Impala Platinum Holdings Limited (IMP) Earnings Call Transcript & Summary

Welcome to the interim results presentation for Impala Platinum for the 6 months that ended in December 2020. With me here today, I have our CEO, Nico Muller; our CFO, Meroonisha Kerber; our Head of HR, Lee-Ann Samuel; and as well as our Operational's Head, Gerhard Potgieter. Our results were released early this morning on SENS, so I'm sure everybody has had an opportunity to digest. So very thankful for this opportunity to engage with our investor community to go through the results, and at the end, also field some questions from the audience. We are broadcasting on 2 channels: on the webcast, and you will have a function there where you can actually type questions at the end of the presentation, which we will receive and deal with in the room. Equally, for people that are on the conference, you will be reminded to just queue if you've got questions, and then we'll take questions starting perhaps on the call and then going to the web. So thank you for joining us. Without further ado, I'm going to hand over to our CEO, Nico, who will take you through the results.

Thank you very much, Johan. Firstly, absolutely delighted to be here and so happy for the industry, for all the participants, the management teams of all the companies, the shareholders, all the stakeholders, governments that have been getting support during the COVID period. It's a fantastic period for us, particularly for those people that have been part of the industry over the last decade. Wonderful to sit here today and have the opportunity to present, what I think, is another outstanding set of results for a PGM-producing company. So just our normal cautionary statement with any forward-looking statements that are going to be made today, you take your own risks on that. So firstly, what I thought I would do is I'll just provide context for our -- the operating period in the last half year compared to the corresponding period in the previous financial period because I think it provides context to some of the results. Firstly, across all of the operating assets, we've had outstanding operating performance. So that's similar to what we had except during this half year, we had to deal with COVID, which I think our team has done outstandingly well compared to a period -- corresponding period in the previous year, where we, of course, did not have COVID. But then the key differences are, firstly, the fact that we have included Canada for the first full year period. During the previous year, we only had Impala Canada for an 18-day period, and that has made a big difference in terms of our production volumes as well as of costs. So you would have seen that the overall 6E ounce production increased by 9% to 1.684 million ounces, and a big part of that is the inclusion of Impala Canada. Also during this half year period, we had far fewer processing constraints. You will recall that in the previous period, we had milling constraints at Mimosa and at Marula. Both of those operations contribute 10% or 9% additional ounces. And in particular, we did not have a repeat of the furnace maintenance that we had at Zimplats and at Rustenburg. And so that's why when you look at our -- the increase in 6E ounces in concentrate, that is 9%. But when you look at refined, you'll find that there's a 29% increase in refined ounces, and that's directly a consequence of not having had the furnace maintenance during this period. Then another big difference is the 71% increase in basket price received that went up to ZAR 35,635 an ounce, and that had a material bearing on all of the financial metrics that we are going to report today, including the ZAR 20.1 billion cash flow. So very delighted what Meroonisha, our CFO, has managed to do with the cash flow. She's made material progress with strengthening the balance sheet. In particular, I'm delighted about the reduction in gross debt, which declined from ZAR 7.6 billion to ZAR 4.6 billion, and the fact that our net debt of ZAR 1.9 billion at the end of the previous corresponding period has converted into a net cash position of ZAR 20.3 billion. Also delighted that a portion of our proceeds have been allocated towards shareholder returns and very delighted to declare the ZAR 10 per dividend share that was approved by the Board in the lead up to these results. Before we get into the operating results, let me just touch on something that's very important to us. We don't focus purely on achieving success through our operating and financial results. We are also very particularly focused on the way in which we do it. From that perspective, I'm very delighted to declare that we had 0 fatalities