Which South African company might be sniffing around Northam? And why is Northam, until now apparently so resolute about going it alone, considering a tie-up?
These are the big questions after the news that CEO Paul Dunne and other management members had received an “unsolicited, exploratory, nonbinding approach” from a “major” local platinum group metals (PGM) producer earlier this week.
This deal, says Northam, would either involve an “asset-level transaction” — in other words, a sale of one or more of its mines — or a “corporate transaction” (read: takeover). Far from rebuffing the offer, Northam has now thrown itself open to the market — and potentially a raft of other suitors, too.
That there are only three other major PGM players on the JSE — Valterra, Impala Platinum and Sibanye-Stillwater — means the pool of potential suitors is tiny. At a market cap of R123bn, taking into account Tuesday’s rally, Northam is the smallest of the four, followed by Sibanye at R142bn. Implats is worth R209bn and Valterra sits atop the pile at a valuation of R396bn. It was the share price performance of Valterra, however, that may have given the game away: while shares in Sibanye and Implats barely budged, Valterra stock fell almost 5% on Tuesday on the news.
“For now it’s probably a 90% chance that it’s Valterra and an outside chance that it could be Ivanplats, but I’d say that’s very unlikely,” Jandre Pieterse, resources analyst at Umthombo Wealth, tells the FM. Ivanplats is part of Ivanhoe Mines, the operation owned by flamboyant mining entrepreneur and risk-taker Robert Friedland. Both Sibanye and Implats have already explicitly said they’re not interested.
Umthombo Wealth is already overweight Northam. Pieterse calls it their “top pick” within the local PGM sector, given the company’s “high-quality” assets and strong production profile. “We do like that they have put themselves in a competitive process to extract maximum shareholder value,” he says.
So, why Valterra? For starters, it has a large net cash position of almost R24bn as of end-June. Then there is the synergy potential between some of Valterra’s mines and Northam’s assets, such as Amandelbult and Zondereinde mines, both very deep, very old operations on the Merensky Reef; and Valterra has spare refining capacity.
Another intriguing angle is the people involved: Willie Theron, who developed Northam’s Booysendal mine, recently joined Valterra as its head of mining operations.
While the approach was explicitly made by a local producer, Pieterse says companies from China and the Middle East might be keen to throw their hats into the ring, too.
Officially, Northam’s board “has resolved to initiate a strategic, competitive process to proactively solicit proposals from interested parties regarding one or more potential transactions, with a view to maximising shareholder value”.
That Northam has never been so openly keen to strike a deal — other than its own hard-headed pursuit of Royal Bafokeng Platinum four years ago — is no sign of a change in its growth strategy, says Hurbey Geldenhuys, its head of investor relations.
“We just think it’s in the best interest of the process, and to unlock value, that it’s done in an orderly manner,” he tells the FM. “There’s no change in thinking, and we always try to do things properly, and this is the only thing one should read into it.”
This is not an unusual way to proceed, but Northam could easily have chosen to hold talks with its potential buyer away from public scrutiny. Asked about this, Geldenhuys says: “There may be some other suitors that have never thought such a process would be possible and hence would not wade in, that may now get the opportunity to do so.”
So does this imply that South Africa’s PGM sector, and Northam itself, is undervalued and therefore ripe for corporate action? The company’s shares, after all, were trading about 40% below their February peak of R433.35 before the announcement was made.
“We do believe that the equity is undervalued,” Geldenhuys says. A process like this would, theoretically, help to crystallise what Northam is really worth.
Just this week, Northam flagged an expected 64% rise in sales revenue and more than a sevenfold increase in headline earnings when it reports results on Friday. Its Vision 2031 strategy targets PGM sales of more than 1.5Moz and chrome concentrate sales of more than 2Mt over the next five years, the culmination of a decade-long investment process in its mines. It is here that analysts see Valterra’s refining capacity really coming into play.
As for the wider industry, Geldenhuys says Northam has long maintained that a lack of investment in the PGM sector “is going to result in an irreversible reduction in primary metal production. And if the world needs the metal, they’re going to struggle to find it. That’s why we’ve been expanding our company. We are firmly of the view that the market will remain strong and there’s a good business case for PGM miners.”
So would a combined group be better able to capitalise itself or keep production going?
“We’ve demonstrated over the past 10 years that if you have the right assets and the right projects, it’s not difficult to attract capital. If you combine certain assets and you really try to have true operational synergies, where you spend capital more efficiently, clearly that’s an advantage,” he says.
“But if you pay R100 and you save R100, there’s no deal. There must be real value-unlock: pay R100 and gain R200. That is a transaction.”
While Northam shares initially jumped 6% on the news, taking the stock back above R300 on Tuesday, there’s no guarantee a deal will be struck.
Northam did, however, reveal that this isn’t the first approach it’s fielded. Far from it. “Over the years, Northam has received a number of unsolicited approaches from credible parties,” it said in a media release. “On these occasions, Northam engaged in bilateral negotiations, and it became evident that Northam was significantly undervalued, and no transaction materialised.”
