Edited Transcript of NHM.J earnings conference call or presentation 28-Feb-20 9:00am GMT

At Booysendal, the conclusion of a 5-year wage agreement will contribute to stable labor relations, in particular, during the production buildup at the South mine. And I’d like to take — firstly, before we touch on the results, to recap the strategic journey that has taken place here over the last 5 years. And this slide, in basic form, depicts what the company has been trying to do.

We consider the strategy in 4 phases. In 2015, we raised money, and at the same time, solved for empowerment through the Zambezi structure. I must say and reemphasize, the Zambezi transaction has been absolutely transformational for Northam in every sense of the word. It’s one of the foundation stones, on which today’s Northam has been built. Secondly, we applied some of the monies through an acquisition phase whereby we were able to secure assets at favorable prices at what has proved to be the bottom of the cycle. The western extension of Zondereinde, Everest mine, Eland mine and the U.S. recycling business are measured acquisitions, and are very complementary to the Northam business.

The third very important phase is project execution, which continues at all 3 of the mining sites. It’s one of the key ingredients to our success, in fact. We believe we are quick, innovative and capital efficient. These qualities, we believe, differentiate Northam, providing a unique growth and investment opportunity for shareholders to consider.

The final phase of our current strategy is returning value to shareholders. This is a very important phase for management. The way Zambezi is structured gives us a very obvious and powerful way to return value to shareholders through the purchase of the preference shares. As mentioned, this process has started, and we will continue doing this by applying all free cash over and above our targeted net debt position to this end. Just to remind you, we targeted net debt-to-EBITDA ratio of 1:1, and as we stand here today, we’re comfortably in that range.

The next few slides will demonstrate some of what we’ve achieved during the past 5 years. But before that, let’s have a look at the market. One of the main drivers, in fact, for our strategy was our strong conviction that PGM prices would rise appreciably as South African supply contracted, as a result of underinvestment by producers during an extended period of price weakness post the 2008 financial crisis.

We’ve built new production capacity during the downturn in a capital-efficient manner to take advantage of what we believed would be a rising market. Northam holds the firm view that PGMs are fundamentally industrial metals and are subject to normal supply and demand dynamics. The demand side of the equation, particularly for palladium and rhodium, has been boosted by the introduction of stricter emission automotive legislation, in particular, China, India and Europe. The market deficits in these 2 metals have resulted in significant price appreciation during the last 6 months. I do want to stress the main body of the appreciation happened right at the end of this period.

In our view, there is a clear investment case for platinum. Platinum, in our view, once again, is the only solution to balance this market, and we believe platinum will have it today. Rhodium needs palladium. Palladium needs platinum. All roads lead back to platinum. The average U.S. dollar basket price during the period increased by 42% to $1,443 per 4E ounce. Just as an aside, today’s basket price is around $2,600 per ounce, this equates to over ZAR 1.2 million per kilogram, and these prices bode well for the group’s financial performance for the full year.

This slide clearly illustrates how Northam has invested through the cycle. Since 2015, we spent ZAR 1.8 billion on acquisitions. That has brought us just under 49 million ounces of additional resources, plus 2 concentrated plants and with combined milling capacity of 500,000 tonnes per month, together with other high-quality mining infrastructure. If one considers the resources alone, the acquisition cost equates to $2.50 per ounce. We believe this represents exceptional transaction efficiency. The cumulative expenditure to date developing these assets is ZAR 8.3 billion. And we can see from the graph that for Booysendal this peaked in 2018 and is now starting to taper. The project focus will now start moving to Eland and the Zondereinde Western extension ore body.

The cumulative expenditure — sorry, excuse me, the capital forecast for the full financial year, our 2020 year, is estimated to be ZAR 2.7 billion, which includes for Eland at full tilt and a provision for the beginnings of what will become the Number 3 shaft complex at Zondereinde. On the back of our acquisitions, the resource base has grown 25% since 2015. Our reserve status has increased by 51% as a result of the planning and project execution. To put this in context, this allows a production of 1 million ounces for over 30 years.

Over the past 5 years, the execution of our growth strategy has resulted in a 53% increase in production from own operations. The newbuild profile is unparalleled in our view and offers, once again I’d like to repeat, a unique investment proposition for shareholders to consider.

Mining is a primary industry and sits at the bottom of the economic triangle. We have a huge economic multiplier effect and a high dependency ratio. Very importantly, at this time in our country, the investment we have made has already resulted in the creation of an additional 5,340 new meaningful mining and engineering jobs, largely in economically depressed areas of the country where the need is great. These are well paid, decent jobs. Much of the training we have done has transferred new skills to people with no previous work experience.

Northam has recently returned significant value to shareholders, as I mentioned, and all ordinary shareholders are benefiting from the rise in the Northam share price, including our empowerment partner Zambezi. The Zambezi subset of ordinary shareholders has accrued ZAR 4.9 billion worth of value by December. And today, that number is significantly higher.

I’ll now move on to the meat of the presentation, the operational review, and Alet will follow me with the financials. By the way, this picture is a picture of the check on the large raise bore machine at the Zondereinde 3 shaft.

