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Edited Transcript of NHM.J earnings conference call or presentation 23-Aug-19 9:00am GMT

Full Year 2019 Northam Platinum Ltd Earnings Call

Johannesburg Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Northam Platinum Ltd earnings conference call or presentation Friday, August 23, 2019 at 9:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Aletta Helena Coetzee

Northam Platinum Limited - CFO & Executive Director

* Damian Stephen Smith

Northam Platinum Limited - Group Geologist

* Paul Anthony Dunne

Northam Platinum Limited - CEO & Director


Conference Call Participants


* Hurbey Geldenhuys

Vunani Securities (Pty) Ltd, Research Division - Head of Research and Equity Analyst, Platinum

* Johann Steyn

Citigroup Inc, Research Division - MD and Head of South African Equity Research

* Nkateko Mathonsi

Investec Bank Limited (SA), Research Division - Resource Analyst

* Patrick Mann

BofA Merrill Lynch, Research Division - VP & Research Analyst

* René Carlo Hochreiter

NOAH Capital Markets (Pty) Ltd - Mining Analyst

* Steven Friedman

Renaissance Capital, Research Division - Associate




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


Good morning, everybody. How is the sound? Just while everybody is settling, we mustn't take things for granted. For those who may not know, that's a picture of a catalytic converter. And as all of you should know by now, the main use for PGMs, if we take them as a whole, is in the automotive industry. And the PGMs are coated onto the substrate, which you see, or the honeycombs, some people refer to it, that you see in the metal. So that's what a catalytic converter looks like.

Are we good to start from a time point of view? Thank you.

Okay. Good morning, everybody, and thank you for joining us once again for the Northam annual results. And welcome to those of you on the phone lines and also on the webcast.

As usual, the presentation is quite concise, but the booklet, these days contains quite a lot of detailed disclosure, and you can read that one at your leisure. We've also released our full integrated annual report this morning, which is available on the website.

This is the usual disclaimer. It's a little bit expanded this year. I hope you read it.

I'll review some of the key features and give an update on the Northam unfolding strategy, and then I'll give a brief comment on the metal prices and some detail on the operations. Alet will then deal with the financial results in full. And following that, we'll give a brief update on the projects and provide an outlook for the coming year.

Northam has had a very good year, producing a record operating profit of ZAR 2.4 billion. Equivalent refined metal production increased by 7.4% to just under 520,000 ounces 4E. Both Zondereinde and Booysendal posted higher operating profits, resulting in normalized headline earnings increasing to ZAR 1.4 billion. Just as a reminder, normalized headline earnings backs out the noncash Zambezi effect.

Our growth strategy remains on track. Good progress has been made at Booysendal South with the successful commissioning of the rope conveyor and the recommissioning of the South concentrator. At Zondereinde, excellent progress has been made with ore development in the Western extension. Total capital expenditure was lower this year at ZAR 2.9 billion. And whilst this is a very large number in the Northam context, we firmly believe that these projects will position the group very favorably into the future. Now is the time to invest, and we will not be holding the horses.

Both Zondereinde and Booysendal delivered solid operating performances and maintained good cost control in our opinion, limiting unit cost increases to just 7.4%. The transition from contract mining to owner-operator at Booysendal has proved to be successful with an improved operational performance as the new arrangement has bedded down. Progress has been made with the destocking of excess inventory with 40,000 ounces released from the pipeline, contributing to the significantly improved sales volumes. I'll elaborate on the remaining inventory a little later.

Northam is approaching a pivotal moment. And before we get into the details of the results, I'd like to spend some time setting out how our strategy has unfolded and where we are in the process.

This particular slide represents a timeline of what we consider our strategic journey. As you can see, we have a 4-phase strategy. In 2015, we raised money and, at the same time, solved for empowerment. This is the essence of the Zambezi transaction. Secondly, we applied some of the money in an M&A phase. We purchased the Western extension block at Zondereinde. We purchased Everest South mine, Eland mine and the U.S. recycling assets. The M&A phase is now complete. The third phase is project execution. And as everybody will be aware, we're busy. The final phase, which will materialize this coming year, is returning value to shareholders, and this is a very, very important phase in our minds. The way Zambezi is structured gives us a very obvious and powerful way to return value to shareholders through the purchase of the Zambezi preference share. We'll do this by applying free cash over and above our targeted net debt position. 2020 promises to be the culmination of a long, hard slog, but the rewards will be worth it. The company is now extremely well positioned.

This slide represents the investments we've made over the past few years. And as we can see, we're on a downhill run. We're over the peak funding requirement. Group CapEx peaked last year, in fact, at ZAR 3.7 billion on expenditure mainly at Booysendal South, the completion and commissioning of the second furnace and the purchase of the Western extension. This year, the total CapEx was significantly lower at ZAR 2.9 billion although still a large amount, and the forecast for capital expenditure in the coming year is set to taper further as key project milestones are achieved.

Some of the results from the investment can be seen on this graph, which shows the production from own operations and how it's grown over the last 5 years. This is a direct result of our capital program. The forecast for the next year is a further 10% growth to around 570,000 ounces. Primarily, that growth this year will come from the ramp-up at Booysendal South mine. This growth trajectory will continue over the next 3 to 4 years as our projects reach their design capacities. Being able to grow production into a rising market is a tremendous driver of cash and generation of value for all.

Looking at the prices of our primary metals. The standout feature has been the continued increase in the rhodium price since late 2017. The spot price of palladium has pulled back somewhat since touching $1,600 in March and is currently trading around $1,500. The platinum price has been fortunately -- has unfortunately continued to languish at 10-year lows in dollar terms. The average palladium price we received increased by 26%, and the rhodium price received increased by 61% in the prior -- in the past year. The average price for platinum, on the other hand, declined by 12%. And the overall result was a 9% increase in the U.S. dollar basket price received. This, combined with a weaker rand, resulted in a 12% higher rand basket price received.

