marginal at spot prices.” He warns of “significant downside” to its earnings forecasts.
This article first appeared in the Financial Mail.