And firstly, safety. Regrettably, in December 2019, Mr. Batswana Solomon Kalaote lost his life in a fall of ground accident at Zondereinde. Batswana was 58 years old. He was married with 3 dependents. An accident of this nature is deeply distressing to all our team members and our thoughts remain with his family, his friends, and of course, his colleagues on the mine. Shortly before this incident, Zondereinde recorded 2 million fatality-free shifts. The mine has also recently been awarded ISO 45001 accreditation. And the lost time injury frequency rate did improve to 1.14 injuries per 200,000 hours worked. At Booysendal, the good safety performance continued and the mine recorded for the first time, 5 million fatality-free shifts during the period. The lost time injury rate regressed to 0.3. However, this continues to be an absolutely world-class performance. Eland is in start-up mode with a new workforce and is still bedding down its work practices and procedures we need to improve here as the mine matures.

The safety and health of our employees continues to be at the forefront of everything we do, and we take our duty of care extremely seriously, both as a Board and as a management team.

Looking at some of the key operational highlights. As mentioned, Zondereinde had a difficult start to the year. Had a difficult 6-month period, in fact. And in July, we had a fire on the eastern side of the mine, which is an old section of the mine. It’s a disused section of the mine. There was no damage to equipment or injury to people. However, it did cause us a business interruption in July. This was exacerbated later in the period by Eskom’s inability to generate sufficient power in early November and throughout December. Despite these issues, we have managed to mitigate on production volumes, which increased by 5.4%. However, we were not able to mitigate cost.

Developments in the western extension continues as planned, and the pilot hole for the Number 3 shaft has now reached 760 meters below surface.

At Booysendal, production volumes increased by 26%, with the North mine performing exceptionally well. And the buildup from the South mine is continuing pretty much as planned. The South concentrator has also now been fully commissioned to receive run of mine ore.

Eland has produced its first PGMs, but not at full margin. The concentrator was partially commissioned and development has started at Kukama shaft. The acquisition and integration of the Maroelabult assets and the adoption of the mobile tunnel borer will necessitate a review of the Eland development and mining plan and will move through this year’s budgeting process. We’ll communicate the new parameters of Eland at the August results presentation.

Our expansion strategy is unfolding as planned pretty much, and we’re on track to achieve our 1 million-ounce production target in due course.

Northam’s production profile will, in fact, accelerate in the very next 2 years as the Booysendal South project ramps up. We’ve actually — we — this year, we’ve just begun to stope or to commence mining extraction, and now the project focus will shift to the western limb assets. Looking at the numbers themselves. So this slide gives a snapshot of the group’s consolidated operating performance. Mill tonnage increased to 3.3 million tonnes, including the first production from Eland. This resulted in a pleasing 20% increase in PGM production to 307,000 4E ounces. In addition, we also produced 19,000 ounces from third party material.

The total refined metal produce was up 6% at 319,000 ounces and PGM sales were higher, again, at 330,000 ounces. The production of chrome in concentrate increased by 28% to 469,000 tonnes. With the bulk of the additional production coming from the tailings retreatment operations at both Booysendal South and Eland Platinum mine. Despite lower prices, chrome remains a material contributor to Northam’s revenue. Total revenue per platinum ounce was 45% higher at ZAR 39,864 per platinum ounce. That’s all revenue expressed per platinum ounce produced.

Unit cash cost increased to ZAR 24,780 per platinum ounce, and we want to stress once again that this is a full mine-to-market cost with no byproduct revenue offset. In our book, cost is cost, revenue is revenue.

Looking in detail at Zondereinde, and despite the fire and the Eskom-related stoppages and of course, the fatal accidents in December, production of equivalent refined metal increased by 5.4% to 162,380 4E ounces. So it’s the result of a 2.2% higher mill head grade, coupled with improved recoveries and the treatment of surface material which made up for the impact of the fire.

Operating unit cost increased by 9.6% to ZAR 25,890 per platinum ounce, and we believe that Zondereinde remains in a very competitive position relative to its peers. With an improved operating performance and a higher basket price, operating profit at Zondereinde increased by over 300% to ZAR 1.8 billion.

The online capital expenditure for the half year was ZAR 325 million, which included ZAR 237 million for own project expenditure. The balance, ZAR 88 million, sustaining capital. The forecast capital expenditure for the full financial year at Zondereinde is expected to be ZAR 865 million, including a provision for the establishment of Number 3 shaft complex.

Development within the Western extension itself, underground has progressed very well on levels 3 through to 12. Footwall strike drives has advanced past the second mining line and developments of raise connections is in progress, as you can perhaps see on the mining plan. Stoping continues in the first mining line and is currently generating around 40,000 tonnes per month of Merensky ore. Ground conditions in both stoping and development ends are good. Planning and early work on accessing the further Western extension via the Number 3 shaft complex continues. This will be a raise bore shaft and, as I said, pilot drilling is expected to reach its planned depth of 1,430 meters at the end of this financial year, it’s a 16-inch hole. Development of the access tunnels to the underground raise bore position on 3 level is ahead of schedule.

Booysendal recorded a good production result with a very strong performance from the North mine, which is the operating mine running at full nameplate effectively and a growing production profile in the South mine. The total mill feed was 27% higher at 1.7 million tonnes, including 250,000 tonnes of Merensky ore. The DMS circuit is operating optimally, with overall recoveries above 86%. Metals in concentrate increased by 26%, very pleasing at 132,000 4E ounces. Unit cash costs rose to ZAR 18,714 per platinum ounce, following the start-up of the South concentrator and the commissioning of the 2 declines. Please bear in mind that, that mine in the south has been commissioned, together with its concentrator at very low volumes at the moment. You cannot expect the same unit cost in the south as we currently have at the north at the moment, very, very early days there.