PGM demand in the autocatalyst sector is expected to increase as tighter emissions legislation is introduced across Europe, China and India. Real driving emissions legislation will become more onerous for the motor manufacturers as emission limits will need to be maintained over the life cycle of a vehicle. This is leading to increased loadings per vehicle. Industrial demand is also expected to grow in the petrochemical sector and as support for fuel cell development increases.

On the supply side, underinvestment in the South African industry over the past decade is leading to lower production output. Palladium remains in a substantial and growing deficit, and we believe it's unlikely to be resolved in the near term. An increased rhodium deficit is developing as demand in the autocatalyst sector once again follows a similar trajectory to palladium. Rhodium is the most effective metal for the control of nitrogen oxides and cannot easily be substituted. The potential for reverse substitution of platinum for palladium remains. However, we do not see hard evidence of this yet.

Northam holds a very strong view that PGMs are primarily industrial metals. Pricing signals come from real industrial demand, in particular from the auto sector. The day platinum is reengineered into the gasoline engine will be the day the price recovers.

I'll now move on to the operational review. And firstly, safety.

Regrettably, in October 2018, Mr. Stefer van Niekerk, who was a project manager on one of the projects at Zondereinde and in fact in the concentrator, lost his life in a surface accident. Our thoughts remain with his family, his workmates and his friends. It was a very sad, sad event indeed. Notwithstanding, Zondereinde recorded 1 million fatality-free shifts in May, and the lost time injury rate remained unchanged.

At Booysendal, the exemplary safety performance continued with the mine achieving over 405 million fatality-free shifts by the year-end. The lost time injury rate decreased to 0.18. That certainly is a world-class performance. Eland is in its infancy and recorded a lost time injury rate of 0.53. The safety and health of our employees continues to be at the forefront of everything we do.

This slide gives a snapshot of the group's consolidated operating performance. Milled tonnage from the combined operations increased to 4.9 million tonnes, resulting in a pleasing 7.4% increase in PGM production to just under 520,000 ounces 4E. As a reminder, 4E platinum, palladium, rhodium and gold, total refined metal produced was up 21% to 571,000 4E following the release of inventory. In addition, 12,000 ounces of ore was sold to a third party, giving a total sales volume of 583,000 ounces. The production of chrome concentrate increased by 18% to 764,000 tonnes with the bulk of the additional production coming from the tailings retreatment project at Booysendal South mine. Despite lower prices, chrome remains a material contributor to Northam's revenue. Total revenue per platinum ounce was 13.6% higher than the previous year on the back of a higher PGM basket, of course. Unit costs were well contained at ZAR 22,847 per platinum ounce. I must stress once again that this is a full mine-to-market cost with no by-product offset. We believe this positions Northam very favorably on the industry cost curve.

The higher basket price and well-contained cost resulted in an expansion of the cash margin from 18.5% to 22.9%. It's worth pointing out that since year-end, the rand basket price has moved significantly, and rhodium will become and has become a very strong component. You may or may not be aware that rhodium opened at $4,000 per ounce in Hong Kong this morning. [Eugene] from metals, you owe me lunch.

Zondereinde put in a strong operating performance. Total tonnage milled was 4.7% higher at 2,455,000 tonnes with higher contributions, in particular, from the Merensky orebody. Stockpiled ore increased to 237,000 tonnes despite the sale of 105,000 tonnes to a third party during the course of the year. The Merensky head grade was higher at 6.1 grams per tonne, and the UG2 head grade was flat at 4.3 grams per tonne. Equivalent refined metal production increased to 308,000 ounces 4E. Incidentally, this is the first time in many, many years that Zondereinde has exceeded the 300,000 mark, a very good performance.

Unit operating cost increased by 9.2% to ZAR 24,124 per platinum ounce. And I must point out that inside that number, the Zondereinde workforce has increased by 5% to man the development teams to access the Western extension. In addition, 11.7 kilometers of main development was completed during the year. This is a remarkable achievement. We believe that Zondereinde remains in a competitive cost position relative to its peers.

With an improved operating performance and a reduction in metal inventory, operating profit increased at Zondereinde by 269% to ZAR 1.3 billion. The on-mine capital expenditure for the year was ZAR 674 million, which included ZAR 606 million on project expenditure and ZAR 68 million on sustaining CapEx. The forecast capital expenditure for the coming year is ZAR 595 million, including a provision for the establishment of Number 3 shaft.

Booysendal recorded good operating and production results, somewhat impacted by community protest across the Eastern Limb. The total mill feed was 7.5% higher at 2.9 million tonnes, including 397,000 Merensky tonnes. The DMS circuit is now operating well with recoveries optimized above 86%. Metals in concentrate increased a pleasing 14.5% to 217,000 4E ounces. Unit cost -- cash costs were very well contained at ZAR 16,772 per platinum ounce, which places Booysendal in the first quartile -- clearly in the first quartile on the industry cost curve. Booysendal has now had a full year as owner-operator with clear benefits in all 3 main metrics: safety, production and costs. The on-mine capital expenditure was ZAR 1.8 billion, of which ZAR 153 million was spent on sustaining capital and the bulk of the remaining expense, of course, at the Booysendal South mine establishment. Capital expenditure for the next financial year is expected to be ZAR 1.3 billion. I'll review the Booysendal South projects a little later in the presentation.

