Implats CEO Nico Muller. Picture: SUPPLIED
Implats CEO Nico Muller. Picture: SUPPLIED

Paying a discount on Friday’s closing price for Canada’s North American Palladium (NAP) was a shrewd move by Impala Platinum (Implats), which operationally branches out of Southern Africa for the first time in its more than half-a-century history.  

The R11.4bn deal, announced on Monday, hands SA’s third-largest platinum miner a company that’s been riding a wave of investor optimism about palladium, a metal used in vehicle exhausts to reduce harmful emissions.

The transaction also shines an awkward spotlight on SA, which under President Cyril Ramaphosa has been working to attract local and foreign investors as a vital part of efforts to allow the economy to break out of its longest downward cycle since 1945.

Implats CEO Nico Muller sold the deal as a prudent and sensible geographic diversification. He was being polite.   

SA has not been exactly friendly to investors in its vast mineral resources in recent years. The Mining Charter, for example, has largely become a quasi-legislative document that mineral resources minister Gwede Mantashe can change and to which he can add any clauses the department fancies.

Structural reforms

It would be a tough sell to any investor to commit billions of rand in exploration and mine development, which can take years before the investment starts to pay off, if investors cannot predict what regulations would be imposed on them.

Several business leaders, from the CEOs of major banks and retailers to the heads of business lobby groups, have urged Ramaphosa to push through structural reforms quickly, including cutting costs at cash-strapped Eskom, and to deliver an economic turnaround.  

The president and his team should read Implats’s move across the Atlantic as a sign of frustration over the slow pace of reforms aimed at bringing legislative certainty and ensuring Eskom is a reliable energy supplier.  

Though Eskom has not imposed load-shedding since earlier this year, it has warned that its creaking infrastructure can buckle any time. For any investor in an energy-intensive mining industry, this would be a deal breaker.

Should be happy

Furthermore, most companies would grab an opportunity to dilute the risk of working with a union that is prepared to launch an ill-conceived five-month strike as the Association of Mineworkers and Construction Union has done at Implats’s larger rival Sibanye-Stillwater in recent months. The futile strike cost Sibanye R1.6bn, and tens of thousands of rand in workers’ monthly wages.  

Implats shareholders, however, should be happy with the deal.

The offer of an average C$16.77 per share, which blends a C$16 per share offer to 81% shareholder Brookfield Business Partners and C$19.74 per share to minority investors, is a 15% discount to NAP’s closing price on Friday, the last trading day before the deal was announced.

The deal adds more of an in-demand industrial metal to Implats’s portfolio as tighter environmental regulations force vehicle manufacturers, which account for about 80% of palladium consumption, to ramp up purchases. Buoyed by a gaping supply shortfall, prices of palladium notched up record levels last week, topping $1,700/oz. Analysts say there is room for the price to trade at about $2,000/oz.

It’s easy to see what is behind Muller’s prediction that the asset will allow his company to recoup the R11.4bn investment within four years. The asset, which produces nearly 240,000oz of palladium at substantially lower cost than in SA as the mine is mechanised and boasts leading safety statistics, has an estimated mine life of seven years, which can be extended to 15 years with exploration properties nearby to add output.   

It is true that the long-term outlook for platinum group metals is shaky as a widespread adoption of electric vehicles could weigh on demand but that is not expected within the next four years, by which time Implats’s investment would be starting to pay off. For now palladium is an essential input in hybrid and petrol-powered vehicles.