Announcements Corporate Rating Alerts

GCR upgrades Northam’s issuer ratings to A(ZA)/A1(ZA) on strengthening earnings and conservative financial profile, Outlook Stable

Rating Action

Johannesburg, 07 October 2020 – GCR Ratings (“GCR”) has upgraded Northam Platinum Limited’s (“Northam”) long and short-term national scale issuer ratings to A(ZA) and A1(ZA) from A-(ZA) and A2(ZA) respectively, with the outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Northam Platinum Limited Long Term Issuer National A(ZA) Stable Outlook
Short Term Issuer National A1(ZA)

Rating Rationale

The upgrade of the ratings primarily reflects Northam’s strengthened earnings profile and expectations of continued robust free cash flows and financial metrics on the back of favourable commodity prices. This is balanced against the group’s small scale, with mining operations concentrated in terms of assets, geography and mineral exposure.

Northam’s profitability has surged over recent years, enhanced by higher platinum group metals prices and rising production volumes. The impact of COVID-19 has been well managed, with the group’s key mine able to resume operations fairly quickly as lockdown eased, thus own production volumes were kept relatively steady YoY, albeit 108,685 4E oz was forfeited from FY20 annual targets. Operating profit more than doubled to R5.3bn in FY20, with the margin buoyed to 30% (FY19: 23%). Importantly, whilst the pandemic has led to a delay of some of the planned capital investment for production expansion, growth projects remain largely on track. As such, further margin uplift is expected over the rating horizon as we see metal prices broadly remaining favourable and the continued ramp-up of lower-cost production from Booysendal’s mechanised operations as it moves towards reaching steady state. Partially counterbalancing these expectations in the short-term is the highly uncertain global operating climate.

The group’s competitive profile is viewed as a ratings weakness, primarily reflecting its smaller scale compared to PGM peers and major global mining companies, concentration of production from two core mines, limited commodity diversification (platinum accounts for 60% of 4E oz sales volumes), as well as significant exposure to South Africa, a high-risk mining jurisdiction. The group’s earnings have historically hinged on production at Zondereinde, however, the substantial and ongoing development of Booysendal, together with other expansion projects, are expected to continue to improve operating and cash flow diversity over the medium term. GCR favourably considers Northam’s globally competitive cost position (both core mines’ relative position is in the lower half of the industry cost curve) which allows for better margin resilience in a weaker environment, the long reserve life at its mines of around 25 years (providing long-term production visibility), and its integrated business model through the mine to market value chain.

Northam has a good record of maintaining conservative financial policies. The group recently adopted a net debt/EBITDA target ratio of 1x and thus is expected to maintain a strong balance sheet over the rating horizon, despite the large ongoing capex programme and the Zambezi share buy-back commitment. GCR expects the operating cash flow to total debt and interest coverage ratios to trend above 60% and 15x respectively, with the improvement driven by sustained higher earnings. We view Northam’s standing in credit markets to be very good compared to many rated peers, especially since it successfully tapped the bond market at competitive rates in a highly volatile environment.

GCR continues to view liquidity as strong. We expect sizable discretionary cash flows driven primarily on our expectations for relatively strong average metal basket prices to persist over the next 18 months. This is expected to boost its cash position and will be more than adequate to fund its capital expenditures from its own balance sheet and redeem term debt as it matures. Liquidity support is also underpinned by committed bank facility headroom of R4bn, with liquidity sources expected to be able to sustain at least 1.5x coverage of its 18-24-month liquidity requirements even under free cash flow stresses. We also do not expect covenant pressures. GCR does, however, 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.

Outlook Statement

The Stable Outlook reflects GCR’s view that the group will continue to pursue a conservative financial profile and benefit from its ongoing production ramp up against supportive price levels, which should translate into robust margins and cash flows that sustain strong credit metrics over the next 12 to18 months.

Rating Triggers

The ratings could be upgraded should the group direct its expected strong positive free cash flow generation to reduce gross debt on a sustainable basis. Additionally, greater progression of the group’s production profile towards targeted steady state levels that enhances scale and diversity would also need to be demonstrated. Conversely, the ratings could be lowered on the back of a decline in earnings and cash flows arising from operating/geopolitical problems and/or if commodity prices decline beyond our current expectations, which negatively impact credit metrics. The ratings could also be downgraded if the group departs from its policy of maintaining low net leverage, or if liquidity weakens.

Analytical Contacts

Primary analyst Sheri Morgan Senior Analyst: Corporate Ratings
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
GCR Rating Scales, Symbols and Definitions, May 2019
Criteria for Rating Corporate Companies, May 2019
GCR Country Risk Scores, May 2020
GCR Corporate Sector Risk Scores, July 2020
GCR affirms the national scale ratings on several South African corporates despite a deterioration in South Africa’s operating environment, Aug 2020

Ratings History

Northam Platinum Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term Issuer Initial National BBB+(ZA) Stable Outlook June 2012
Short Term Issuer National A2(ZA)
Long Term Issuer Last National A-(ZA) Positive outlook Aug 2020
Short Term Issuer National A2(ZA)

Risk Score Summary

Rating components & factors Risk scores
Operating environment 11.50
Country risk score 8.00
Sector risk score 3.50
Business profile (2.50)
Competitive position (2.50)
Management and governance 0.00
Financial profile 4.00
Earnings 1.00
Leverage & cash flow 2.00
Liquidity 1.00
Comparative profile 0.00
Group support 0.00
Peer comparison 0.00
Total Risk Score 13.00

Glossary

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
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.
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.
Rating Horizon The rating outlook period.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Refinancing The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.
Repayment Payment made to honour obligations regarding a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.
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 EBITDA by its interest payments for a given period.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
Leverage In 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.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATING

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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

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, as well as 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 ratings included:

  • The audited financial results for the year to June 2020
  • Four years of comparative audited numbers
  • Group SENS, presentations and trading updates
  • Debt facility details and covenants by counterparty
  • Financial forecasts
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