Moving on to inventory compared to a year ago, the green bars represent the position at the end of June this year whilst the blue bars represent the position at the end of June last year. We can see from the graph that the concentrate in process (sic) [progress] is reduced by 19,000 ounces following the commissioning of the dewatering planter. The concentrate ahead of the smelters has reduced by 38,000 ounces and moved along in the process. The smelter BMR and PMI (sic) [PMR] inventories have increased by a combined 18,000 ounces, and 40,000 ounces was released and monetized. A permanent processing route for the revert material, which we found difficult, has recently been established and is working well. Finally, the ore stockpile that you see on the graph at the bottom has recently been sold to a third party. The destocking process will continue until normal inventory levels are reached, and we expect normal inventory levels at next year's higher mining run rate to be approximately 150,000 4E ounces.

Excuse me a moment.

This slide gives a snapshot of Northam's substantial resource and reserve inventory. The mineral resource estimate for Booysendal has increased by 5% following a revision of the pay limit applied to the ore body. The marginal reduction in resources Zondereinde reflects normal mining depletion. The net result is an increase in the group resource estimate to 243 million ounces.

The group's mineral reserve inventory increased to 30.4 million ounces as a result of the increase in the Eland reserve estimate following the completion and approval of a feasibility study for Kukama shaft. The overriding determinant for any mining company remains the quantity and quality of ore body available to it. Northam is blessed in this regard.

This slide shows the individual prill splits for our 3 operations. And given that most of our future expansion is actually planned from UG2, we believe that Northam is in a good position to benefit from the price strength of both palladium and rhodium. These 2 metals now make up approximately 40% of the UG2 4E basket. Incidentally, when the base metal's affected, then Eland has the highest basket price in the group, and this is indicative of why we regard the ore body highly.

I'll now hand over to Alet who'll take us through the financials.


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


Thank you, Paul.

Good morning. Northam's strong financial results were underpinned by a 41% increase in our revenue to ZAR 10.6 billion as a result of an increase in volumes, prices and a weakening of the rand. Unit cash costs were well contained, and this resulted in a record operating profit of ZAR 2.4 billion for the group, which represents an operating profit margin of 23%, which is more than double than what was achieved in the previous corresponding period.

EBITDA amounted to ZAR 2.6 billion, which represented an increase of 138%.

ZAR 2.9 billion was spent on capital during the year, mainly in the execution of the group's growth strategy.

Normalized headline earnings per share increased by more than 226% to ZAR 2.70 per share.

And lastly but very importantly, the group made a profit after tax of ZAR 60.1 million, the first IFRS profit since inception of the Zambezi BEE transaction.

Normalized headline earnings, which is our main measure of performance, have been calculated taking into account headline earnings adjusted for noncash items relating to the Zambezi BEE transaction. Stripping out these noncash items resulted in a headline earnings of ZAR 1.4 billion. Because of our IFRS profit, our earnings per share increased to ZAR 0.172 per share, and headline earnings per share increased to ZAR 0.158 per share.

Revenue increased by 41% to ZAR 10.6 billion. The increase was largely attributable to a 20.7% increase in volumes sold, an 8.8% increase in the U.S. dollar basket price and a 10.6% weaker average exchange rate achieved.

The average U.S. dollar sales prices improved for most metals during the year, except for platinum, which continued its downward trend to $824 per platinum ounce. Palladium and rhodium both performed well with increases of 26% and 61%, respectively. The minor metals, iridium and ruthenium, also performed well with an increase of 42% and 78%, respectively. Platinum now only contributes 39% of total revenue. Platinum makes up roughly 60% of our basket, so even with the favorable increases in palladium and rhodium, the 4E basket dollar price only increased by 8.8% to $1,097. Total revenue per platinum ounce sold increased by 13.6% to ZAR 29,640 per platinum ounce sold.

Cost of sales increased by 22% on the back of an increase of revenue, which resulted in an operating profit of ZAR 2.4 billion. Some of the key elements in the individual elements making up cost of sales include a 13% increase in the cost of mining as a result of an increase in production as well as general mining inflation. Concentrate cost increased by 25% with the commissioning of the Booysendal concentrator. Smelter and BMR cost increased owing to additional power cost required by the second furnace as well as a 21% increase in refined metal production. Included in selling and administration overhead costs are costs incurred relating to our corporate office; the establishment of group services, which includes the costs associated with the implementation and support of our SAP IT infrastructure; as well as all marketing cost incurred by the group. Royalty charges increased in line with the increase in revenue. Share-based payment expenses and profit share scheme cost relate to expenses incurred in respect of the group's share plan, which is largely influenced by the Northam share price and then, of course, contributions made to the Toro Employee Empowerment Trust.

On an annual basis, the group performs an independent third-party assessment of our rehabilitation liability based not only on the DMR assessment but also on the actual commercial closure cost assessment. The update resulted in a charge through the income statement.

Concentrates purchased decreased by 77% owing to the expiry of a contract with a third-party concentrate supplier at the end of June '18. The corresponding metal from external parties decreased by 75%. The release of nearly 40,000 ounces was offset by the increase in the cost of production, which is reflected in the change in metal inventories. Our main focus remains on cost control and growing our production base down the cost curve.

After taking into account ZAR 1.3 billion of noncash Zambezi preference share charges, the group generated a profit before tax of ZAR 702 million.

Tax is calculated on a statutory basis, which resulted in a tax charge of ZAR 642 million. The tax charge mainly relate to deferred tax, which is noncash.

The group has unredeemed CapEx available to utilize against future taxable mining income at Northam Platinum Limited or Zondereinde mine about ZAR 348 million but at Booysendal approximately ZAR 7.1 billion. Details of all the taxes are included in both our book year as well as the annual financial statements.

