Arne Frandsen is hoping to bring his company’s long-awaited listing to Joburg as soon as markets permit. “We have been in this business for long enough to know that the market window opens with little notice. When that happens, Sedibelo is ready,” he says of Sedibelo Resources, a platinum group metals (PGM) producer of which he is chair.
Sedibelo operates Pilanesberg Platinum Mines near Rustenburg. It has been promising to go public for the best part of three years, but a complicated corporate structure related to its days as part of the now-defunct Pallinghurst Resources Fund prevented this from happening.
Sedibelo’s listing will add colour to SA’s listed PGM sector, partly because it looks on the marginal side, a bit like Harmony Gold is to the gold sector. Published financial numbers, now available on Sedibelo’s website, demonstrate a slim US0.04c a share basic earnings profit in the six months to June against $1.24 a share last year, when PGM prices were trading higher.
The question, though, is whether Frandsen and his Sedibelo Resources — which is also expected to take a listing in the US — have missed the best part of the PGM market. Naturally he doesn’t think so, yet there’s a lot of caution about PGM shares among investment analysts at the moment, reflected in the performance of shares since January.
Anglo American Platinum (Amplats) is 23% weaker at the time of writing. Impala Platinum (Implats) is 21% lower while Northam — which has the uncertainty of a possible bid for Royal Bafokeng Holdings (RBPlat) hanging over it — is 19% down. Sibanye-Stillwater, with its exposure to the gold sector, is a slightly different case. Shares in the company are 13.5% weaker year to date.
It seems the heydays seen in recent years could be drawing to a close
— Arnold van Graan
“It seems the heydays seen in recent years could be drawing to a close,” says Nedbank Securities analyst Arnold van Graan. He points to the most recent operating and financial results from the PGM majors, which were a disappointment.
Output was lower while inflation on consumables, including fuel, was pronounced. In addition, safety incidents and the continued impact of Covid — which results in low skills availability and supply constraints — were a drag on performance.
Most producers also reported a sharp increase in capital spend, which Van Graan puts down to higher stay-in-business costs. Northam, for instance, revised its capital expenditure higher to about R5.4bn for the current financial year, against R4.6bn for the year ended June.
But the major factor for PGM shares, and which could lead to further weakness, is the headline issue of global recession, especially its impact on automotive production.
Platinum has diverse end uses but other members of the PGM family, rhodium and palladium in particular, source about 85%-90% of their total consumption from the automotive market. Last year’s deceleration in vehicle production, owing to a supply shortage of semiconductors, resulted in a decline in the palladium price from $2,400 an ounce to about $1,700 an ounce.
However, primary supply of PGMs, which is dominated by SA producers, continues to be unreliable — a positive for metal prices. In September, Amplats cut its full-year refined PGM production forecast by up to 700,000 ounces following a delay in the commissioning of its Polokwane rebuild project. Since the beginning of the year, the palladium price has regained ground. It’s now at $2,200 an ounce, partly assisted by an improvement in semiconductor supply to the automotive market.
Added to this, the rand exchange rate against the dollar has weakened about 15% since the beginning of the year. This helps drive up profitability and suggests PGM producers are likely to report decent margins. So while inflation is a challenge for SA miners, metal prices are highly supportive. But how long can it last? Market and structural factors may translate into future earnings weakness.
According to UBS analyst Steven Friedman, the PGM basket as a whole is still trading above the marginal cost incentive level. He forecasts “material downside risks to sector margins and returns against a backdrop of increasing cyclical and structural headwinds”.
Recession is the big daddy of concerns. UBS sees a slowdown in automotive production once the current backlog has been worked through, raising concerns about the 2023 outlook. Structurally, the adoption of electric vehicles is also a risk for PGMs, which don’t supply that type of car. “While ICE [internal combustion engine] vehicles are still down 13% in key end markets, combined EV [electric vehicle] sales increased about 78% year to date, reinforcing the structural demand headwinds from increasing EV penetration rates which will likely weigh on ... palladium and rhodium prices over the medium term,” says Friedman.
There are also particular reasons for being wary of SA’s PGM stocks. An extended offer for RBPlat could have negative consequences for Implats’s share price, as it will have to extend a cash guarantee to the JSE’s Takeover Regulation Panel.
Implats CEO Nico Muller said last month the company’s R10.50 a share final dividend could have been better but for the guarantee.
The last chapter in respect of Implats’s battle with Northam over RBPlat is yet to be opened, but it will surely have value consequences for either company, depending on what they decide to do. Adrian Hammond, an analyst for Standard Bank Securities, recently threw a new spanner in the works. “The option to ‘walk away’ may be a better option for either bidder,” he said in an investment note.
Northam hasn’t yet stumped up a bid to build on its 34.5% foothold in RBPlat, while Implats has taken its shares to about 41%. Neither looks like backing down, global recession notwithstanding.
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