Re-jigged finances administer the kiss of life to Platmin

The game has changed dramatically at Platmin in the last few days.  A financing crisis has been averted, with huge management and corporate consequences, but investors can now breathe again.  Platmin now looks stronger than at any time in its history.

In early August, Platmin announced that The Standard Bank of South Africa and Standard Chartered Bank had jointly agreed to underwrite funding to the tune of $200m for the Pilanesberg mine.  The Pilanesberg project was apparently developing on time and on budget with first production planned for H1 2009.  So far, so good.  

The snag was, the platinum price was still up at $1600/oz on the day the loan was announced to market.  Only three months later with platinum hovering around half that level, the banks noted that Platmin’s July 2007 Feasibility Study calculations were based on a long-term platinum price of $951/oz.  Unsurprisingly, they began appending onerous forward-selling conditions at depressed PGM prices.  To quote CEO Ian Watson, “that meant we would have ended up working for the banks for the next six years.”

But around $150m was needed simply to allow completion of the mine infrastructure.  Add to that the questionable ability of Platmin’s BEE partner Moepi to pay their way – Platmin had already effectively loaned them almost $34m – and the crisis needs no elaboration.  Mercifully, Standard Bank’s initial bridging loan of $46 million (ZAR 350 million) has since been renegotiated to December 2009 from December this year, but the pressure was on.

Enter knight on white charger, one Brian Gilbertson, of Pallinghurst Resources, with an offer of equity funding.  Mining tycoon Gilbertson has quite a CV.  Ex-CEO of BHP Billiton and Vedanta, ex-chairman of Impala, and current President of Sual, Gilbertson is a big-league dealmaker, and he appears to have closed a real cracker here.  Upon final TSX approval, Pallinghurst’s $175m buys them outright control of Platmin, which in a year’s time should be producing 250,000 annualised ounces of PGM with bottom quartile cash costs.  Together with BEE partner Bakgatla-Ba-Kgafela, Pallinghurst will wind up with 69.8% of Platmin.  So depressed is Platmin’s price that Pallinghurst could afford to offer a premium of 36% to the company’s 30 day volume weighted average price, and 67% to Platmin’s closing price on December 8th.  This generous premium signals a friendly deal rather than an aggressive one.

In other market conditions Platmin’s share price would have leapt like a salmon on such news, but predictably it has scarcely twitched.  Apart from fully funding all remaining construction of the mine and the processing plant, the equity injection removes both the heavy burden of debt repayment and the forward-selling trap.  Pilanesberg is open pit and will have such low cash costs that profitability is a racing certainty.  It deserves mention that project design refinements have lowered operating costs from $511 per ounce to $400per ounce, offering a 40% margin even at today’s prices.  Part of the gain is through delaying the development of the more expensive Ruighoek section with its higher strip ratio, a change which has wider corporate significance.

The deal is conditional upon TSX approval – shareholder consent probably won’t be necessary – but assuming it goes through, Gilbertson and Pallinghurst CEO Arne Frandsen will be joining the board of Platmin.  Keith Liddell will move up from Deputy Chairman to fill the shoes of Rupert Pardoe, who resigns.  Two other Directors won’t be seeking re-election.  BEE partner Moepi will be replaced by Bakgatla-Ba-Kgafela, with Moepi swapping its interest for Platmin shares.  

The enlarged share capital, finalised by the end of March 2009 if all goes to plan, will give Platmin a market cap of C$174m (£111m) at today’s share price.

So it’s full steam ahead at Pilanesberg.  MCC Contracts have been engaged to operate the Tuschenkomst open-cast mine, where infrastructure is now 85% complete.  MCC already work for Zimplats, Aquarius, Lonmin, and Xstrata and should be a safe pair of hands.  Reef mining has commenced and first concentrate production is on track for March 2009.

A new feature at Tuschenkomst is the ubiquitous plan amongst Bushveld platinum producers to install a 10MW diesel standby generator.  The power is really only needed for the UG2 concentrator plant, but it guarantees full use of this vital contributor to revenue at a cost of around ZAR180m ($22.5m).

Further down the processing route, Platmin has signed an off-take agreement with Northam Platinum, whose smelter lies 60 km from Pilanesberg.  Refining will be done by WC Heraeus in Germany and Port Elizabeth.  Terms are under wraps but according to COO Terry Holohan, its low chromitite content (~1%) makes Platmin’s concentrate – a blend of Merensky, Pseudo and UG2 reef horizons – a highly attractive, premium-priced commodity.  The reason is that higher chromitite material can be blended with it without blowing up the smelter.  The result will be, to quote, “some of the best payment terms in the industry”.  

On the opposite limb of the Bushveld at Mphahlele, Indicated Resources have increased by 37.4% to 7.81Moz  (4.24Moz attributable to Platmin), and Inferred Resources by 47.1% to 10.0Moz (5.45Moz attributable).  A feasibility study is due to report this month, but Platmin’s eastern limb Mphahlele and Grootboom projects are both being placed on care and maintenance to conserve capital.  New order prospecting and/or mining rights will be preserved and eventually these projects will resume, perhaps in late 2009.

That isn’t the end of Gilbertson & Co’s expansionist plans, but it makes complete sense for Platmin to keep things tight and focussed local to Pilaneseberg.  In fact several interesting properties abut Tuschenkomst and Ruighoek.  Contiguous to the north with Tuschenkomst is Barrick’s Sedibelo property, an attractive add-on that would probably double the mine life from 13 years to 25 years or so.  Since the Pallighurst/ Bakgatla consortium already has an interest in Sedibelo, bookmakers will have stopped taking bets on a deal.  Abutting the other side of Sedibelo is another Pallinghurst consortium interest, Magazynskraal.  The geology may not be as straightforward as at Tuschenkomst, but a deal or deals are highly likely in due course.

Further down the pecking order will be Anglo Platinum’s Zandspruit tenement next door to Ruighoek, and Anglo’s Rooderand property immediately to the south of Tuschenkomst, although this would be an underground operation and is less immediately attractive.

In terms of price, Platmin looks attractive.  Johnson Matthey’s recent Interim Review reckons on platinum prices between $700-1,400/oz in the next months.  Assuming a conservative 40% margin, operating profits of $160/oz tot up to $40m on a market cap of CAD174m (£111m) looks anything but demanding.  However, there are a couple of notes of caution beyond PGM prices.  Firstly, Platmin have to prove they can perform in terms of ounces and costs. 

Secondly, there is a potential share overhang.  Following the takeover of Mineral Securities Limited, CopperCo holds 19.5 million shares representing approximately 17.52% of the currently issued capital of Platmin.  Unfortunately this acquisition went horribly wrong and CopperCo is now in administration.  How – and on what timescale – this pans out is guesswork.  The neatest solution is for Pallinghurst to step in, but this risks raising objections in Toronto to the current Platmin rescue deal.  Incidentally, Pallinghurst are themselves lisiting on the JSE this week.

Lifiting our noses from the detail, it is clear that Platmin is now the vehicle for Brian Gilbertson’s PGM aspirations.  Pallinghurst is backed by over $500m of unspent seed capital, with potential to raise more if warranted.  Pallinghurst’s interests are wider than PGMs alone, but Platmin’s journey over the next decade could be a very interesting one indeed.