The online capital expenditure was ZAR 700 million, of which ZAR 112 million was spent on sustaining capital. And capital expenditure for the full financial year at Booysendal is expected to be in total, ZAR 1.5 billion.

At Booysendal South, construction of the shaft head infrastructure and the central UG2 complex is ahead of schedule. And the last components will be commissioned this quarter. Underground development continues, as you can see, with the production build up to 220,000 tonnes per month, still on track for 2023. You may be able to make out on the plan on the screen that stoping has commenced quite recently to the north and the south of the decline systems.

Construction of the central Merensky boxcut is on schedule and portal development for underground access will begin before the end of the financial year. Recommissioning and equipping of what we term, BS4 decline has started, and this will provide access to the unmined ground adjacent and below the former Everest mine.

Earthworks and foundations for the north rope conveyor — this is the second rope conveyor, has started. Mechanical construction will commence in July. And this conveyor will transport Merensky ore from the north and central Merensky mining modules to the big sales concentrator. Overall, the South mine project remains on schedule and total capital forecast remains at ZAR 5.6 billion escalated.

Moving on to Eland. Processing of service PGM and chromite material commenced during this period — excuse me — how did I do that? Just give us a moment, everybody, please, could be [up not now]. The computer is on. Funny the computer is on. There we go. There we go. Thanks. Thanks very much, man.

So beginning, again, moving on to Eland. Processing of surface PGM and chromite-bearing material commenced with the partial recommissioning of the concentrator there, and we produced 16,000 ounces in concentrate, PGMs, of course, and 38,000 tonnes of saleable chrome.

Unit cash costs at these low volumes was ZAR 29,227 per platinum ounce. Bearing in mind, once again, that this operation is in very early ramp up. In parallel to the processing operations at the concentrator, developments of the declines at Kukama shaft — it’s the next slide, began with the refurbishment and commissioning of underground equipment.

We’ve adopted the tunnel boring technology, and this unit has been advanced — is being used to advance the belt decline barrel. A total of 528 meters has been developed, which is currently ahead of schedule. Revised mine planning, incorporating the adjacent Maroelabult section and the tunnel boring machine will be concluded before the end of this year, financial year, that is, and we’ll inform our revised capital program from next year.

In summary, the operations are performing well. The higher basket price has resulted in an expansion of the cash profit margin from 20% in the prior year — or the prior period to 38%, and we can expect more to come. As an aside, if you look at that basic business equation there, which is cost — revenue minus cost equals cash profit, we can see in round numbers, we got 40 minus 25 equals a 38% margin or in nominal terms, ZAR 15,000 per platinum ounce round numbers. We always round numbers. Alet is very specific, but we round this. Production, we especially round up, by the way.

The basic business equation in this period, ZAR 40,000 per platinum ounce minus ZAR 25,000 per platinum ounce. So as an aside, the price this morning surpassed ZAR 70,000 per platinum ounce. I would not, for one moment, suggest you model this, but it does indicate the leverage in the business. It also indicates our natural rand hedge. These are dollar assets.

This slide is a very detailed breakdown of group inventory compared to 6 months ago. So we’re now comparing June to December. The green bars represent the position at the end of December, while the blue bars represent the position at the end of June. I’m going to go through this in quite some detail. I think it’s quite important.

There have been — this is very dynamic. It’s very important to understand, this is very, very dynamic, and there has been significant movements of stock between the elements this year, and of course, as the company has grown. Ore stockpiles have reduced by 13,000 ounces with the partial sale of the UG2 stockpile at Zondereinde.

Concentrate in process is at normal levels for the current run rate, of course. Concentrate ahead of the smelter has increased by 12,000 ounces owing to very high deliveries in December, coinciding with significant power interruptions from Eskom. Not an easy circumstance for smelters in general.

The smelter and BMR inventories have reduced by a combined 21,000 ounces and now approximately are at expected levels. The refining pipeline has increased due to increased deliveries from South Africa to Germany. And in Germany, there’s a significant Christmas break that — where no refining takes place effectively for a period of time. Let’s just bear that in mind.

Normal inventories, at the current production rate, are approximately 165,000 ounces. And what we’ve endeavored to do with the little dotted lines is to show you where we expect normal inventory levels should be at the current run rate. It’s also very important to remember that the work in progress will grow as the company grows — physically that is. The physical working portion will grow along with the growth in the company. You can’t embark on a growth profile, such as Northam, and not expect the work in progress to increase, very important realization. Combined with this, for the financial guys, this is a rising market environment. So just please bear that in mind.

Alet, could I hand over to you for the financial review? Thank you.

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Aletta Helena Coetzee, Northam Platinum Limited – CFO & Executive Director [2]

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Thank you, Paul. Good morning, everybody. Our interim financial results were exceptional. My first slide highlights some of the key financial features. We achieved an all-time record operating profit of ZAR 3 billion compared to ZAR 1 billion in the first half of last year and ZAR 2.4 billion for the full financial year. This is on the back of an increase in revenue of 57% to ZAR 7.8 billion as a result of an increase in volumes, the weakening of the rand and significant price appreciation.

