Johannesburg, 31 October 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Northam Platinum Limited of A-(ZA) and A1-(ZA) in the long and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Northam Platinum Limited (“Northam”) based on the following key criteria:
The ratings consider the group’s growing base of operations, with substantial investment into acquisitions and development activity at existing mines providing additional sources of resources and productions, as well as some geographic diversity. This is expected to position Northam as a major producer of platinum and related metals over the medium term, amidst a very challenging environment where certain peers have scaled back production. Nevertheless, the ratings are still moderated by its limited commodity diversification and reliance upon two mine sites at present, with performance remaining highly exposed to exogenous factors, primarily volatile platinum group metals (‘PGM’) prices.
Northam’s integrated business model increases its production scale, diversifies value chains and enhances profit. The group reports profitable mining operations aided by growing production volumes and competitive cost assets, which have seen margins track upwards from the review low in FY14 despite the current weak USD platinum price environment. Margin progression is expected to be amplified over the next few years as new projects ramp up.
Cash flow generation at Northam has historically been robust, however, operating cash flow strain was evidenced in FY18 as a significant amount of working capital was absorbed in inventory due to a backlog of metal concentrate to be processed, including a substantial R1.4bn purchased from third-parties. Thus, a sustainable indicator of Northam’s financial strength will be its short to medium term operating cash flows, where excess inventory is expected to be processed through the additional smelter complex in FY19, which should enable Northam to resume positive free cash flows and strengthen its liquidity position.
From FY15 to FY17, Northam’s balance sheet was net ungeared, as the group utilised its large BEE cash pile and growing earnings to finance its capex activity. For FY18, however, interest bearing debt increased markedly from R435m to R3bn, in order to fund the expansion plan and working capital. This saw gross debt to EBITDA and net debt to EBITDA register at 239% and 208% respectively, which has significantly reduced gearing headroom for the current ratings. Debt serviceability weakened in FY18, with gross interest cover falling to 4.4x (FY17: 9.8x) and negative operating cash flow cover registered (after strong metrics seen in the prior two years).
In view of the aforementioned, the main credit risk facing the group is its weaker liquidity position, reflecting its reduced cash balances of R389m and cash flow strain if excess stock takes more time to unwind than planned to aid with deleveraging. This in view of continued sizeable project spending and upcoming maturing debt (albeit most likely be rolled), with only R1.2bn in committed undrawn credit lines post year-end FY18.
A ratings upgrade could be considered if current expansion and production targets are continually achieved that translate into a strengthening of cash flows and operating diversity over the medium term. Further, the group would need to show prudence in capital spending and improvement in its credit metrics. However, a material decline in revenue or profit arising from operating, geopolitical or environmental problems could lead to a downgrade. A further increase in debt-led capex or liquidity stress could also be negative for the ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial Rating (June 2012)|
|Long term: BBB+(ZA)|
|Short term: A2(ZA)|
|Last Rating (October 2017)|
|Long term: A-(ZA)|
|Short term: A1-(ZA)|
|Senior Analyst: Corporate Ratings|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Northam Platinum Limited Issuer rating reports, 2012-17
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE SECTOR
|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.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commodity||Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.|
|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 investments, 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.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|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.|
|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||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Operating Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Northam Platinum Limited participated in the rating process via face-to-face management meetings, teleconferences as well as written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Northam Platinum Limited.
The information received from Northam Platinum Limited and other reliable third parties to accord the credit ratings included:
- the audited 2018 financial statements and integrated report and prior four years of comparative numbers;
- analyst presentations;
- financial forecasts and cash flow projections for the financial years 2019-2023;
- industry comparative data, and
- a breakdown of banking facilities available and related counterparties.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR affirms Northam Platinum Limited’s rating of A-(ZA); Outlook Stable