compared to the 3 fatalities reported during the previous half year period that we are comparing to. And that all of our safety metrics have improved other than last time injury frequency rate that declined by 6% to 5.14. The total injury frequency rate improved by 21% to 9.34. In addition to that, I believe that we have consistently applied a very proactive and rigorous regime to combat the potential impact of COVID. We have a very strong medical capacity, and we have successfully navigated the first and then the second wave of COVID. We currently have 84 active cases in our total workforce, which exceeds 50,000. To date, we have recorded regrettably 44 fatalities from the pandemic, 18 of which occurred during the reporting period. From an environmental point of view, very happy to state that we have had no material incidents, and we have reduced our Level 3 incidents, our minor incidents, by 67% during the last half year. In addition to that, our water recycling increased by 18%. Our carbon intensity reduced by 10%. Our local procurement increased by 26% to ZAR 1.8 billion. And during this period, we invested ZAR 350 million -- ZAR 355 million to combat the impact of COVID. Lastly, we are very proud that we, again, for the second year, was recognized by the Bloomberg Gender-Equality Index, one of only 380 companies worldwide to achieve that. In addition to that, we received an A rating from the Carbon Disclosure Project for water risk awareness, management and disclosure and a B rating for emissions disclosure and activities. Lastly, very recently, I think, about 10 days ago, we, in addition, was recognized by the London Platinum and Palladium Market for responsible sourcing of platinum and palladium. So if I can just get straight into the operating results. As I said, our 6E concentrate production increased by 9%, largely attributed to the inclusion of the full half year for Impala Canada. I did explain the 29% increase in gross refined 6E production, and that was as a consequence of not having the furnace maintenance. And going on to costs, our gross cost increased by 24% to ZAR 17.6 billion. That was offset by increased volumes to a 9% increase in rand per tonne costs and translated into a 9% increase in unit cost per refined ounce on a stock adjusted basis to ZAR 14,292. Our capital expenditure increased to ZAR 2.7 billion. That represents a 39% increase. And that again is largely attributed to Impala Canada. And in addition to that, the accelerated development of our Mupani project at Zimplats, combined with the translation of the dollar expenditures into rand. This graph just provides a visual representation that shows the significant contribution of Impala Canada with a steady state performance at most of the other operations, most of them showing a small increase in 6E ounce contribution. So the question is, how has this translated into the group financial performance? We had a 71% increase in the rand basket price that was largely driven by the significant increases in palladium and rhodium price as well as a 10% weakening of the rand-dollar exchange rate. This resulted in a more than double increase in our gross revenue, which ended at ZAR 58.1 billion. This translated into a gross profit of ZAR 22.4 billion and EBITDA of ZAR 25.1 billion and free cash flow of ZAR 20.1 billion. Very pleasing is that each and every single one of our assets contributed to the free cash flow as can be seen on the left. And we are particularly pleased with more than ZAR 10 billion contribution from Impala Rustenburg, which has shown remarkable improvements in performance over the last number of years. On the right, again, very pleased that the well-controlled operational performance and cost management has afforded us the ability to translate the increases in basket price into much improved operating margins at all of our operations, resulting in a group operating margin of 48%. Just looking at the world in which we operate, and going forward, I still believe that we are very well positioned to mitigate COVID-19. All of our protocols, all of our standards, all of our capacity remains in place. We are anticipating a third wave as the winter of the Southern Hemisphere sets in, but we believe that we are strongly positioned and we'll collaborate with all of our stakeholders, including government to combat the pandemic. Very pleasingly, with the rollout of the vaccine, our medical staff has been included in the Phase IIIB trial of the vaccine rollout in South Africa. And our first administrations of the vaccine to medical staff is, in fact, occurring as of today. From a market and business prospect, I think we are very well positioned to continue delivering as