EBITDA amounted to ZAR 3.2 billion, which represents an increase of 184%. The group also made an IFRS profit of ZAR 1.1 billion as opposed to a previous loss of ZAR 63.8 million, and in line with our strategy, we have started to return significant value to shareholders.

I’m going to unpack these highlights, but firstly, earnings. We have progressively improved our returns. To illustrate this, I’ve included 3 comparable periods on the graph on the bottom of this slide. I think you can clearly see the ongoing improvement. Normalized headline earnings, which is our main measure of performance, has increased by 241% to ZAR 1.9 billion. This equates to a normalized headline earnings per share of ZAR 3.696. Because of our IFRS profit, our earnings per share increased to ZAR 3.28 versus a loss of ZAR 0.182 in December 2018, and headline earnings per share increased to ZAR 3.283 versus a previous loss of ZAR 0.19.

Moving on to revenue generated. As mentioned, revenue increased by 57% to ZAR 7.8 billion, representing a growth of ZAR 2.8 billion. The increase is largely attributable to a 42.4% increase in the average 4E basket price to $1,443, which added ZAR 1.8 billion. This price movement was mainly driven by the stellar performance of both palladium as well as rhodium, increasing by 54% and 102%, respectively. These metals are continuing their upward trend with prices this morning at $2,872 and $12,950 per ounce. In addition, we sold 11.9% more metal to just under 330,000 4E ounces which contributed an additional ZAR 786 million. And lastly, we realized a 3.7% weaker exchange rate at ZAR 14.72 to the U.S. dollar, adding ZAR 259 million to revenue.

Revenue is very sensitive to prices achieved, and to illustrate this, if the group realized the current 4E basket price in U.S. dollar terms of around $2,600, using the same volumes and the same exchange rate, revenue for the period would have been ZAR 13 billion.

Looking at cost of sales and the factors impacting unit cash cost. On the back of our improved revenue, the group generated an all-time record operating profit of ZAR 3 billion, 187% increase, equating to an operating profit margin of 37.8%. Cost of sales increased by 23% to ZAR 4.9 billion.

Some of the key movements in the individual elements making up cost of sales include: because of our increased production based, mining cost increased by 30% attributable to a 10% net increase in the number of employees, a 12% increase in the square meters mined as well as just general mining inflation. Concentrating costs increased by 71%, with the commissioning of the concentrators at Booysendal South and Eland. Both these concentrators are not yet operating at full capacity, but carry a high associated fixed cost.

Smelter and BMR cost increased, owing to both the increase in the cost of electricity as well as additional power consumption for the treatment of increased volumes of concentrate received from Booysendal South and Eland. Included in selling and administration overheads are costs relating to the corporate office and group services. This includes our marketing contributions to the WPIC, the PGI and the IPA. Royalty charges increased in line with the increase in revenue generated from own operations, taking into account unredeemed CapEx available for setoff against EBIT.

Share-based payment expenses and profit share scheme costs related expenses incurred in respect of the group’s share plan, including the shares relating to the Zambezi lock-in mechanism, which is largely influenced by the movement in the Northam share price. Also included our costs associated with the Toro Employee Empowerment Trust. With the increase in the profitability of the group, the contribution to the trust has increased by more than ZAR 60 million.

Concentrates, metals and recycled material purchase increased by 531%, with a corresponding increase in the volumes of 144%. During the current period, high-grade material as well as finished product was purchased, which carry higher premiums.

Refining cost, including sampling and handling charges, increased by 20% as a result of an increase in refined volumes, but also the establishment of a group lab at Eland. Depreciation is based mainly on the unit of production method. With an increase in production and additional capital expenditure incurred by the group, depreciation increased. Depreciation has also commenced on a number of new components relating to Booysendal South and Eland. The release in metal quantities was offset by the increase in the cost of production, which is reflected in the change in metal inventories.

Let’s look at the statement of profit and loss, and in our case, profit. Consolidated in the group’s results are amounts relating to the Zambezi structure, which includes the preference share dividends of ZAR 619 million as well as the loss on derecognition of the preference share liability of ZAR 108 million. The loss relates to the difference between the fair value per Zambezi preference share and the price we paid on transaction date, taking into account all transaction costs incurred on the purchases of these prefs. The difference between the fair value and what we paid amounted to an average premium of 2.8%.

After taking into account the Zambezi charges, the group generated a profit before tax of ZAR 2 billion. Tax is calculated on a statutory basis, thus resulted in a tax charge of ZAR 820 million. The bulk of this relates to deferred tax which is noncash. The group also started paying tax on mining income as a result of the full utilization of unredeemed CapEx relating to Northam Platinum Limited, the statutory entity in which the Zondereinde mine is housed. Booysendal, however, still has ZAR 6.3 billion worth of unredeemed CapEx available to setoff against future taxable mining income. All of this resulted in a substantial after-tax profit of ZAR 1.1 billion in comparison to a loss of ZAR 63.8 million for the previous corresponding period.

Moving on to the group’s cash flow, during the period, the group generated ZAR 2 billion from operating activities and invested ZAR 1.3 billion in capital expenditure, which generated a free cash flow of ZAR 695.8 million. This is the first meaningful free cash flow generated since the commencement of the group’s growth strategy, which required significant amounts of capital expenditure over the last 5 years.

Taking into consideration our estimate full year CapEx of ZAR 2.7 billion as well as the continued increase in prices and our production growth profile, it’s expected that the group’s ability to generate free cash flow will be positively impacted.

