Analyst questions the economic wisdom of Implats' bid for Canada's NAP
JOHANNESBURG – A top mining analyst has warned that the proposed R11.4 billion Impala Platinum (Implats) acquisition bid of Canada’s North American Palladium (NAP) may not be beneficial to the company.
Noah Capital's Rene Hochreiter said on Tuesday that the acquisition had taken the market by surprise, after Implats announced that it would restructure its loss-making Rustenburg operations.
“It is a very expensive acquisition, which will result in little uplift in production,” Hochreiter said, adding that NAP had not made a profit for 15 years before the palladium price had exceeded $1 400 (R21 175) an ounce.
“The deal looks good at the moment, but in five years from now, the palladium price may start declining on our forecasts,” Hochreiter said.
He said that "NAP was in the higher half of the industry cost curve, with margins below average relative to the rest of the industry at this stage of the cycle”.
Palladium has been in the spotlight after it reached a record high and was $1 676 an ounce last week, primarily driven by demand from the automotive sector.
Implats told the market late on Monday that it had entered into an agreement to acquire NAP, whose Lac des Iles mine comprises an underground mine, surface mining activities and a concentrator plant.
Implats chief executive Nico Muller said the group had made material strides in implementing the restructuring of its Impala Rustenburg operation to achieve a smaller and more productive mining footprint, and it had delivered enhanced efficiencies.
“This, together with a significantly improved PGM price environment, resulted in strong free cash flow generation and a material strengthening of the group's balance sheet, which has enabled Implats to assess opportunities which have the attributes to accelerate delivery on its strategic imperatives,” Muller said.
Last month the group said that it would be in a position to return to a sustained dividend within the next 12 to 24 months after higher sales volumes on the back of the stronger metal prices helped it rake a R1.17 billion profit in the year ended June 2019 from an R10.7bn loss in 2018.
The group said the deal would help it to develop a competitive global portfolio of producing, processing and exploration assets.
It said that the acquisition diversified its production base geographically from South Africa and Zimbabwe to North America.
NAP said the transaction delivered attractive value for its shareholders after the group established Lac des Iles Mine as one of Canada's largest, lowest-cost and safest underground mines, producing a metal that contributes to a cleaner global environment.
“By becoming a significant part of a larger, integrated global producer, we will benefit from greater access to technical, operational and financial resources with which to pursue our production, development and exploration objectives in Canada,” said Jim Gallagher, NAP president and chief executive.
Implats shares declined 0.74 percent on the JSE on Tuesday to close at R103.50.