Implats uses cash windfall to tackle expensive bond

Impala Platinum, SA’s third-largest source of the metal, offered to redeem its $250m convertible bond due in 2022, removing risk and uncertainty from its balance sheet, and taking advantage of a windfall from higher metal prices.

The dollar bond was one of two convertible bond Implats issued in 2017 to raise $500m to redeem two bonds of $200m and a R2.67bn that were falling due in 2018.

These two new convertible bonds due in 2022 raised $250m and R3.25bn at a time when Implats was grappling with low metal prices and balance sheet difficulties stemming from the majority of its South African mines being unprofitable.

However, with improved palladium and rhodium prices pushing up the price Implats received for the basket of platinum group metals (PGMs) it mines and sells, the company has reduced debt and firmed up its balance sheet with higher levels of cash, allowing it to target expensive and risky debt.

“Rising rand PGM pricing and the reported improvement in operational delivery at Implats has had the dual benefit of both improving free cash flow generation and substantial share-price appreciation," said CEO Nico Muller.

"This has allowed us to contemplate taking bold steps to accelerate our capital allocation priorities by taking advantage of market conditions to reduce a material debt obligation at the group.”

The $250m bond has a 3.25% coupon and Implats pays R320m a year in servicing the bond, the single most expensive debt instrument on its balance sheet.

Implats said it was offering holders of this bond a cash incentive for an early redemption of the instrument in an exercise that closes on 19 July. It will issue up to 64-million shares to bond holders if the offer is fully taken up.

Implats could pay out up to R600m if the bond was fully redeemed, said Hurbey Geldenhuys, head of equities at Vunani Securities.

“The dollar bond requires mark-to-market accounting adjustments, which impacts earnings. Without the bond valuation volatility, earnings will be cleaner and more reflective of underlying operating trends,” Geldenhuys said in a note.

For Implats, it also cleared the way to resume dividend payments to shareholders.

“The optimisation of Implats’ balance sheet through a reduction and restructuring of existing debt is a key pillar of Implats’ strategy to reposition Implats as a profitable, sustainable and competitive business with clear capital allocation priorities and ultimately, a return to a dividend paying position,” Implats said, adding its two bonds were “identified as a priority given the higher relative costs”.

“This is expected to improve the flexibility of Implats’ capital structure through reduced levels of gearing, improve free cash-flow generation through lower interest costs and provide Implats with additional headroom on certain of its existing covenants in its revolving credit facility.”

The 2022 rand bond of R3.25bn attracts annual interest payments of R120m and will be dealt with later.

Implats’ financial situation improved in the six months from the end of June 2018, the first half of its financial year, as a focused operational improvement strategy at its problematic mines around Rustenburg took effect and benefited from the higher metal prices.

Net debt fell to R976m by the end of December from R4.4bn at end-June, with gross cash rising to R6.4bn from R2.7bn. Gross debt fell by R1.7bn to R7.3bn.

seccombea@bdfm.co.za