Cash flows utilized in financing activities amounted to ZAR 756 million. This includes ZAR 247 million paid in cash interest and ZAR 350 million, which was repaid on the revolving credit facility. It also includes ZAR 2.4 billion, which was raised through the issue of domestic medium-term notes and used to purchase Zambezi preference shares. The net impact was a closing cash balance of ZAR 875 million. I would like to refer you to Page 105 of our results booklet, which makes reference to the fact that subsequent to the period end, we’ve repaid a further ZAR 800 million on the revolving credit facility, increasing the available facility to ZAR 2.5 billion.

Looking at net debt, the various funding facilities as well as the debt maturity profile of the group. The net debt position increased to ZAR 5 billion whilst maintaining the net debt-to-EBITDA ratio in line with our self-imposed conservative target ratio of 1:1. Northam adopts a prudent approach to managing its long-term funding facilities. The group’s enlarged operational footprint and increased working capital requirements have necessitated an increase in available debt facilities. During the period under review, Northam refinanced it’s ZAR 3.5 billion 5-year revolving credit facility on more favorable terms, extending the maturity date from November 21 to September 24. Interest will now be charged on a utilization basis, with the lowest rate at JIBAR plus 220 basis points versus the previous agreement of JIBAR plus 330 basis points.

The interest rate on the general banking facility was also renegotiated from prime less 150 basis points to prime less 175 basis points. This has enabled the group to improve the average cost of borrowings by 107 basis points from 10.63% to 9.56%.

In addition, the Board approved an increase in the domestic medium-term notes program from ZAR 2 billion to ZAR 5 billion. Based on our requirements, we have issued ZAR 4.2 billion worth of DMTNs to date. Looking at the maturity profile of the current issued DMTNs, as indicated on the bottom of this slide, the repayments are well spread over the next 5 years, and management intends to roll the ZAR 750 million worth of DMTNs that will mature in the next 12 months. This is to facilitate the process of returning value to shareholders.

In addition, Northam’s credit rating was also reaffirmed with our outlook upgraded to positive. This acknowledges Northam’s improving trends in earnings, our production profile as well as our conservative debt metrics. In line with our strategy, a key focus for management is the appropriate allocation of capital to return value to shareholders. We have started to generate meaningful free cash flow, and we have increased and optimized our funding facilities. This has put us in a position to now return value. During the period under review, we did this through the issue of acquisition of 32.5 million preference shares. We now hold 22.9% of the total issued number of Zambezi preference shares, making us the third largest shareholder. Going forward, we will continue to focus our attention on returning value.

I will now hand you back to Paul for the rest of the presentation.

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [3]

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Thanks, Alet. Now that picture, by the way, is the Eland concentrator, to give you an idea of how — just how big a 250,000 tonne processing plant looks like, and it’s also in good shape, as you can see.

One of the most serious threats facing our business and the country, and in fact, the Southern African region, is the inability of Eskom to provide a reliable source of energy. The threat that unplanned — in particular, unplanned outages pose to underground workers, particularly in deep level mines, is simply unacceptable. In addition, the production interruptions and the general loss of economic opportunity is having a devastating effect on the welfare of the country. We are doing our best to manage the situation, and we will do that at our operations. And we will continue to stress to both government and Eskom just how serious this issue has become for all of us.

Despite these challenges and others, the mining operations are performing well, and we can expect to deliver further production growth as the new projects come to book. Alet and I will continue to focus on cost in order to grow our margin and maintain our relative cost position.

Our best protection is the stretch in the cost curve, and we will operate Northam well into the lower half. The full year result will deliver further margin expansion. Effective project execution is absolutely key. A lot of hard work has been done, and execution risk has reduced significantly, particularly at Booysendal. The main project focus, as I mentioned earlier, will now shift to Eland and the Western extension block.

We’re increasingly confident that we will be able to deliver the projects on time and on budget to take advantage of the rising PGM market. The automotive industry needs these metals, and we will do everything we can to satisfy that demand.

Last time we reported, we did say we would return value to shareholders, and we’ve done just that. For absolute clarity, we intend to continue with this program by applying all free cash over and above our targeted net debt level at which we are at today, and this is effectively a share buyback by proxy. The pref is underpinned — every pref is underpinned by 1 Northam oath.

To conclude, the operations are performing well. The growth strategy is on track, the basket price this morning is at an all-time record high, and we will look forward to reporting a very strong set of results for the full year in August.

Ladies and gentlemen, that concludes our presentation.

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Questions and Answers

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [1]

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If we can take some questions, please. Firstly, from the floor, then we’ll go to the lines on the webcast. And can I just ask for the sake of in particular, the people on the lines that when you do pose the question, you would just introduced yourself in a normal fashion. Leroy?

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Leroy Mnguni, HSBC, Research Division – Analyst of Metals and Mining [2]

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Leroy Mnguni from HSBC. My question is really just around you speaking about continuing to apply your excess cash to buying back the pref. At what point do you feel that you’ve bought back enough prefs to start introducing dividends?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [3]

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So Leroy, I have to answer the question sensitively. You would imagine that we have done our calculations as to where we think the right level is of purchase of the pref. It’s certainly not all of them. So without giving the exact answer, if we were to buy 50% of the prefs, we’d be very, very happy. And our model clearly shows that at that level, the structure is completely derisked.

