Johannesburg, 13 October 2017 — Global Credit Ratings has today upgraded the national scale Issuer ratings assigned to Northam Platinum Limited to 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 growth strategy that Northam articulated at the time of the BEE transaction has begun to materialise with the successful acquisition of quality PGM assets at very favourable prices. In addition, the miner has brought existing projects to commissioning on time and within budget. Thus, Northam’s corporate risk profile has eased as Booysendal has maintained steady state production for two years, becoming the second operational mine of the group. Moreover, recent transactions will add additional sources of productions, as well as geographic and segmental diversification through the recently acquired US based recycling assets.
Notwithstanding only marginal revenue growth from platinum group metal sales (“PGMs”), Northam reported a 60% increase in operating profit. This was achieved due to improved metals prices, a greater portion of lower cost production, general economies of scale and tight cost controls. Ensuring operations are amongst the lowest cost producers is critical within the current weak price environment. While Booysendal is already in the lowest cost quartile, Zondereinde is a relatively high cost mine, although recent development and investment capex should see production costs decrease relative to its peers.
Northam reported a very strong YoY improvement in operating cash flows in FY17. While there was some working capital pressure due to an inventory build-up, this should be resolved with the commissioning of the new smelter, and the group is also expecting a release from inventories in 2H FY18. This should support sustainable operating cash flows above R1bn in the medium term.
Northam has a strong capital base, with the R1.8bn in cash at FY17, well in excess of the R425m in interest bearing obligations. Even on a gross basis, gearing metrics are low, with gross gearing and gross debt to EBITDA at 4.2% and 64.1% respectively (FY16: 4.4%; 90%). Accordingly, the miner remains in a strong liquidity position despite acquisition and capex costs projected for the medium term, with R3bn to be spent in FY18 alone. These costs will be met by the cash holdings, almost R1bn in excess inventory, and the robust projected internal cash flows. Northam also maintains a large committed debt facility with Nedbank, which can be used to cover unforeseen requirements on short notice. Moreover, the success of recent development and investment activity provides some comfort that the c.R3bn in capex activity committed for FY18 will be successfully implemented.
Northam’s performance remains highly exposed to exogenous factors, primarily volatile PGM prices. While the group is confident of the long term demand for PGMs, pricing may be volatile in the short term which would impact cash flows. In addition, regulatory uncertainty has increased in South Africa and remains a risk to the entire industry, although Northam’s current BEE status is in excess of proposed requirements.
Further positive rating migration is predicated on development of Booysendal South and recently acquired ore bodies. This should see the operating margin continue to widen and sustain robust cash flows and credit protection metrics, as projected.
However, any challenges that delay the current capex project, or increase development costs, could place some pressure on liquidity and thus lead to negative rating action. In addition, performance could be negatively impacted by volatile PGM prices labour and safety disruptions or adverse regulatory changes.
|NATIONAL SCALE RATINGS HISTORY|
|Initial Rating (June 2012)||Last Rating (September 2016)|
|Long term: BBB+(ZA)||Long term: BBB+(ZA)|
|Short term: A2(ZA)||Short term: A1-(ZA)|
|Outlook: Stable||Outlook: Positive|
|Primary Analyst||Committee Chairperson|
|Eyal Shevel||Sheri Few|
|Sector Head: Corporate Ratings||Senior Analyst: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
Northam Platinum Limited Issuer rating report, 2012-16
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE SECTOR
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Economies Of Scale||Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.|
|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.|
|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.|
|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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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 with no contestation of the ratings.
The information received from Northam Platinum Limited and other reliable third parties to accord the credit ratings included:
- the audited 2017 financial statements;
- four years of comparative numbers (based on audited financials);
- financial forecasts and cash flow projections for the financial years 2018-2022;
- 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 upgrades Northam Platinum Limited’s rating to A-(ZA); Outlook Stable