Northam Platinum has spent R10.9bn in debt and cash towards eliminating the Zambezi preference share structure earlier than the 2025 deadline.
The Zambezi preference shares are the debt instrument that underpins the 31.4% BEE stake in the platinum group metals (PGMs) producer, which has undergone an aggressive growth spurt at its Booysendal, Zondereinde and Eland operations.
In the latest purchase, Northam spent R1.6bn buying JSE-listed Zambezi preference shares, giving it a total ownership of 80.4% of the instrument. Of the R1.6bn, Northam paid the Public Investment Corporation (PIC) R1.3bn for the preference shares it holds.
This means the Zambezi empowerment parties, who had owed about R15bn in debt to various parties, now owe Northam R12bn and the original lenders about R3bn. The buying of preference shares has no consequence for the BEE ownership stake because it merely shifts the ownership of debt.
The value of the BEE stake in Northam is R31bn, which means there would be significant value if they were able to repay their debt now by selling shares, but the deal only matures in 2025.
Northam has run up debt of about R7.1bn in a R15bn domestic, medium-term notes programme to buy the preference shares. The balance of the R10.9bn paid for the shares has come from the cash pouring into the company from the high prices for the basket of metals it produces.
With a margin of about 50% on these metals, Northam is pumping cash.
Northam is a conservative company and has been trying to mitigate risk for itself, its shareholders and empowerment partners. It is unlikely to wait nearly five years, in which time the market could change negatively, reduce the company’s share price and put Northam under pressure to repay debt.
Any shortfall between the investment held in Northam and the preference share liability has been guaranteed by Northam, which can elect to redeem any shortfall with its shares and/or cash in a ratio it decides is most suitable.
Future earnings
Given that the scheme is so clearly positive for all parties now it would suit everyone for the transaction to be finalised as soon as possible rather than run the risk of adverse developments in May 2025.
“Northam’s acquisition of more than 80% of Zambezi preference shares represents a significant step in pursuit of the company’s previously stated intention to accelerate the maturity of the Zambezi transaction. This strategy continues to positively impact future earnings and shareholder value creation,” Northam CEO Paul Dunne said on Tuesday.
Northam intends to update investors in the first three months of 2021 on the Zambezi preference shares and empowerment structure. It plans to have a vote by shareholders and the Zambezi stakeholders within that period to finalise its strategy.
If the empowerment partners sell Northam shares to pay off debt, it would reduce their stake in Northam to below the 30% empowerment requirement stipulated in the third iteration of the Mining Charter gazetted in 2018.
It’s not clear at this stage what Northam’s strategy is around the 30% ownership level and what arguments it may make to the department of mineral resources & energy around the transfer of real value to its empowerment partners to offset that requirement.
Northam management has previously argued that the best value for its shareholders would be created by the purchase of the preference shares instead of paying dividends or buying back its own shares. Once the preference shares are out of the way, Northam will consider how best to reward it shareholders, Dunne has said.
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