Dividends, of course, would be a consideration for the Board, and the management team would recommend accordingly sometime in the future.

If you look — just to fill out the question, to exemplify perhaps where we are and without giving you inputs to your model — which I know you would do very comprehensively, but in round numbers, again, the basic cash equation for our business as it was in this period, ZAR 40,000 minus ZAR 25,000 of cost which is ZAR 15,000, multiplied by volume in platinum ounces.

So let’s take a view, and again, without giving absolute direction, let’s assume the prices for year 2020 come in at about ZAR 50. I think that’s probably a very fair assessment. Costs, again, this is, in a way, guidance, around about ZAR 25, there’s a 50% cash margin in this business, multiply it by the platinum volume, and you can make an assessment of that. And you will see that there is significant cash generation well above the capital requirements of the growing business. And that will give us an opportunity to make large inroads in a very short period of time into the preference share, and then it will free us up to take other capital allocation decisions beyond that.

But again, I do want to be very, very, very clear. As we stand today, our whole focus is every rand and cent of free cash will be applied to purchase the pref.

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Leroy Mnguni, HSBC, Research Division – Analyst of Metals and Mining [4]

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And then, I guess, it’s become customary for you to give us your 6 monthly rhodium price forecast. Where can we expect it to be in August?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [5]

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Good try, Leroy. That’s a good question, of course, and it’s very difficult to answer, given what’s happened. But the rhodium market — if I can flesh it out and talk about the market rather than the price levels, the rhodium market is heavily concentrated on both demand and supply. And again, I will talk in round numbers, if I may, for ease of conversation, in very, very round numbers. The rhodium market is 1 million ounce market and it’s a 80-20 market: 80%, primary production, 20% recycle. Very, very round numbers. The demand for rhodium is increasing, in our view, by at least 20% on the 1 million ounces through legislated demand across the world, in particular, in those 3 regions, Europe, China and India. So the 1 million-ounce demand will grow. The 800,000-ounce supply is unfortunately concentrated in only one ore body, pretty much in the world, which is UG2 — South African UG2. There’s nothing in Merensky, there’s nothing to speak of in the northern limb, very little in Zimbabwe, very little in North America. The Russians have got some, which is the balancing portion. 90%, in round numbers, of all rhodium supply comes from South African UG2. 90% of all rhodium demand is one application, which is the control of NOx, nitrous oxides, in the catalytic converter inside a car or a truck. Very heavily concentrated on both sides of the equation.

In a way, it’s not a difficult market, if I can say it that way with tongue in cheek. The difficulty comes, it’s a little bit opaque, but demand is rising for sure. Primary supply is under a lot of pressure because that South African UG2, it’s largely western limb units, which are aged, and that is leading to tightness in the physical market for rhodium. Rhodium is not easily substituted. And in fact, the substitute, as we understand it for rhodium is palladium on around about a 4:1 ratio, and that will bring its own problems for the palladium market, which is also tight.

So this is why we use that expression. Rhodium needs platinum — sorry, excuse me, rhodium needs palladium, and in turn, palladium needs platinum. All roads lead back to platinum. That is the solution to balance this market.

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Patrick Mann, BofA Merrill Lynch, Research Division – VP & Research Analyst [6]

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It’s Patrick Mann from Bank of America Securities. I just wanted to ask maybe to push you a little bit more around palladium needs platinum. So for a long time, people have been looking for when substitution comes in, particularly in gasoline autocats. So maybe if you could just give us your view on where you think the auto OEMs are in that process, and how long it could take?

And then the second question was, you’ve obviously commissioned new concentrators, employed more people to increase production and you’re not yet at full utilization. So I suppose from here, how much do you expect real unit costs? How do you expect that to evolve as your production grows? I mean have you put in most of the fixed cost base at this point? And we should expect real cost to come down? Or is there still a bit of fixed cost to be added?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [7]

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Okay. Thanks, Patrick. Let me answer the second one first. It’s probably the easier one. As production grows against the fixed cost base, of course, the unit cost — and it’s the unit cost, I think we’re all referring to will come down. There’s no doubt about that, and we’ve put quite a bit of fixed cost in this particular period. We’ve effectively commissioned a brand-new mine with a — with 2 declines. So to differentiate Booysendal South from Booysendal North, Booysendal North has a single decline, Booysendal South in mining terms, is effectively twice the size. We’ve just commissioned with very little volume. Clearly, the unit cost will be suboptimal, there’s no doubt about that. But you should not be worried about that, that’s the point we make. It’s very, very important not to get blinded by that issue. The volume will come as the production ramps up and the production ramp-up will take about 4 years.

The same applies at Eland. We took a lot of fixed cost with a view to produce, and the production will come. Our tendency and the culture at Northam is very clear, we expense quickly. We expense quickly the — again, I think the guys will know what I’m talking about — the analyst community will know. We do not easily capitalize. We expense quickly. This is a very good discipline and it holds management’s feet to the fire by using that method.

On the first part of the question, Patrick, the — our view at this stage? We have not seen — and it doesn’t mean to say we — there isn’t, but we have not seen hard evidence of substitution platinum for palladium at this point in time.

