Impala Platinum Holdings

  • South Africa has historically been known as the place of gold; the country was the largest gold producer for many decades in the 20th century. As the mines got deeper and more expensive to mine, the gold mines slowed down production, with the result being South Africa is now no longer even in the 5 global producers of gold anymore. SA has however been able to replace its declining gold industry with a booming platinum one. South Africa produces around 80% of the world’s platinum. Despite having effective control over the global supply of platinum, our platinum mining industry went through a very barren period for several years in the last decade.

  • More recently we have witnessed a threefold increase in the price of palladium. Palladium, the 2nd most common of the 6 metals found in South African PGM ore, is a substitute for platinum in autocatalyst applications. Palladium is mined in a variety of countries, with Russia being its largest producer.

  • After palladium joined platinum to become its own profit generator for PGM miners (as opposed to simply being a by-product), a third PGM metal joined the party last year. Rhodium is the 3rd largest PGM present in an ounce of ore and, as in the case of platinum, around 80% of its global supply is found in South Africa. While the palladium price performance over the last decade has been stellar, the rhodium price rise has been far more spectacular. In the last year, the rhodium price has risen from $6 000 to more than $20 000 today (see graph 1 below). This has caused the PGM basket to rise to record highs, trading today at double the price it was in 2019 (see graph 2 below). Rhodium, the least abundant of the three noble metals, is now the biggest revenue contributor to South Africa PGM mining companies.

  • Rhodium is also used in autocatalysts, but it is the only metal that can reduce nitrogen oxide emissions materially enough to meet new standards applied by regulators in the EU. Nitrogen oxide (“NO”) is one of the 3 harmful substances that are emitted from vehicle exhausts. The general rule is that the more fuel efficient the motor, the more NO emissions, the more rhodium is required to reduce these NO emissions. As rhodium is a very rare metal, there is not enough supply in the market to meet the autocatalytic demand, which is the reason that the price has increased so much in the last few years.

  • Impala Platinum is one of the top 3 PGM producers in the world. Impala’s mines produce 1.3m ounces of PGM per annum. Their primary operations are in the mineral rich PGM bushveld complex in South Africa, with smaller operations in Zimbabwe and North America. Impala, like several others in the industry, had to recapitalise their balance a few years ago. Impala has a relatively high proportion of rhodium in their mined ore compared to its peers, with more than 6% rhodium per PGM ounce. It has consequently been one of the biggest beneficiaries of the elevated rhodium price, currently creating a windfall of excess profits. 

  • In addition to having a high proportion of rhodium, Impala is trading on the lowest estimated 2021 PE and estimated 2021EV/EBITDA ratios out of all the large JSE listed precious metal counters. It is trading on only 5x 2021 estimated earnings (consensus earnings expectations which have more than doubled in the last year). Much of the increase has been due to the high rhodium price. Impala has traded on an average forward EV/EBITDA multiple of 7.5x over the last 20 years. If you were to value Impala using this methodology, Impala shares would currently be worth R300. Even if you had to assume that the rhodium price is a temporary phenomenon, and remove these excess rhodium earnings, it would still be trading at a material discount to its historic average. Impala is currently making a free cash flow yield in excess of 30%. Shareholders should expect to see a strong dividend this year, as well as the possibility of a special dividend. With the surging PGM metal prices still yet to reflect fully in Impala’s published results, we believe there exists a short-term opportunity for investors to accumulate Impala at current prices.

Impala Platinum Holdings