we have over the last 6 months for the rest of this year. We are also very confident that the very strong and buoyant metal prices will be well supported not only in the next 6 months but for the next number of years. I'm not going to go into the details that can be discussed by our market specialist. And lastly, I just want to say that as a significant PGM producer, we occupy a responsible position with regards to market development. In that regard, we contribute $11 million per annum to PGI. We are a member of the -- a funding member of WPIC, the World Platinum Investment Council, and we contribute [ $4 million per ounce ]. And I was particularly impressed with the surge in investment demand from 2019 to 2020, and wish to thank the WPIC for their contribution in that regards. And then very excitingly, we became a limited partner of AP Ventures Fund II. We have made a commitment to fund to a total value of $61 million over the next 12 years. That represents a funding rate of roughly -- I mean, it's between $4 million and $8 million per annum, but it's roughly $5 million on average for the next 12 years. Of course, the focus of AP Ventures is to develop PGM-friendly hydrogen technologies. Lastly, from an effective capital -- from a capital allocation point of view, I think Meroonisha has made remarkable progress. She's reduced our debt from ZAR 7.6 billion to ZAR 4.6 billion and managed to reverse the net debt of ZAR 1.9 billion a year ago to a net cash position of ZAR 20.3 billion. She has, in addition to that, made material progress in refinancing the existing RCF. The cash flow afforded us to declare a dividend of ZAR 10 per share, and that equates to 40% of the free cash flow or 53% cover of headline earnings. Lastly, it is very important during these good times that we continue to look at how we invest in the business, and I think that we have a number of exciting projects. We did communicate that we will invest in creating operational flexibility as well as improve infrastructure integrity, and we have done that in Rustenburg, which represents a 50% part of our business. We increased our redevelopment by 16%, our development by 9%, and we have managed to increase total face length by 9% from 22.6 kilometers to 24.3 kilometers, and that's notwithstanding the closure of our number 9 Shaft. And then lastly, how will we invest in our future growth? And the way we think about it is there's a 3-tiered system. Tier 1 being internal growth, organic growth within the company. Tier 2 would be potentially growth within the PGM sector, but that would be external to the business. So that's typically in the form of joint ventures, mergers, acquisitions. And then lastly, potentially further out into the future is Tier 3, which is beyond our current strategic envelope. So that's metals as well as where we play in the value chain. We do believe that we have the most attractive opportunities within our own company, and there are, in particular, 2 opportunities that have progressed to the stages where they are in the final stages of approval. The one involves a Merensky expansion project at Two Rivers. Again, that is a low -- a very shallow, mechanized operation, low risk, which ticks all the boxes of our strategic objectives. That will add 180,000 ounces of production to our company at a capital investment cost of roughly ZAR 5.7 billion over the next 4 years. The second exciting opportunity involves an expansion of our Bihma and Mupani production capacity. Again, that will add another 180,000 ounces in a shallow, mechanized, low-risk operation. And the cost involved with that is roughly ZAR 4.3 billion, again, over the next 4 to 5 years, and Gerhard can expand further on that. I'd like to conclude by just going over the full financial year guidance. Our strong performance during the last 6 months have been -- have afforded us the opportunity to upgrade mostly the guidance and to tighten the ranges. So for group 6E production, we have increased the 2.8 million to 3.4 million range to 3.2 million and 3.46 million, and that is at a lower guided cost at the bottom, the unit cost of ZAR 14,600 to ZAR 15,100. And if you take the midpoint of that guided range, it represents an 11.2% over the corresponding cost achieved in the previous half year. So we have achieved a 9% cost increase for the last 6 months. And chances are that if we meet our production targets that we will have a good opportunity of coming in below the 11.2% guided. And similarly, on capital expenditure, we are guiding at the lower range of ZAR 5.8 billion to ZAR 6.2 billion for the full year. On that note, it concludes my presentation, and I'm happy to revert to Johan to open up the Q&A session.

