Johannesburg, 24 October 2019 – GCR Ratings (“GCR”) has affirmed the national scale long term Issuer rating accorded to Northam Platinum Limited (“Northam”, “the group”) of A-(ZA) and revised the short term Issuer rating to A2(ZA) (on the change in GCR’s Rating Scales, Symbols and Definitions, May 2019); with a Positive Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Northam Platinum Limited||Issuer Long Term||National||A-(ZA)||Positive Outlook|
|Issuer Short Term||National||A2(ZA)|
GCR announced that it had released new criteria for rating corporate companies in May 2019. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the review under the new methodology, and the ratings have been removed from ‘Under Criteria Observation’.
The outlook change to positive acknowledges Northam’s improving trends in earnings and growing production profile, as well as its conservative debt protection metrics. At the same time, the ratings incorporate its small scale given its limited portfolio of fully operational mining assets and a lack of commodity diversification. Moreover, the group’s operations are domiciled within South Africa’s politically and economically challenging jurisdiction.
At present, Northam has two core producing mines. Zondereinde is the group’s largest producing asset and contributed around 59% of total volumes and 54% of earnings in FY19. Booysendal has a relatively short track record, with the North complex having reached steady state production in FY16 and the South complex only now starting to materially increase production. Operating and cash flow diversity should gradually improve over the medium term by the ongoing ramp up of a few different projects. The group also benefits from its long reserve life at its mines of around 30 years and integrated business model.
The rating also considers Notham’s strengthening earnings profile, where the group is viewed to have a globally competitive cost structure, which provides a level of margin resilience in a weaker environment. This is supported in large by the efficiency of its mechanised mining operations at Booysendal, which compensates for the higher cash cost of Zondereinde. Northam’s EBITDA margin displayed a very strong improvement to 27.2% in FY19, from 16.8% in FY18, as a result of increasing sales volumes together with positive metal prices momentum. GCR views supportive price conditions continuing into FY20, and more importantly increasing capacity at Booysendal (particularly as a significant portion of capex in the investment cycle has already been spent) to drive materially stronger cash flows over the ratings horizon.
Northam’s financial risk profile is considered a credit strength, based on growing operating cash flows and improving financial flexibility. Net debt to EBITDA registered at a lower 1x at FY19 from 2x in FY18, operating cash flow to total debt of 57.7%, and interest coverage of 8.3x, with the improved credit metrics expected to be sustained over the next 12-18 months. This is further supported by management’s publicly stated commitment to maintain leverage below 1x, even as excess cash is retuned to shareholders. GCR does, however, also recognise that the Zambezi preference share liability adds a level of complexity to the capital structure, and adds a persistent element of cash flow pressure.
Northam has a generally good track record of generating positive discretionary cash flows, which strengthened its liquidity position from FY18 levels. GCR expects that growing production will continue to translate into stronger cash accumulation and manageable near-term debt maturities following refinancing last year, improves the group’s ability to manage PGM price volatility or working capital fluctuations. Northam also benefits from R1.3bn available under its revolving credit facility, with liquidity sources expected to be more than adequate to cover cash outflows, primarily capital expenditures and shareholder returns, to ensure it faces no liquidity pressure.
The Positive outlook reflects the likelihood of an upgrade if Northam continues to expand its production profile and operating cash flows in line with expectations. It also incorporates an expectation that the group will maintain financial discipline regarding expansionary capital expenditure and shareholder distributions.
The outlook could be revised back to stable if the anticipated improvement in cash flows and credit metrics doesn’t occur, due to a reversal in supportive market conditions or for other reasons. Although not anticipated in the near term, the ratings could be lowered on the back of a decline in earnings arising from operating or geopolitical problems, and/or a deterioration in credit metrics or liquidity stress.
|Primary analyst||Sheri Morgan||Senior Credit Analyst|
|Johannesburg, ZA||morgan@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Companies, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Corporate Sector Risk Scores, October 2019|
Northam Platinum Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||BBB+(ZA)||Stable||June 2012|
|Issuer Short Term||Initial||National||A2(ZA)||–||June 2012|
RISK SCORE SUMMARY
|Country risk score||8.50|
|Sector risk score||4.00|
|Management and governance||0.00|
|Leverage and capital structure||2.00|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Origination||A process of creating assets.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The credit ratings have been disclosed to Northam Platinum Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Northam Platinum Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Northam Platinum Limited and other reliable third parties to accord the credit rating included:
- The audited financial results for June 2019;
- Four years of comparative audited numbers;
- Industry presentations;
- Detailed facility breakdown at June 2019;
- Financial forecasts.