Impala Platinum: Excellent Business At An Attractive Price At The Right Time; Rating Upgrade (OTCMKTS:IMPUY)

Note: I previously covered Impala Platinum (OTCQX:IMPUY) in November 2023. I discussed the company’s strengths: excellent capital structure, quality assets, and cheap valuation. At the time of publishing, it was too early to buy. Over the last few months, the narrative about PGMs has been shifting. Automotive companies are backing down from BEV hype and returning to the reality of ICE and hybrids. So, the demand for PGMs will remain resilient in the coming years. In today’s article, I review Impala’s last results and update its valuation and rating.

To clarify for readers: 2E means platinum + palladium; 3E means 2E + rhodium; 4E means 3E + gold; 6E means 4E + osmium + ruthenium. Most of the figures are stated in South African rands. I imply an exchange rate of 18.51 R/US$ as of April 10, 2024, when required.

2H23 Operations Update

Impala Platinum has two divisions: mining and refining. The mining segment contributes 48% of the company`s revenue, while IRS (Impala Refining Services) accounts for 51.3%.

Impala’s prime mining assets are:

• Impala Rustenburg Mine in South Africa is the largest platinum mine in the world, with 667 k oz annual platinum production (excluding other PGMs) with LOM until 2035.
• Zimplats mine in Zimbabwe. It produces 266 k oz platinum annually with LOM until 2059.
• Bafokeng Mine in South Africa is another gem in the company’s portfolio. Until 2052, it had an annual output of 160 k oz platinum and LOM.
• Mimosa Mine JV with Sibanye Stillwater in Zimbabwe. It has LOM until 2034 and 6E cash costs of $1,030/oz.
• Two Rivers Mine, in partnership with African Rainbow Minerals. The annual 6E output is 300 k oz, and the LOM is 23 years. The 6E cash cost is $763/oz, the lowest among Impala mines.

In 2H23, Impala realized 1.75 Moz refined production, or 19% higher than 1H23. The company’s refining capacity benefited from reduced load curtailments by Eskom in 2H23. Impala increased its output by 18% to 1.9 6E Moz compared to 1H23. The group unit costs R20,334/oz ($1,096/oz).

In November 2023, Shaft 11 of the Impala Rustenburg mine collapsed, causing the death of 13 employees and 73 injured. Shaft 11 tragedy significantly impacted Impala’s safety metrics in 2H23. Production losses caused by the tragedy are approximately 30,000 6E oz. Rustenburg mine output for 2H23 declined by 5%, reaching 596,400 6E oz. Rustenburg mine achieved a unit cost of R20,569/oz ($1,110/oz).

2H23 marks the first six months of the Bakofeng mine operation under Impala ownership. In this period, the mine yielded 253 600 6E oz at a unit cost of R19,598/oz ($1,058/oz). Zimplats mine delivered 9% higher production volumes in 2H23, reaching 320,200 6E oz. JV (Mimosa and Two Rives) 6E production reached 276,000 6E oz in 2H23 vs. 270,500 6E oz in 1H23.

Impala expects to deliver between 3.3 and 3.45 Moz 6E refined production in 2024 at a unit cost of R21,000 – R22,000/oz ($1,134 – $1,188/oz). The table below from 2H23 booklet provides 2024 guidelines.

Unit cost is expected to increase because of growing inflationary pressure. Rustenburg mine output will remain lower in 2024 due to the Shaft 11 issue. Zimplats mine is projected to boost its production by another 20 – 50,000 6E ounces in 2024.

The following chart shows 2H23 financial results.

Despite the weaker PGM markets, Impala remained profitable in 2H23. The company delivered R43,425 million in revenue and R8,435 million in EBITDA. For comparison, in 1H23, Impala realized R57,797 million in revenue and R24,506 million in EBITDA. The company experienced a significant decline in FCF in 2H23, dropping to R(4,760) million.

Balance sheet

Impala reported on December 31, 2023, $502 million cash, $61.8 million long-term debt, and $193 million total debt. The company keeps an excellent capital composition with 3.1% total debt to equity and 25.6% total liabilities to total assets. For 2023, Impala delivered $35.9 million in operating cash flows and $88 million in operating income. The company paid $2.5 million in interest expenses for the same period.