Thank you so much. Thank you, Nico. The presentation that we've just shared, we will put on our website as well. So if people want to refer, go back to that. It will be available shortly on our website. We're now at the point where we welcome questions from our participants. So what I'll do is I'll hand over to the conference call facilitator, so that we first take questions from the conference call. So perhaps if you could just queue there if you've got questions. And similarly, people that are participating on the webcast, if you've got questions, you're welcome to type in those questions. I'll receive it here, and I'll relay it to the team. So without further ado, if we can perhaps go to the conference call to take some questions.

[Operator Instructions] Our first question is from Catherine Cunningham of JPMorgan.

So just 2 questions for me. So the first one, on Slide 32 of the presentation, you alluded to supply side concerns driving possible opportunistic accumulation of metal. So just wondering if that's the behavior you're currently seeing from customers in the market today? And then the second question is, on Slide 33, you flagged Iridium and ruthenium demand growth from industrial applications and links to the hydrogen economy. So just curious if you've done any in-depth work on the near-term supply-demand balances for those metals? And if you have, could you share some insights?

Johan, [indiscernible] if you have, would you mind responding?

Yes. No problem. So Catherine, let's start with ruthenium and iridium. It's obviously minor metals. But given what has happened in the sort of future view of the hydrogen economy, people have become aware of the role that these metals can play in these sectors on a forward-looking basis. So I suspect we've done work on it as everybody else. But there's still a lot of uncertainty and a lot of moving parts in that analysis. Safe to say that these metals are very well positioned, and we think they are going to be prominent metals of the future. And maybe we can off-line sit with you and share some ideas in that regard. But I won't perfuse that we are necessarily where we need to be in terms of understanding how this could play out. I think there's still a lot of work to be done by ourselves and by the rest of the people that look at it. From a supply side, we have been surprised to the extent that supply slide has been disrupted over the last couple of years. Obviously, and thankfully, it looks now that one of those disruptions is probably going to resolve itself over the next year or 2. And that's very welcome because it has caused, particularly in rhodium, in my view, some tightness that will now hopefully be smoothed out. But it's mining, and what we've seen over the weekend and more recently, again, these risks are always there and things can go wrong. So against that background, when you present very good operational results, it's always with thanks to the teams on the ground that deal with these risks on a daily basis. I hope that gives some color.

Our next question is from Adrian Hammond of SBG.

Well done on a good set of numbers here. I've got 2 questions for you, one from Meroonisha and one for Johan. So firstly, you Nico, on 16 and 20 Shafts, you've delayed the steady states on 3 months. Year-on-year increases in costs at 16 Shaft is some 20%. I just want to give us an update on your progress with these buildups that they're still tracking your budgets? And what other opportunities are you finding there since you've updated guidance at Rustenburg? And then secondly, on the growth options that you've given us, could you expand a bit more on sort of the longer-term requirements, particularly the need for smelter and whether that CapEx has been budgeted for? And then just looking at your CapEx that you've given us, ZAR 4 billion or ZAR 5 billion odd for each ZAR 10 billion, it's currently 1/4 of your annualized free cash flow in H1. So I guess the question is, what do you intend doing with all that cash, if you're comfortably meeting all these requirements? And perhaps Meroonisha can answer that with -- given where spot is today, what sort of payout ratio you could see yourself shifting the company to with the balance of your capital needs in mind? And then for Johan, is -- do you factor in investment demand in your platinum surplus outlook?

Thank you, Adrian. The first 2 questions are really for Gerhard, but let me have a go at it while he's gathering his source and then Meroonisha and Johan can come in. So for a very long time, the ramp-up of 16 and 20 Shaft has burdened this company. Over the last 18 months, for the first time, I think that we have been dealing with the right sequence of activities at those 2 shafts. When I look at the amount of factory floor space that Mark has created that has really accelerated over the last 12 months, I think he's now in a position to accelerate growth, and there has not been a significant growth at 16 and 20 Shaft in terms of physical ounces being produced. But the pressure was not on that. It was to create an operating platform that will support growth going forward. So relative to our plans, both of those shafts had an outstanding 6-month period and both of them met all of the metrics that we have planned, and I'm very confident that as we're now starting -- start adding productive capacity in the form of operating teams that you are going to see an accelerated growth in production. It's not only in terms of operating flexibility to mine face length, but one of the things that I have been very pleased about is that all the forward-looking capacities, scarce commodities like [indiscernible] water, logistics, power reticulation, ventilation, cooling power, I believe the teams have got a very strong handle on all of the potential constraints that each one of these elements can raise. And I think that they've done an outstanding job in mitigating the risk associated with those. And then I think it's a very important question that you are asking about future downstream processing capacity and how our growth projects matches that, and perhaps Gerhard is in a good position to give you some color on that.

