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GCR upgrades Northam Platinum Limited’s rating to A-(ZA); Outlook Stable

Oct 18, 2017
GCR upgrades Northam Platinum Limited’s rating to A-(ZA); Outlook Stable

Global Credit Ratings has accorded the above credit ratings to Northam Platinum Limited (“Northam”) based on the following key criteria:

The growth strategy that Northam articulated at the time of the BEE transaction has begun to materialise with the successful acquisition of quality PGM assets at very favourable prices. In addition, the miner has brought existing projects to commissioning on time and within budget. Thus, Northam’s corporate risk profile has eased as Booysendal has maintained steady state production for two years, becoming the second operational mine of the group. Moreover, recent transactions will add additional sources of productions, as well as geographic and segmental diversification through the recently acquired US based recycling assets.

Notwithstanding only marginal revenue growth from platinum group metal sales (“PGMs”), Northam reported a 60% increase in operating profit. This was achieved due to improved metals prices, a greater portion of lower cost production, general economies of scale and tight cost controls. Ensuring operations are amongst the lowest cost producers is critical within the current weak price environment. While Booysendal is already in the lowest cost quartile, Zondereinde is a relatively high cost mine, although recent development and investment capex should see production costs decrease relative to its peers.

Northam reported a very strong YoY improvement in operating cash flows in FY17. While there was some working capital pressure due to an inventory build-up, this should be resolved with the commissioning of the new smelter, and the group is also expecting a release from inventories in 2H FY18. This should support sustainable operating cash flows above R1bn in the medium term.

Northam has a strong capital base, with the R1.8bn in cash at FY17, well in excess of the R425m in interest bearing obligations. Even on a gross basis, gearing metrics are low, with gross gearing and gross debt to EBITDA at 4.2% and 64.1% respectively (FY16: 4.4%; 90%). Accordingly, the miner remains in a strong liquidity position despite acquisition and capex costs projected for the medium term, with R3bn to be spent in FY18 alone. These costs will be met by the cash holdings, almost R1bn in excess inventory, and the robust projected internal cash flows. Northam also maintains a large committed debt facility with Nedbank, which can be used to cover unforeseen requirements on short notice.  Moreover, the success of recent development and investment activity provides some comfort that the c.R3bn in capex activity committed for FY18 will be successfully implemented.

Northam’s performance remains highly exposed to exogenous factors, primarily volatile PGM prices. While the group is confident of the long term demand for PGMs, pricing may be volatile in the short term which would impact cash flows. In addition, regulatory uncertainty has increased in South Africa and remains a risk to the entire industry, although Northam’s current BEE status is in excess of proposed requirements.

Further positive rating migration is predicated on development of Booysendal South and recently acquired ore bodies. This should see the operating margin continue to widen and sustain robust cash flows and credit protection metrics, as projected.

However, any challenges that delay the current capex project, or increase development costs, could place some pressure on liquidity and thus lead to negative rating action. In addition, performance could be negatively impacted by volatile PGM prices labour and safety disruptions or adverse regulatory changes.