The graph below compares Impala, Sibanye Stillwater (SBSW), and Anglo-American Platinum (OTCPK:ANGPY) on solvency and liquidity. All figures are LTM.

All three companies have conservative balance sheets. However, Anglo-American and Impala share the first place with below 10% total debt to equity and double-digit EBITDA/Interest Expenses. The PGM market has been, at least to say, challenging since its peak in 2022. Prudent capital allocation and lower leverage are prerequisites for any mining company to survive the winter season of depressed commodity prices, i.e., in Impala’s case, the PGM bear market.

Dividends

Impala pays dividends and distributes dividends based on 30% of adjusted free cash flow, pre-growth capital. For 2H23, it realized negative cash flow, so an intermediate dividend was not declared. Comparing the IMPUY, SBSW, and ANGPUY dividend yields over the last two decades is worth comparing.

Anglo American scored the highest yield during peak markets (2008 and 2022). Interestingly, SBSW paid dividends in the 2014-2018 period. More than 90% of Impala’s revenue comes from 3E; the remaining is from gold, iridium, and ruthenium. ANGPY revenue originates from platinum (45%) and palladium (32%). The remaining is distributed between rhodium, gold, iridium, and ruthenium.

SBSW’s revenue composition differs significantly from that of Impala and Anglo. 54% of the sales come from PGM mining, 24% from gold mining, and 20% from scrap recycling. In 2017, Sibanye acquired Stillwater and transformed itself into Sibanye Stillwater, which explains variations in dividend distributions over the last twenty years.

Valuation

PGM miners are among the cheapest themes to bet on. Impala, Sibanye, and Anglo-American multiples are shown below.

SBSW is the cheapest in the group. Impala falls in the middle with 0.93 TTM EV/Sales and 5.33 TTM EV/EBITDA. For reference, in November, Impala traded at 0.6 TTM EV/Sales and 1.8 TTM EV/EBITDA.

Looking at the past multiples, Impala seems the cheapest in the group (except SBSW EV/Sales).

The company trades below its peak values and SBSW and ANGPY peaks. I firmly believe that the PGM deficit will lead to a resilient bull market in the coming years. A shifting attitude toward ICE will positively impact the demand for PGM. Besides that, gold leads the precious metals with 17.28% YTD gains. PGM miners, in general, are a steal at the present stock prices.

Investors Takeaway

Over the last few months, I have started building a PGM mining position. Impala is one of my choices for expressing my long thesis. However, the idea comes with a few considerable risks.

The first one is an extended bear market in PGMs. However, the likelihood is very low, considering the narrative shift and structural PGM deficit. The demand driven by the auto industry will act as a tailwind for PGM prices. Digging deeper, all three prime PGM markets (platinum, palladium, and rhodium) are most likely to remain in deficit for 2024 and 2025.

The automotive industry will start destocking its inventories. The palladium price took a hit due to excess cheap supply from Russia. This effect was amplified by extreme one-sided positioning. The chart below shows the short positioning in palladium futures.

The long/Short ratio in palladium remains low, about 0.3. The table below provides information about managed money positions in multiple commodities.

Platinum and palladium data are shown in the green rectangle.

Operating in SA (South Africa) is another risk worth mentioning. Impala’s assets are in South Africa and Zimbabwe. Impala has 48% platinum, 37% palladium, and 61% rhodium in its reserves in SA. Zimbabwean assets represent 51% platinum, 54% palladium, and 39% rhodium of total reserves. The company somehow diversified its assets base between Zimbabwe and SA. The outcome of the coming General Election in May will have a profound impact on the crisis-torn country. In my opinion, those elections are the most important for SA since the first ANC electoral win in 1994.

The financial risk is almost nonexistent, considering the company’s 3.1% total debt/equity and $504 million cash. Even at significantly lower PGM prices, Impala will cover its debt obligations.

I gave Impala a Hold rating the previous time, given the circumstances. Since the beginning of 2024, the narrative has changed. I expect the PGM prices to increase, transforming PGM miners into profitable enterprises paying juicy dividends. Impala is one of my choices for playing the PGM resurrection. I give the company a Buy rating.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.