So our view remains that the market will be led by palladium, followed by rhodium in terms of relative strength, if I can put it that way, and unfortunately, for the moment, platinum will remain the laggard until the market, and we, of course, and everybody else sees real evidence of substitutes. We haven’t seen it yet. It’s not an easy technical solution, that’s our understanding, and we’ve spoken to not only TSF, JM and Umicore, but also directly to some of the OEMs. Technically, it’s not so easy. In particular, in the hard-core application, which is a thing known as a close-coupled catalytic converter, which is a mouthful, which sits very close to a modern gasoline engine, and it sees very high temperatures. Palladium performs much better at high temperatures relative to platinum, and until that technical solution is solved, the substitution equation is not so easy.

The other thing is worth pointing out that the focus of the OEMs minds is not really on that point at the moment. It’s really all about compliance with the new legislation, backing out some of the — I can be polite, some of the bad behavior, and also getting vehicle models through real-world driving emissions test work, in particular, in Europe. So the bandwidth of the company is very much focused on those issues as opposed to the substitution effect. So at this stage, that’s our view, that’s how we understand it. But we do make the point that if that is the case, and it remains so, then we believe you will see continued price appreciation in both palladium and rhodium. And unfortunately, for the moment, platinum will remain an investment case on the possibility of substitution. And I think that’s probably what we’re seeing in terms of the price action in platinum. Platinum, as I said in the speech, has clearly got an investment case because it’s relative price. It looks — again, I’ll use my cheeky expression is cheap as chips relative to it’s sister metals and gold.

So I do think there’s a strong investment case for platinum, and we do believe that the only real way in the future to solve the conundrum that palladium and rhodium represent is, in fact, adoption of platinum.

Chris?

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Christopher Nicholson, Morgan Stanley, Research Division – Research Analyst [8]

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Paul, it’s Chris Nicholson from RMB Morgan Stanley. I’ve got 2 questions, I’m going to ask each in turn. First one, hopefully, is quite simple. Third shaft at Zondereinde, how much is that going to cost in totality? And is that — that is one of the reasons why CapEx this year at Zondereinde has been guided up from what you previously said?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [9]

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Yes, that’s correct. We’ve made a provision for this year, and we will do the same for next year. A provision, Chris, for a potential shaft system at Number 3 shaft, what we call the Number 3 shaft site.

Now there is a certain degree of technical risk associated with a raise bore at that depth, and this is why we are being a bit, shall we say, cautious in terms of our guidance for you — for the moment. We’ll come back to you probably only in about 18 months as to what we may or may not do at 3 shaft.

In the meantime, we’re going to continue with the pilot hole. As I said, it’s a 16-inch hole, it’s very important that the hole is absolutely straight because it will be a hoisting shaft. It’s not just the vent shaft or a ore pass. So technically, it’s challenging. At depth, it’s challenging.

So until we have the pilot hole in and we’ve begun to rein the large diameter from that 3 level position, and we make some headway there, we haven’t got a shaft, if I can put it very clearly as that. But in the meantime, we’re busy, and we are spending some, what I would call early monies, if I can put it that way. And for the moment, it’s a provision and we have technical stop points along the way against the success of that particular initiative. So it’s early days, if I can say it that way.

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Christopher Nicholson, Morgan Stanley, Research Division – Research Analyst [10]

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The second question and fully appreciate. This sounds completely crazy against where prices are this morning, but your primary customer is Heraeus, which I understand they predominantly use the metal for industrial uses outside of the auto industry. Is there a risk against that offtake, if the world enters a prolonged economic growth downturn? Or could they call force majeure or something against that? I know this sounds completely crazy, but yes.

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [11]

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In all our contracts, we have a force majeure provisions on both sides of the contract is — it’s pretty standard practice across the world in our industry. It — companies are very loath, extremely loath, to invoke that type of provision because it’s reputationally extremely damaging, not just at the points of core, but of course, for the future.

We are — we have a very strong relationship with Heraeus, and that partnership goes way back to the late ’80s, early ’90s when Northam was in its infancy, and we got very much confidence in the Heraeus. The structure of the contract is effectively an offtake of 30% of what we produce. Of course, if there’s a major downturn, and we don’t produce anything, 30% of nothing is nothing.

So I think it’s not a nominal amount of offtake. In terms of the refining process itself, which is the physical side, our material is the baseload for the Heraeus refinery in Hanau. We are the baseload. So when a drum arrives from Northam, it is immediately treated into that refinery because it forms the operational base on which they themselves can leverage. So we are very, very important for Heraeus, and Heraeus is very, very important for us. René?

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René Carlo Hochreiter, NOAH Capital Markets (Pty) Ltd – Mining Analyst [12]

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A question about this is the (inaudible).

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [13]

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Is the mic on for René? Just to check or can we swap the mic?

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René Carlo Hochreiter, NOAH Capital Markets (Pty) Ltd – Mining Analyst [14]

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Sorry, René Hochreiter from NOAH Capital. The COVID virus and the effect on the PGM demand, especially palladium and rhodium, I think — what do you — well, I know what I think, but what do you think about the possibility of the virus actually easing the pressure on the deficit of palladium and rhodium? And what sort of quantum do you think it could be, maybe in terms of car sales coming down for this year while that virus is a problem?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [15]

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Yes, I think René, there’s a great unknown there at the moment as to the ultimate impact. One in every 4 cars in the world is made in China, 25%, plus/minus, and it’s significantly down, very significantly down in the last couple of months. So it’s an uncertainty. It hasn’t, at this stage, impacted the metals markets. In a way, this particular period in time is a test for the metals markets in the sense that if the palladium and rhodium markets were speculative in nature, one would have thought that the speculation would have been out and run for the hills by now, and that hasn’t been the case. It’s also our understanding that these markets are true in the sense that it’s proper physical demand, in particular, driven by the automotive industry.