After taking into account tax, the group generated a profit after tax of ZAR 60.1 million in comparison to a loss last year of ZAR 705 million.

The group incurred ZAR 2.9 billion on capital during the course of the year. ZAR 1.5 billion was spent on the development of Booysendal South, which included ZAR 302 million both on the North as well as the South RopeCons. In total, ZAR 3.4 billion has now been spent on the project, which represents about 60% of the total value of the contract. I'm sorry.

We now have a mine at Booysendal South. The concentrator and South RopeCons have been commissioned. The road connecting Booysendal South and North with each other has been commissioned, and we now also have a second access point. During the coming year, our focus will be on underground development as most of the main infrastructure has now been completed and commissioned. With a project such as Booysendal South, it is important to, once you get going, to actually get it done.

Further projects in the group also included ZAR 174 million spent on further expansionary CapEx at Booysendal relating to the Merensky North mine, the UG2 deepening project and the South TSF retreatment project. All 3 of these projects have now been completed. ZAR 120 million was spent on the Western extension at Zondereinde, which is well advanced. ZAR 113 million was spent on the Zondereinde deepening project. ZAR 66 million was spent on the concentrator and dewatering optimization projects at Zondereinde. And ZAR 371 million was spent at Eland relating to the TSF retreatment project, recommissioning of the processing operations and readying the Kukama shaft. And lastly, ZAR 222 million was spent on sustaining CapEx across the group.

The capital expenditure for the coming year is estimated to be around ZAR 2.3 billion: ZAR 1.3 billion at Booysendal, ZAR 600 million at Zondereinde and ZAR 400 million at Eland. We believe that the capital that we are investing in our business is good spend, establishing good quality, long-life assets that will provide the foundation for our increased production base of 1 million ounces.

During the year, the group generated ZAR 2.7 billion from operating activities compared to a utilization of ZAR 342 million in the previous year. This represents a swing of ZAR 3 billion. ZAR 2.7 billion was spent on cash -- on capital equipment. ZAR 410 million was paid in interest during the year. We drew down on ZAR 650 million on our revolving credit facility and raised an additional ZAR 400 million through the issue of new domestic medium-term debt notes. The net impact was an increase in cash and cash equivalents of ZAR 641 million to ZAR 950 million at year-end.

The group's net debt position increased from ZAR 2.6 billion at June '18 to ZAR 3 billion at year-end due to expansionary CapEx incurred. As previously stated, we target a net debt-to-EBITDA ratio of 1:1, and we are nearly there. During the year, we have refinanced our domestic medium-term notes, which matured in April, May and June; increased and consolidated the revolving credit facility; as well as negotiated an additional ZAR 500 million general banking facility, increasing the group's debt facilities by ZAR 1.4 billion.

Subsequent to year-end, we further renegotiated the ZAR 3.5 billion 5-year revolving credit facility on more favorable terms, extending the maturity date from November 21 to August 24. Interest will now be charged on a utilization basis with the lowest rate at JIBAR plus 220 basis points versus our current 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.

In addition, our Board has approved an increase in the domestic medium-term debt note program from ZAR 2 billion to ZAR 5 billion. The increase will enable the issue of new notes to facilitate our strategy of returning value to shareholders, and we are very comfortable to use debt funding to facilitate this process up to our 1:1 net debt-to-EBITDA ratio.

Our key focus areas for the coming year will firstly be on effective cost control. The platinum sector remains under pressure. And hence, cost containment is key to the group's sustainability. Mining is a volumes business with relative high associated fixed costs. Increasing production positively impacts the unit cash cost.

Secondly, it is important to note that the group's future cash generation is vulnerable to exchange rate movements and commodity price fluctuations. We believe that our investors would prefer exposure both to the weakening rand and dollar-denominated commodity prices, and hence, we do not hedge or forward-sell.

Thirdly, the long-term success of our business depends on achieving an optimal balance between growth, sustainable operations and returning value to providers of capital. Management carefully considers the appropriate allocation of capital in these areas to achieve the group's strategic objectives. We believe that for the coming year, we will be in a position to invest in our business by spending ZAR 2.3 billion on capital expenditure as well as returning value to shareholders.

And lastly but to us probably the most important focus area for the coming year is returning value to shareholders. As Paul has indicated, the group is now moving into the final phase of our strategy that we embarked on in 2015 with the Zambezi BEE transaction. We have started to generate free cash flow, have increased and optimized our funding facilities and will now return value to shareholders, which we have commenced with, with the purchase of some Zambezi's preference shares subsequent to year-end.

I will now hand you back to Paul, who will take you through the various projects of the group.


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


Thank you, Alet.

This photograph shows the central mine site at Booysendal as it looked like at the end of June. There's a lot of infrastructure contained on a relatively compact 12-hectare site. I just want to remind everybody it's an environmentally sensitive area and we minimize deliberately our footprints.

Construction of the shaft head is ahead of schedule with completion of the conveyors, the crusher circuit, pollution control dam, process water dam and workshops, offices and change house will be completed by the end of the year. Underground development and construction continues, and the production buildup is on track for 220,000 tonnes per month by 2023.

The South concentrator was fully recommissioned this year. And later in the year, I think it was April, May, the first run-of-mine ore was processed from the UG2 mining central complex. Hydro mining and reprocessing of the tailings dam at the South tailings storage facility continues. A total of 1.4 million tonnes was processed during the year, yielding 92,000 ounces of saleable chrome concentrate. Construction of the second aerial ropeway, which will transport ore from the Merensky modules both in the North and the center, will begin shortly.

