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Sorting the platinum winners
A roadmap to potential merger & acquisition activity in this red- hot sector.

Author: Barry Sergeant
Posted: Friday , 13 Apr 2007

JOHANNESBURG -

Sky-high platinum, palladium and rhodium prices have intensified speculation over potential merger and acquisition (M&A) activity in South Africa's Bushveld igneous complex, host to the world's biggest contiguous platinum group metal (PGM) deposits.

South Africa's new minerals policy, along with sustainable growth in global demand for PGMs, have spurred the creation of a number of junior PGM players, now all in play, alongside the long-established stalwarts, Anglo Platinum (JSE: AMS, R1220 a share; OTC: AGPPY, $168.5 a share), Impala Platinum (JSE: IMP, R235; OTC: IMPUF, $29.75), and Lonmin (LSE: LMI, £34.22; JSE: LON R485).

There is also Russia's Norilsk, which produces significant ounces of platinum and especially palladium, but as byproducts to nickel. Norilsk, indeed, produces more palladium that the rest of the world put together.

Previous M&A activity amid the Bushveld complex has included Lonmin, which acquired Messina, and more recently, AfriOre. African Platinum (AIM: APP, £0.54) is currently under offer by Impala. On Thursday, the stock price of Eland Platinum (JSE: ELD, R102.50) shot up on an official cautionary that it's involved in talks. On Friday, Ridge Mining (AIM: RDG, £1.19) jumped in London as investors continued to speculate about which platinum junior may become the next play for predators.

In the background on Friday, palladium moved up for the seventh consecutive day to $375 an ounce, near its highest in almost a year, and platinum moved to around $1,272 an ounce, the highest since November 21 when it touched $1,403. Precious metals are hot, with PGMs leading precious metal equities as hefty market prices for byproducts such as nickel help to top up burgeoning corporate cash flows.

Beyond the three major platinum diggers, the so-called Tier One PGM stocks, specialists also follow Tier Two names, viz., Aquarius Platinum (LSE: AQP, £16.43) and Northam Platinum (JSE: NHM, R57), and then the bigger explorers, Ridge Mining, Platinum Group Metals (TSX: PTM, C$3.70), and Platmin (TSX: PPN, $7.75). Then there is the so-called North American group, comprising two established players in Stillwater Mining (NYSE: SWC, $14.04), and North American Palladium (TSX: PDL, $10.27).

Then there are the outliers: Anooraq Resources (TSX: ARQ, $2.30), Eastern Platinum (TSX: ELR, $2.07), Platinum Australia (ASX: PLA, $1.68), Wesizwe (JSE: WEZ, R11.30), and Nkwe (ASX: NKP, $1.19), among others.

Outside Tier One and Two, Eastern Platinum carries the highest market value, at $1.2bn. Last year Eastern Platinum graduated to "Canada's largest" PGM producer when it acquired an indirect majority stake (69%) in Barplats, with interests in operations and projects in the Bushveld complex at Crocodile River, Kennedy's Vale, Spitzkop, and Mareesburg.

Analyst Mark Smith at RBC Capital Markets has developed a sophisticated model for valuing PGM stocks, but thankfully, the analysis of the smaller PGM stocks can be usefully focused on the so-called adjusted market capitalisation (AMC) per ounce, based on the most generous definition of resources. The numbers suggest that Pan Palladium is by far the "cheapest" stock, at just $2 AMC (also known as enterprise value) per ounce.

This is followed by Ridge Mining at $7, Anooraq ($8), African Platinum ($10, under offer from Impala), AfriOre ($15, taken out by Lonmin), Eastern Platinum ($15), Nkwe ($15), Platinum Group Metals ($28), Platmin ($31), Eland ($42), Platinum Australia ($55), and Wesizwe ($68).

A number of specialist precious metals investors have singled Platmin out of this group, favoured for its near-surface high-grade Bushveld platinum asset, plus longer-term growth in underground assets adjacent to Lonmin's Messina mine. Platmin is anticipating pro-forma potential production of 500 000 ounces a year PGMs.

Access to smelting and refining is another critical factor in evaluating potential M&A in the South African PGM sector. The scramble is on to build new smelters and refineries, long the preserve of the established Big Three. A number of the juniors, however, have toll contracts, not least with Impala Refining Services (IRS). Others, such as Anooraq, score access by running joint ventures, in this case, with Anglo Platinum, on the east and north limb of the Bushveld complex. Eastern Platinum's life-of-mine toll with IRS applies only to Crocodile River; its other interests are up for toll negotiation.

None of Platmin's four projects have offtake contracts, but Lonmin owns 22% of the company, at least for now. Ridge Mining has an offtake with IRS on Blue Ridge, but no deal yet for Sheba's Ridge; and so on. Given the positioning of projects, there appear to be natural consolidation deals for some listed stocks, such as Platinum Group Metals and Wesizwe. Such a merged entity could form an interesting target for Aquarius, which could look to pooling agreements with Anglo Platinum.

There is also good potential corporate activity from within Anglo Platinum, given extended delays in its black economic empowerment (BEE) plans. Anglo Platinum already operates 11 platinum mines in South Africa, and one in Zimbabwe. Potential deals from the Anglo Platinum stable include 15% of subsidiary Lebowa Platinum being vended to a BEE grouping led by Anooraq. Such a deal could include the Lebowa-adjacent Ga-Pasha project.

Anglo Platinum could also look to selling its 22.% stake in Northam Platinum to Mvelaphanda Resources, backed by its biggest shareholder, Afripalm. These parties may also be future partners for development of Anglo Platinum's Booysendal deposits, but this package could also involve the likes of Wesizwe.