Thank you, Nico. Just a warning to Mark, I would like you to comment on the 16 and 20 Shaft a little bit more. But while you're getting your words together, I'll answer the Zimplats answer -- question for you. For quite a while now, Zimplats was running at full capacity, 6.5 million tonnes a year, producing that from 4 mines and literally 3 concentrators. So the expansion at Zimplats must come at also with a need for further beneficiation capacity. As the new Mupani mine ramps up, it will be the fifth mine. And it, together with the Bihma mine, will be growing into a significant size of the production, so much so that this current project will take it to 6.7 million tonnes, which means only those 2 mines together will be able to produce the full capacity of Zimplats, leaving the other 3 older mines, with some excess capacity for us as they ramp down. So the first thing we have to do is to provide a fourth concentrator unit at the operation, so that we can concentrate those tonnes. Unfortunately, the smelter at Zimplats is at full capacity, which means the first step from that would be that those concentrates will have to come to our Rustenburg operations, and we treat it here. Longer term, we've acknowledged the fact that we are constrained as far as our smelting capacity in Zimbabwe is concerned. And we are busy with studies for further furnace there. Unfortunately, it's not only a furnace, it's also a sulfur abatement that goes, but it's quite a substantial capital investment to be made, and we have started with the feasibility studies on that. So it's early days, but we've acknowledged the fact that we need more capacity in Zimbabwe. I'll now pass you over to Mark to give more detail on the 16 and 20 Shaft.

Sorry, Gerhard, can I just interrupt? I think we've answered 16 and 20, but I think just in terms of -- sorry, I don't mean to be disruptive, I apologize to everyone. But in terms of other beneficiation capacities, it's not -- we don't only have a feasibility study on the 36-megawatt furnace in Zimbabwe. We do see our processing capacity and capabilities as a potential competitive advantage. We are looking at each part of the process from concentrating to base metal -- to smelting to base metal refinery, not really a precious metal refining because we don't believe that there's a constraint, but each one of these areas, we are evaluating. Not -- it's not actually aimed at the 2 projects that I have mentioned at Two Rivers in Zimbabwe. We believe that we are sufficiently positioned to accommodate that, but there are a number of other prospects, both organically and beyond our current footprint, that may come to play. And we believe that we can position the company in a very strong position to offer a potential solution to any future increases in PGM production. So let's just leave it at that. And then we can ask Meroonisha to talk about what she's going to do with all of the cash, and Johan can talk to the last question.

Thanks, Nico. As we articulated in terms of our capital allocation framework, our priority was on creating strength and flexibility on the balance sheet but at the same time, attempting to provide a balance between meaningful returns to shareholders as well as pursue value-accretive growth opportunities, whether they're organic or M&A. If you just -- if you look back on the last 6 months, you'll see that we've spent just over ZAR 9 billion on further strengthening the balance sheet. So deleveraging the balance sheet, building up the cash buffer that we had previously signaled to the market as well as setting aside some cash for our environmental rehabilitation obligations. Similarly, we've declared a ZAR 10 per share dividend, which is a meaningful dividend and would result in an outflow of about ZAR 8 billion. Together with that, we've also -- we repurchased about ZAR 1 billion worth of bonds, which effectively amounts to a preemptive buyback of shares. If you look forward to the next 6 months, we have said that we would still like to do further work on the balance sheet. What that would mean is that we would still prioritize the pay down of the remaining debt at Impala Canada. When we signaled the cash buffer of ZAR 20 billion, obviously, the quantum of that was informed by our IRS business, which is quite working capital intensive. At the end of December, we were about ZAR 16 billion to ZAR 17 billion we had built up. And in the next 6 months, we think we can get to the ZAR 20 billion quite quickly. And we will continue to provide for environmental obligations on a go forward. But it's likely with the current outlook and the operational performance that we probably, at the end of the financial year, would have reached our balance sheet aspirations. And that will then give us the opportunity to focus our attention on delivering shareholder returns as well as pursuing value-accretive growth opportunities, similar to the ones that Nico has articulated, especially the organic ones. So in terms of percentages, our dividend policy is flexible enough, where it prescribes a minimum of 30%, but the Board has the discretion to vary that. And you've seen that now at the interim where we've upped it to 40%. I do think going forward, that percentage is likely to increase, but we would need to balance the returns to shareholders with creating a sustainable company with high-quality assets.