Overall, we're very pleased with the progress of this project. Capital spend has accelerated, reflecting the fact that we're pushing very hard to completion. As Alet pointed out, once you decide to do something, we do it.

At Eland, hydro mining of the tailings storage facility commenced. This has enabled commissioning of the secondary mill, the PGM flotation and the chrome recovery circuits of the Eland concentrator. Chrome concentrates were produced at the latter end of the year, and the first PGM concentrate has been delivered to the Zondereinde smelter.

On the mining side, planning for the restart of the Kukama shaft is complete. The focus for the next 24 months will be on reserve buildup through the developments of the decline system and strike drives. Early mining will be progressed at Kukama in the [One West] area to optimize elements of the mining process, in particular hydro-powered rock drilling, support installation and inline conveyor loading.

We've also initiated a performance verification project now for the mobile tunnel borer, which is underground, in the footwall decline of Kukama shaft. Outcomes from this process will enable a decision of whether to employ the MTB for the longer term. This machine, by the way, there's a bit of a tradition amongst the Italian engineers. It's like the United Nations down there at the moment. We've got Italians, Portuguese, South Americans and Brits. And they do name the machine, and this machine has been named, [yazi], which in Zulu means, broad translation, fast like lightning. So we hope it lives up to its name.

Ore reserve development within the western extension at Zondereinde has progressed very well, as I said earlier on Levels 3 through 12. Over 10 kilometers of development has been completed to date in this block, most of it, in fact, in the year gone. This is an outstanding effort done.

Footwall strike drives have progressed past the second mining line, and stoping has started on the first mining line. In addition, planning and early work to access the Western extension from surface, the 3-shaft project, has commenced. Preparation for the raisebore access shaft is progressing well. Surface site clearance is complete. The geotech drilling down the lenses approach shaft is complete. This has again revealed very good rock mass quality in this area. Development underground will advance to the reaming chamber whilst the [colo site] on surface will be prepared for the establishment of the machine next month.

Now looking forward to the year coming, a few points that we'd like to highlight. Project execution remains key to our unfolding strategy. A lot of the hard work has been done, and execution risk has reduced significantly. This gives us an increased confidence that we'll meet our project timeframes on budget and take advantage of what is a rising PGM market.

Now we're over the peak funding requirement. We're ready to return value to shareholders. As Alet again pointed out, we're ready to do this through the repurchase either of our ordinary shares or of the Zambezi preference share or, more likely, a combination of both. Any free cash over and above our targeted net debt level will be used for this purpose. Again, as you can see from the numbers, we're very, very close to that targeted net debt position. In fact, we're pretty much there.

Our operations are performing well, and we expect to deliver further production growth in the new year. We'll continue to focus on costs in order to grow our margin and maintain our relative cost position. Our best protection, as we always say, is the stretch in the cost curve, and Northam needs to operate well into the lower half, which we do.

Turning to labor relations. Booysendal came to the end of a 1-year agreement in June, and negotiations for a new wage agreement have started with the majority union, AMCU. We trust that these negotiations will be conducted in an atmosphere of mutual trust and understanding and mutual respect.

Zondereinde concluded a 3-year wage negotiation earlier in the year, and that will provide for relatively stable labor relations on the Western Limb in our operations.

So to conclude, the operations are performing well. The growth strategy remains on track, and we look forward to what we phrase a pivotal year for Northam in the year ahead. I'd like to say thanks to the Northam team. It's not easy what you've done, and you can be very proud of these results. Thank you very much, everybody.

We'll now take some questions firstly from the floor, and then we can move to the lines.


Questions and Answers


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


If I could ask that everybody just say their name. Patrick?


Patrick Mann, BofA Merrill Lynch, Research Division - VP & Research Analyst [2]


Is this on? It's Patrick Mann from Merrill Lynch. Paul, I just wanted to ask, I mean, you can now borrow money at JIBAR plus 220 basis points, invest it into the Zambezi prefs at prime plus 350. I mean is the logical conclusion here not to max out your balance sheet and just repurchase as much as possible? I mean what's the thinking behind limiting it to 1x net debt-to-EBITDA? And then maybe a more specific question. Zondereinde, you had growth in production, but your unit cost was still up kind of 9% to 10%. Is that cost running ahead of the growth in production? Or, I mean, when you get to the 350,000 ounce per annum target, should we expect that your real unit costs will come down slightly just from the production growth benefit?


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


Thanks, Patrick. On the first question, the answer is very straightforward really. 1:1 EBITDA-to-debt will be enough. We do make the comment that we will act in a forward-looking manner. So if one were to -- yes, I know you have a very strong model. So if you look at your EBITDA calculations for this coming year and the year on, it's very, very strong. And if we just target 1:1 net debt-to-EBITDA, we'll be fine. You can buy an awful lot of prefs and shares.


Patrick Mann, BofA Merrill Lynch, Research Division - VP & Research Analyst [4]


Maybe a follow-up there. Are there prefs available? Are the holders willing to sell them back to you?


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


I think we have demonstrated already that we are able to buy the pref shares at or around fair value, and we believe that, that remains the case even for the larger holders.

On the second question -- second question was the Zondereinde unit cost at 9%. I do want to point out very, very strongly that there's a 5% increase in the employee base staffing that Western block, in particular the development teams. And we've completed 11.7 kilometers of development. That's an awful lot of mining activity. And of course, it's activity-based costing that's in that number.


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


So is -- the production growth is [not possible]?


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


Again, if you look at the -- you're 100% right. And if you look at the graph there, the mining underground plan that we presented, you will see that the development is completed, but there is no mining yet. It's all virgin ground. And remember, the majority of the footwall developments at least is off-reef. There's 0 revenue for that effort. But of course, you'll have to do it.


Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [8]


Johann Steyn from Citi. Just a follow-up question on that. The 11.7-kilometer development, was that all expensed or capitalized?


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


The majority of it is expensed, Johann, except for the access to the bottom of 3 shaft, which we're considering capital development. So there's a ramp or -- but the majority of the main mining development is expensed. Yes. So we do have some capital development associated with the 3 shaft infrastructure, which I just want to qualify.

We have a question at the back from Nkateko.


Nkateko Mathonsi, Investec Bank Limited (SA), Research Division - Resource Analyst [10]


It's Nkateko from Investec. Maybe just a follow-up on the questions on costs. Are you able to give us a cost guidance for both Booysendal and Zondereinde for this year? If it's possible, that would be very helpful. And then also I wanted to ask on the in-process inventory. The guidance -- the sales guidance, which I think was in line with what you're expecting to refine, was 610,000 ounces 4E. And you came in at 483,000 or 4, 7 -- 571,000 sorry?


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


Five, yes.


Nkateko Mathonsi, Investec Bank Limited (SA), Research Division - Resource Analyst [12]


571,000. What was the surprise? Because you had guided and you expected to actually liquidate a bit more than you were able to? So I just want to understand, are there implications for the new smelter capacity and what you're able to achieve with that smelter?


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


Yes. The furnace itself is actually doing very well, but we had a material there called revert, which is quite a hard, lumpy intermediate product. We were too slow with it basically. It's as simple as that. So we have instituted a milling solution for that problem. Not really anything to do with the furnaces. So it's working quite well. So that was the shortfall.

The first question was the cost guidance. I think Booysendal will come in, I would say, low to mid-single digits. Zondereinde mining inflation less one. that's my guidance for Zondereinde.



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


Paul, René from NOAH Capital. Well done on your results. Fantastic to see you positive for the first time in a long time. Just a hypothetical question. How much better is it to buy back shares for the shareholder compared to paying a dividend? Is it just a matter of saving the withholding tax?


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


I think it's more than just the withholding tax. I think it is the limitation of contingent liability in '25. Effectively, you're taking that risk off the market, which is a good thing to do. So it's not just the return of the coupon, let's say, it's also a risk mitigation action from the company's point of view.

Secondly, please remember it's effectively a buyback by proxy because each preference share -- underlying each preference share is one ordinary share. So to talk very, very broadly again, we have 509.9 million shares in issue in total, of which 159.9 million shares are represented by Zambezi together with an underlying ord. So there's a targeted, shall we say, shareholding. We also have general authority to buy up to 10% of the ordinary shareholding back. It's already approved. So you can see that in total, the ability to return value to shareholders is quite considerable in terms of what we can actually do or permitted to do, let's say. And pointing again to -- to answer your question directly, I think what you're going to see happening at Northam is quite a lot of -- you're going to see both investment in the business through the capital program and you're going to see return to shareholders. And my belief is you're going to see both purchase of the pref and purchase of the ord in the coming years. And again, to point out once again, if you look at the targeted levels that we've spoken about, 1:1 debt-to-EBITDA, and you do your numbers 1 or 2 years forward, you should be getting to a very big number in terms of the potential cash generation to return back to shareholders.


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


Yes. Just one more question, if I can press you maybe. You've been very good on the rhodium price forecast. What do you see by December this year?


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


René, that's very difficult to say. I mean we did call we had a little friendly bet with [Eugene]. But rhodium is not substitutable basically. Not only is it not substitutable in a NOx application, but it's already being heavily thrifted. It can't be taken out anymore. If you need to control NOx, which the world does, nitrous oxides, broadly speaking, is the health gas coming out of exhaust. So rhodium is the metal for the job. It's extremely effective. At $4,000, by the way, rhodium is cheap. I'll use that expression.


René Carlo Hochreiter, NOAH Capital Markets (Pty) Ltd - Mining Analyst [18]




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




René Carlo Hochreiter, NOAH Capital Markets (Pty) Ltd - Mining Analyst [20]


$5,000 by December.


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


I didn't say that. But what I will say, we do see it going north. We make a very strong prediction on that point. It will go north. It's tight.

We have a question in the middle.


Unidentified Participant, [22]


[Shane] here. As an investor, this is one of my first presentations that I've heard from Northam. In terms of the cost curve, where does Northam Platinum sit with respect to its competitors? And where do you see that going in the future in the short term at least?


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


So Booysendal is sitting in the bottom quartile, firmly in the bottom quartile, and will give every mine in the country a run for its money, including the opencast. Zondereinde is smack bang in the middle of the cost curve, right in the middle. That's where we are. Eland, by the way, will come in between Zondereinde and Booysendal.


Unidentified Analyst, [24]


It's [Leroy Mnguni] from HSBC. Just around Zondereinde. So a lot of the development -- well, most of the new development that you're doing is Merensky. I understand that at full production, your constraint will really be your shaft capacity. Given the improving economics of UG2, how are you thinking about that Merensky-UG2 split going forward?


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


Yes. [Leroy], it's a good question, and there's no one answer, unfortunately, that I can give you. There are 3 main influences on why you would think about that decision. One is -- the obvious one is the close -- the metal split, and the price associated with the metal is just slightly different between UG2 and Merensky. One is a chromite seam, one is a nickel and copper, which is Merensky. So the metal content is different, and the pricing of those metals is different. So that's one consideration.

If you have a tonnage constraint, the next consideration may be, well, let's hoist the higher-grade material in favor of the lower-grade material. That does not necessarily mean the same for profitability. Profitability is a different question to head grade.

