Asset manager Visio, which holds a minority stake in Northam Platinum, has called on the platinum miner’s management to abandon its pursuit of Royal Bafokeng Platinum (RBPlat), arguing the strategy would not be beneficial to shareholders.
Northam and bigger rival Impala Platinum (Implats) are ensnared in a protracted battle to gain control of RBPlat, envied for its large, shallow and high-quality platinum group metal (PGM) ore bodies.
But Visio, which manages more than R35bn in assets on behalf of its clients, said Northam is one of the only PGM producers with the enviable position of significant organic growth, which should allow it to achieve good scale and further improve its cost position. Given these favourable dynamics, there is no justification for overpaying and risking the balance sheet, the asset manager said on Monday.
In a letter addressed to management and whose key points were shared with Business Day, Visio said Northam has the highest gearing/debt of all major PGM producers and it would thus be appropriate at this point in the cycle to reduce the risk by degearing and rewarding shareholders by returning excess capital in the form of dividends and/or share buybacks.
Visio also argued that Northam is investing at the top of the commodity cycle, which “typically leads to shareholder value destruction”. The asset manager owns 4.5-million shares, equivalent to 1.1% in Northam, which is led by CEO Paul Dunne.
“We commend Northam for having invested counter-cyclically into their current assets during periods of low PGM prices. However, we are deeply concerned with this pro-cyclical acquisition,” Visio resources analyst Jandre Pieterse said.
To its credit, Northam has said to stay competitive in the medium to long term it needed to maintain a relatively significant market share, giving the shrinkage of the PGM industry over the past decade.
The RBPlat purchase, Northam contends, will enhance its ability to retain and attract capital and people, play a meaningful role with large customers and access refining capacity on competitive terms.
Northam owns nearly 35% of RBPlat, with an option to increase its stake to 38%, while Implats’ shareholding in the target company sits at 41.54%. The Public Investment Corporation is the potential kingmaker with a shareholding of 9.9%.
In the letter, sent last Thursday, Visio also said Northam’s risk management framework regarding the takeover proposal was not appropriate.
“Based on discussions with Northam management, we believe that one of the key drivers of this proposed transaction is their bullish PGM price outlook,” Visio resources analyst Vizikhungo Mpono said.
“We do not believe that it is appropriate risk management to make investments that require very high commodity prices to justify the price paid, regardless of how much confidence management may have in their price forecasts.”
Even if the forecasts are correct, the best investment would be into the current Northam assets, not into RBPlat, Visio said. “This is because Northam trades on a 3.9 times price to earnings (PE), whereas the offer values RBPlat at a 10.6 times PE, more than double the valuation per rand of earnings, using 12-month forward consensus estimates. In contrast, Northam traded at a premium to RBPlat prior to the transaction.”
PGM prices have fallen significantly since the Implats offer was made in January 2022, affecting the share prices of the companies concerned.
Other concerns were “operational deterioration” at RBPlat since the proposed transaction was made. The asset manager said while Northam’s management may be confident in their ability to turn RBPlat’s performance around, this comes with potential risk and uncertainty, particularly given how all of SA PGM miners have struggled with volumes and costs.
“RBPlat belongs to Implats. We are also strongly opposed to Northam pursuing a joint venture arrangement with Implats on RBPlat due to the above valuation concerns, as well as the risks that come from the asset being managed by two parties that have differing priorities, given that they are at different stages of the capital cycle,” said Visio.
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