So the markets are true as opposed to purely speculative, if I can put it that way. And secondly, I haven’t yet got an answer for you on the first part, what the ultimate impact will be. But economic activity in China has been depressed, very depressed. In some industries, as low as 50%. In the auto industry sales part, very, very low. Retail has been very, very much impacted. But China are this morning and in prior days, encouraging everybody to return to work. In some areas, we’re back at 80% already. The number — the percentage increase in new cases is now in single digits. So it does seem that the impact is slowing down in China, that’s the best information we have at this point in time.

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René Carlo Hochreiter, NOAH Capital Markets (Pty) Ltd – Mining Analyst [16]

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And then just one more question to help my modeling, I do long-term modeling. But what sort of long-term CapEx would you use for Zondereinde, for Booysendal and for Eland?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [17]

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We normally refer to stay in business CapEx at around about ZAR 1,000 per platinum ounce, ZAR 1,000 per platinum ounce. A very good modeling number. Some people in recent time, might talk about an 8% of total working cost being applied sustained business capital as a good benchmark. Yes.

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Arnold Van Graan, Nedbank Corporate and Investment Bank, Research Division – Mining Equity Analyst [18]

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Paul, it’s Arnold Van Graan from Nedbank. So I got 2 questions. The first one relates to your Eland mine plan, as you alluded to reviewing that. So I don’t want to preempt the process, but does it imply a quicker ramp up at Eland? So that’s the first question. And the second one is, what is your contingency plan regarding Eskom? Are you looking at some self generating capacity? And I guess, going back to the first question, how does that impact your process at looking at Eland and building that up, given the risk associated with reliable energy supply?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [19]

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So the last bit, Eland is quite energy-light, first of all, given the nature of that operation is very, very shallow. So big — no big refrigeration equipment refined, for instance, or hoisting, no vertical shafts. So Eland is quite light on power, it’s not necessarily our primary rationale for what we do with Eland. What is encouraging as with respect to Eland, we’ve got a very high percentage of rhodium. I think the prill splits or the metal splits we’ve produced at the last results presentation, you can have a look at them, very high rhodium percentage, shallow, large, virgin ore body. And in this last period, we’ve just purchased a second asset, which is contiguous or next door, and we now have 3 shafts. Kukama is — would be the middle shaft and Maroelabult would be the Western shaft and Nyala would be the eastern shaft. And we’ve initiated on Kukama, and now we will integrate in the first instance, Maroelabult, together with Kukama, and we’ll have a look as to how that impacts all the main parameters, such as working costs, capital requirement, and more importantly, the revenue stream. The answer to the first part of your question is, yes, it does.

There’s one from Bruce at the front.

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Bruce Williamson;Integral Asset Management;Analyst, [20]

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Bruce Williamson, Integral Asset Management. At current market prices, do you have a rough estimate of what the cost of the contained platinum — contain PGMs in an autocat are compared to the average cost of the metal car itself?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [21]

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Well, platinum, not specifically. No, Bruce.

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Bruce Williamson;Integral Asset Management;Analyst, [22]

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No, if you just take the 3 metals together?

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [23]

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We’re looking at a big auto in North America, around about $1,000, if I’m understanding correctly, one of the bigger units. Yes, if I’m correct.

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Bruce Williamson;Integral Asset Management;Analyst, [24]

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So it’s $1,000 versus a car that might cost.

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [25]

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And a smaller car in Europe, maybe $300, $400. Again, I’m guessing a little bit, but René wants to — Damian wants to answer the question for me.

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Damian Stephen Smith, Northam Platinum Limited – Group Geologist [26]

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Sorry, can I help you? For palladium rhodium catalysts, it’s the approximate cost at the moment is $600 a catalyst. For platinum, the same platinum running, it’s about $400, okay? So that $400 or $600 compares to the cost of a car.

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [27]

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Yes. And of course, platinum itself is primarily used in the diesel units, primarily. Palladium, rhodium in the gasoline units, primarily. So any more questions from the lines? Perhaps we can go to the lines of the — are we the clear on that side? Any more questions in the room? Okay. There’s one more from Arnold. Look at [chance there].

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Arnold Van Graan, Nedbank Corporate and Investment Bank, Research Division – Mining Equity Analyst [28]

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A question for Alet on the pref. So I mean, looking at these numbers, you might get to your target of buying back the prefs quite quickly. What’s the next step from there? What’s the most tax and efficient way to do that? Is that paying a dividend? Or is there any structure or any way to revise the structure we can just service the coupon?

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Aletta Helena Coetzee, Northam Platinum Limited – CFO & Executive Director [29]

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Well, it depends on what happens to the pref price and our free cash flow generation. But once we get there, our Board will reassess how best to return value to shareholders, and that might include the payment of a dividend. But time will tell.

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Paul Anthony Dunne, Northam Platinum Limited – CEO & Director [30]

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Okay. Thank you very much, ladies and gentlemen, please join us for a sandwich and a cup of tea, and there’s further opportunity for questions. Thank you.