And thirdly, the relative productivity between UG2 and Merensky is also very, very important. Our -- UG2 is a very, very straight, conformable orebody at Zondereinde. The geo losses there are in single digits. It's a very wide, straight orebody. The productivity per team on the UG2 is higher than the productivity per team on the Merensky because of the qualitative factors of the 2 orebodies.

So there are 3 influences. And we -- the way -- and the fourth one, which is the, in our view, the right answer, you maximize your orebody in totality. Co-extract, maximize the orebody over a very long period of time. That's the right answer. There's no one percentage answer.

In terms of logistics, you're 100% correct, we will have a shaft constraint. And Zondereinde is made up of 2 shafts, Number 1 and Number 2. Very imaginative there from [Glenders] the guys before you. But yes, that's what they're called. And we definitely have a tonnage constraint. You heard us referring to 3 shaft there. 3 shaft will be a hoisting shaft. We'll let you know what that number is once we've sourced the correct rock hoist mainly available in the country at the moment. But that will definitely enable us to supplement the overall tonnage hoisting capability of Zondereinde.

And then broadly speaking, we -- the current mining effort has been heavily concentrated in what we call the northwest quadrant and the emerging deepening section until recently. Now what we are able to do, we're able to, in a way, concentrate the Merensky production on the western side of the mine. We're going to migrate the UG2 production to the eastern side of the mine. There's nothing wrong with UG2 on the eastern side of the mine. And then balance it all up on a decline. So we'll have a much more flexible environment from a mining point of view, and flexibility is king in mining. We don't want to be -- or we need to always be conscious of removing logistical constraints, which -- whether it's men, material or, in fact, the orebody -- the ore itself. I haven't actually given you the answer, but it's -- there is no one answer, frankly. There is none.


Unidentified Analyst, [26]


And then my second question is given what the mobile tunnel borer could do at Eland, I know you said the M&A phase of your strategy has been concluded, but I mean, if -- are you seeing anything there that gets you excited about what you could do with other operations in a country that you could still potentially buy?


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


The MTB will certainly work very well at Booysendal on strike to the south. No question about it. It could work extremely well. Accessing these -- Booysendal orebody is a 14.5-kilometer strike length. It's a very long valley. And we've only touched, in fact, the North portion and a little bit in the center now. There's a whole strike portion to the south. Very environmentally sensitive. But with a tunnel boring machine, you can go and strike very nicely just below surface. So that's definitely an application that's in the forefront of our mind for the medium term at Booysendal.

In terms of M&A, we're not focused on M&A at this stage. We're going to return value to shareholders. It's as simple as that.


Steven Friedman, Renaissance Capital, Research Division - Associate [28]


It's Steve Friedman, Renaissance Capital. Just a question on your deal strategy with the purchase of prefs and the share buyback. Is that a-- I mean, just mathematically, it feels like the purchase of the prefs is the best way of sort of returning value to shareholders. Why do you go with a deal strategy? Is it your view on the share price? Or is it your concern about getting access to those prefs?


Paul Anthony Dunne, Northam Platinum Limited - CEO & Director [29]


So in the first instance, our preference, Steven, is to return value via the pref structure. But we're not holding ourselves to do that alone. We think we'll do both. So preferentially, we'll do it through the pref structure. But there will always be a time where the ord may well be also attractive as a vanilla buyback, yes. Let's see how we go. It's good to have that tension between the 2 instruments also.


Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [30]


Paul, it's Johann again from Citi. Just a little bit more detail about that mobile tunnel bore. How is it going? I know you gave a very high-level update of you doing the test work. But I guess you guys cited this 2 months ago, was it right?


Paul Anthony Dunne, Northam Platinum Limited - CEO & Director [31]


It has cut, Johann. So we're moving into what we call the performance validation phase now where we -- it needs to start and run. I think it's [for a night]. Now, Damian, is it -- how many days...


Damian Stephen Smith, Northam Platinum Limited - Group Geologist [32]


314 meters.


Paul Anthony Dunne, Northam Platinum Limited - CEO & Director [33]


300 -- so we wanted to cut 314 meters in a continuous test run, and that's what we're about to do. Only then will we opine on it and say we're happy or not. But it certainly cuts the rock, no question about it.

Are there any questions on the line? I do have some more.


Operator [34]


No questions on the conference call.


Paul Anthony Dunne, Northam Platinum Limited - CEO & Director [35]


So the question from [Lerato] from Absa, "Excluding the released pipeline stock that you contributed to high volumes, what were your actual volumes produced and sold during the year?"

500 -- just on 520,000 ounces is the underlying business performance, if that's the question that is being asked there.

And also from Lerato from Absa, "Are you buying (inaudible) at a premium to face value?" The answer is no, we have not. We have put out a (inaudible) announcement about a week ago. It was at or very, very close to what we refer to as fair value.

So how much is the premium? Well, there was no premium.

There's another question at the back there.


Hurbey Geldenhuys, Vunani Securities (Pty) Ltd, Research Division - Head of Research and Equity Analyst, Platinum [36]


Paul, it's Hurbey Geldenhuys from Vunani Securities. Paul, if I go somewhere into the future and these basket prices continue to rise as they are at the moment, obviously your company will be generating a lot of cash, which will give you the ability to buy back quite a considerable amount of these prefs. Let's say a situation arises where you have bought back maybe 50% of the prefs and your share price is significantly higher than it is at the moment. What -- I mean, what sort of scenarios can play out in that -- at -- in such an instance, if it occurs?