Adrian, just on your last question. So our practice is that when we disclose historical information, we include investment demand for platinum. But in all forward-looking analysis, we don't include it because it's very hard to obviously model. So historically, it's included on a forward-looking basis. It's our policy not to particularly put it in unless we ask of our view what it could be.

What do you think it could be?

Well, I think it depends, obviously, on the investment environment as well. What we've clearly seen over the last couple of years with where the world economy is and the sort of yields that we've seen across the world and the sort of gold and other fixed assets where money has gone. Platinum has clearly benefited from that, and it's in a very ideal position to continue to grow and receive benefit. But it's very much linked to -- that part of the platinum value chain is very much linked to global financial conditions at any point in time.

Thank you. If we have time at the end, I think it may be useful to allow Mark to talk not only about 16 and 20 Shafts, but also just in terms of the prospects of his operation because I think he has got really positive messages to pass on.

I see the next one is Arnold. Arnold, if you're still on the line.

We have a question from Arnold Van Graan of Nedbank CIB.

Just a quick one from my side. Nico, I read here that you've increased your labor component at Rustenburg to mitigate the impact of COVID-related shortages and availability issues. So how did you do that? Was that through contractors? And is it temporary? Will those costs come out? Or is it part of your, I guess, broader ramp-up of 16 and 20, where you -- in any way, you're supposed to bring additional people on? So I'm just asking here from a cost perspective, whether those costs remain in the system or whether they go out. That's it from my side.

Thank you, Arnold. I think this is a great opportunity for Mark to come and represent his business. If you will, Mark?

Nico, thanks. Nico, the labor -- the first issue on the labor, we brought them in as permanent -- half were permanent staff on Impala's books and half were just getting contractor crews in. It is temporary simply because of our normal natural attrition rates, and they were on the front end of the business. They were production labor, which does have a slightly higher natural attrition rate. So now it's not embedded in the future, unless, of course, we can translate them into extra production, which, fortunately, I think we are proving that we can do that. So I don't think that will hit the costs at the bottom line. And then just on 16 and 20, I think it was covered by Nico that 21% and 27% respective increase in face length that show that those projects are moving ahead. And I think the slight delay in when they will hit maximum production is just us opportunistically utilizing the defined lockdown that we did have to move it up by 2 months. And then we did have 1 or 2 issues on securing steel work and things for the construction projects, but it had a minor impact on the actual final full ramp-up of those 2 businesses. So -- and then each shaft, 16 and 20, has achieved 3 million fatality-free shifts, which is first time ever for them, and I think is indicative of the operations running fairly well on a basic level. That's all.

Thanks, Mark. I see Chris Nicholson. He's raised his hand on the conference call.

We have a question from Chris Nicholson of RMB Morgan Stanley.

Two questions, please. So just -- the first one, just to be clear on Zimplats, in particular. I think last time you talked to the market, you were considering a smaller concentrator -- I guess, expansion on the bottleneck in there that would get volumes from about 6.5 million to, I think, 7 million tonnes a year over the next 2 or 3 years. So one, Is this 180,000 ounce option you're talking in addition to that and then maybe different from time lines on feasibility there? And then just the second question, and maybe for Meroonisha, I think I understand -- I mean, the ZAR 10 dividend is great and considering where you were just a year or 2 ago, well done on that. I think I understand the dividend policy and the balance sheet buffer, specifically on those convertible bonds. I know you have an option to call them later this year. Would you consider doing an open market buyback post calling then to offset some of that dilution?

Thank you so much. I'm quite happy for Gerhard to answer the first question. And of course, Meroonisha will talk to the bond buyback.