Impala Platinum (Implats), which currently has five main platinum group metals (PGM) mines in South Africa (SA) and Zimbabwe, on Monday (7 October) made an all cash offer for 100% of the stock of Canadian-based PGM producer, North American Palladium Ltd (NAP). Implats will pay private equity firm, Brookfield Business Partners $570mn, or $16/share, for its 81% stake in NAP. It is offering $19.74/share to minority shareholders – a 15% premium on the 30-day weighted average price, according to the company. However, we note that NAP closed at that price on Friday (4 October).
NAP’s main asset is an underground palladium mine in Ontario – 75%-plus of palladium is used in catalytic converters to control vehicle emissions. Although global vehicle sales have been on the decline, a perceived move toward tighter emission standards has buoyed palladium prices, which broke through the $1,700/oz on 30 September. As at 8 October the palladium price closed at $1,650.70/oz, meaning its YTD gain now stands at c. 38% or around $453.50/oz.
The cash offer is c. R11.3bn, or 14% of Implats’ current R82.7bn market cap. The deal will be funded as follows:
- $350mn (c. R5.2bn) in a bridge facility that will be refinanced (possibly through equity);
- $120mn (R1.8bn) in a forward sale of existing stock;
- $288mn (R4.3bn) in existing cash;
- So, effectively half cash and half debt/equity (equity of up to 3% of shares in issue).
The acquisition has been approved by NAP and Impala’s boards, however, the press release states that the transaction is still subject to shareholder approval, as well as certain regulatory, court, and stock exchange approvals.
NAP, the acquisition target, was established in 1993 and Implats, with its over two-decade exploration presence in Canada, has an existing relationship with the company. According to Implats CEO Nico Muller, over the past three years it has developed a strong relationship with, and understanding of, NAP and its management team and operations NAP produced 237k ounces of palladium at an all-in cost of $690/oz in FY18. It reported EBITDA of $147mn and free cashflow (FCF) of $45mn in FY18. Looking ahead, its guidance for this year is 220k-235k ounces of palladium at a cost of $785 to $815/oz (at spot $184mn in FCF, or at spot c. 4.5x FCF). On the balance sheet, recent cash generation has led to net cash on the balance sheet (outside of some long-term lease liabilities). At spot, Implats is generating an annualised c. R12bn in FCF, so if current pricing persists the debt will be repaid fairly quickly from new and existing FCF
In terms of the strategic rationale behind the deal, we highlight the following paragraph from Impala’s FY19 results presentation: “ the cash buffer allows the expedition of capital priorities by considering value-accretive organic and acquisitive growth opportunities and accelerating the journey towards … dividend payments and contemplation of share buybacks.”
In Monday’s announcement Implats noted that it believes “ … medium-term palladium demand will be underpinned by a structural shift in automotive requirements.” This will be largely on the back of ” … expected and continued dominance of gasoline fueled vehicles in the global light duty fleet and tightening emissions legislation in China, India, Europe and North America.”
Implats goes on to say that it expects medium-term supply to remain constrained ” … due to the depletion of reserves at producing assets and the rationalisation of both replacement and stay-in-business spend. In addition, the process of bringing potential new sources of palladium-rich supply to market faces substantial hurdles due to financing requirements and the lack of downstream processing capacity.” The company adds that “Future secondary supply is set to expand on the back of growth in primary auto demand over the past decade. However, it is Implats’ view that the palladium market will remain in a structural deficit in the medium-term …” This supports the Group’s expectation of “stronger-for-longer palladium pricing.”
In terms of the NAP acquisition, Implats believes it will ” … align Implats’ production mix output to more closely match the expected composition of both current and forecast 3E (platinum, palladium and rhodium) demand and increase Implats’ participation in global primary palladium supply, while not contributing to the further expansion of supply.”