Johannesburg, 13 October 2016 — Global Credit Ratings has today affirmed the national scale Issuer ratings accorded to Northam Platinum Limited of BBB+(ZA) and A1-(ZA) for the long and short term respectively; with the outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Northam Platinum Limited (“Northam”) based on the following key criteria:
Northam’s F15 BEE transaction is positively considered both for the substantial cash injection of R4.6bn, to be used to fund the expansion of PGM output to 800,000oz annually, and for securing Northam’s fully-empowered status long term. Management plans to stagger the medium term capex plan, which includes: the development of Booysendal South over six years at a cost of c.R4.2bn (at FYE16 numbers); a R750m investment in processing capacity; plans to deepen operational mines; and potential investment in other shallow, mechanisable resources. Northam’s sizeable capex programme over the next five years will be conservatively funded from equity and internally generated cash flows. This will effectively position the group to benefit from growth in global demand, especially as supply dwindles due to progressive depletion of South Africa’s producing shafts, amidst continued disinvestment from the mining sector as a whole.
Further diversification into fully mechanised and inherently low cost ore bodies will secure stronger margins and return on capital through the cycle, providing greater operational and financial flexibility, while reducing labour exposure. Although the substantial outlay of capital represents investment risk, GCR has taken cognisance of proven execution evidenced in the timely delivery on Booysendal North, as well as the strategic acquisition of Everest Mine (which has a number of synergistic benefits for Booysendal South) and recently, contiguous additional resources at Zondereinde.
A 7% increase in PGM sales volumes sustained Northam’s revenues above R6bn in F16. While the weak local currency somewhat tempered the impact of the sharp fall off in the USD basket price realised over the year to 6% in Rand terms, the downturn considerably amplified the contraction in earnings. Accordingly, Northam reported a 36% reduction in operating profit to R383m, despite sustained cost rigour and enhanced efficiencies. The low PGM prices also masked the growth in Northam’s own refined output, which was underpinned by Booysendal North reaching steady-state production.
While the group has booked a large, cumulative loss in the past two years, stripping out the preference dividends accrued and capital items related to the BEE transaction shows a moderate YoY increase in normalised headline earnings to R444m in F16. Operations remained strongly cash generative, which coupled with R265m in interest income, trebled operating cash flow.
Having repaid the R1.4bn, three-year domestic medium term notes issued in 2013 in 1Q F16, management has raised R425m from three and five year notes. Although there might be further recourse to DCM funding or bank facilities, operations are expected to be net ungeared in the medium term, assuming no fall out in PGM prices. Debt service ratios are sound, but are susceptible to variability through the cycle due to protracted PGM price weakness or volatility, and/or losses arising from prolonged disruptions.
Upward rating migration will be predicated on development of Booysendal South, which with Booysendal North, will see a modern, mechanised mine match output from Zondereinde. Coupled with the expansion of the operational mines, this will sustain sound cash flows and credit protection metrics through the cycle. However, business constraints arising from protracted labour and/or safety disruptions, unforeseen project delivery challenges, exogenous cost pressures, or adverse regulatory changes, would place downward pressure on the ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2012)|
|Long term: BBB+(ZA); Short term: A2(ZA)|
|Last rating (September 2015)|
|Long term: BBB+(ZA); Short term: A1-(ZA)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Northam Platinum Limited rating reports, 2012-2015
RATING LIMITATIONS AND DISCLAIMERS
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|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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 Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Option||An option gives the buyer or holder the right, but not the obligation, to buy or sell an underlying financial asset at a pre-determined price.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|SPV||An entity that is created to fulfil specific objectives. An SPV is normally bankruptcy/insolvency remote and created to isolate financial risk.|
SALIENT POINTS 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 and other 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 with no contestation of the ratings.
The information received from Northam Platinum Limited and other reliable third parties to accord the credit rating included:
- the audited 2016 financial statements;
- four years of comparative numbers (based on audited financials);
- financial forecasts and cash flow projections for the financial years 2017-2021;
- corporate governance and enterprise risk framework;
- 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 BBB+(ZA); Outlook Positive.