Paul Anthony Dunne, Northam Platinum Limited - CEO & Director [37]


Well, if the ord is higher than the pref, that is what we are all endeavoring to achieve. The -- that will put Zambezi in the money, and our empowerment structure will be a roaring success. That's exactly what we hope to achieve. The -- would we buy above and beyond 50% of the prefs? I think we may. It depends on what's available. To Steven's point, who holds, who's prepared to sell. Again, on that question, remember, cash is king at various times in the cycle. And cash is always a good thing to offer for any instrument whether it be the pref or the ord. So we will obviously have the potential to show the cash or show me the money, honey, as they say in the movies. The money will be very, very visible. And should anybody want to realize cash for the instrument, it will be available.

I do see us, for the very reason you point out there, Hurbey, a combination of both pref and ords. It's not just the either/or here, it's a quantum discussion. There's a lot of possibility here.

The ultimate anniversary date for Zambezi is in May 2025, and the options for termination there or continuing, I think, are well known, and that will be at Zambezi's election themselves in discussion. I'm sure they will have a very good discussion with the company and through the company to the institutional shareholder base. So yes, I think the Board also, Hurbey, we mustn't -- with these things, capital allocation decisions, it is the prerogative of the Board, the Northam Board. I did make a point in my commentary that we have a very, very strong, cohesive and experienced Board at Northam, and they will opine, as those events materialize, as to what is the best allocation of capital. But for the moment, pref first, ordinary shares second, dividend third. That's the order.


Nkateko Mathonsi, Investec Bank Limited (SA), Research Division - Resource Analyst [38]


Nkateko again. Just a follow-up on the premium on the prefs. Are we likely to see you pay a premium or a premium is a no-no? I know right now, you haven't paid a premium. But...


Paul Anthony Dunne, Northam Platinum Limited - CEO & Director [39]


We haven't paid a premium, and I'm not going to discuss that any further without being obtuse in an open forum, if you don't mind, Nkateko.

There's actually quite a few questions here, so I'll go as quick as I can.

"How sustainable are the margins reported this year? What is your normalized targeted long-term margin?"

Well, there is no target per se. But one thing I will say, a good rule of thumb in mining of our type of mining, deep-level mining, for sustainability alone, you need a 20% margin just to keep the business in business in terms of replacement, capital requirements. If you're not earning a 20% margin, you do not have, in my opinion and in Northam's opinion, a sustainable business going forward. So that is the minimum it needs to be.

If one wants to do capital expansion-type projects, we need to be in the 30% -- north of 30% margin at least. And then what I would say mid-cycle, mid-cycle profit margins, again I would say that's probably the 30%, 35% margin number. It's probably a fair mid-cycle margin for our business. Remember, this is a long-term, high-capital-intensity business with a relatively higher risk than most. It's not an ice cream factory. It's not [to be compared]. And that's why those margins -- that's why capital demands those type of returns when it invests into the business, and it's certainly the way we think about it as management.

Production guidance 2020, [470k] 4E. 4E inventory, currently around 191,000, excluding ore, correct? This implies release of 40,000? Maybe, yes. Correct. I agree with that assessment. Let's see how it comes.

I'm very sanguine about the stock, and a lot of people are not. But I'm personally very, very sanguine about the stock. The -- we broke the back of it last year already. You will see.

Sometimes, by the way, that works for you. And sometimes it works against you. We're very, very fortunate that it has worked for us because since year-end, the prices are -- the basket price, as I said in the presentation on one of the slides, substantially higher than the reported numbers you see here. So that stock will be sold into a higher price, which is very fortunate for us.

This is Mike at Tantalum. Oh, that was Mike, sorry. That was Mike. Sorry, Mike.

[Steve Shepard]. "Please update us on the U.S. assets. Where are they going?"

We're on one container a month at the moment. So that's where we are. Remember, Northam doesn't want to be -- it's not our strategic intent to be the biggest recycler in the world. We want to participate. A lot of pricing signals come from the recycle market. For platinum, for instance, it's 2 million of 8 million in terms of the contribution to the world supply. It's a very, very important segment. Recycling should not be underestimated.

So [Steve], we're at one container a month. That's about 20 tonnes a month. And the grading is about 3 kilograms a tonne. It's a very, very high grade. Relative to the mining grades, it's -- that wouldn't be considered necessarily a high grade in refining terms, but in mining terms, that's a high grade, 3,000 grams per tonne, 20 tonnes a month.

The next one is from [Denneo]. "What have you responded to the ZAR 17,000 wage demand from AMCU?"

We have different sets of demands at Booysendal. It's a mechanized operation with different wage demands. So we're not on the same page as the Western Limb.

Again from Denneo . "What" -- it's the same question, yes. So Denneo , I can talk to you separately. But at Booysendal, it's a separate negotiation from the ZAR 17,000 demand. It's very early days for us there at this stage. We've received a letter from AMCU. We've had joint management and union negotiation training, which is a facilitated process. Make sure everybody treats everybody with respect, as I pointed out earlier. And we've had the first clarification meeting at Booysendal. So it's very early days. Wonderboy Kekana is in the room. He's the General Manager at Booysendal. If anybody should wish to talk to Wonderboy after the meeting, I'm sure he'll be glad to add some more flavor to that point.

There's 2 more questions. "Besides net debt-to-EBITDA, what other guiding principle will management use to purchase Zambezi prefs? Preference shares are compounding at 13% a day."

No, that is not correct. 13% a year, of course.

"Whilst your RCF attracts JIBAR 2.3%, why not increase the targeted?"

Same question really as Patrick asked. The answer is we don't have to. The EBITDA increases over the next 2 years are more than substantial. At a 1:1 level, you would be able to do a big, big chunk of the prefs.

Mike from Tantalum. "Any shortfall between prefs and ord prices? Will this be included in net debt-to-EB calculation target?

When assessing free cash flow, any shortfall between -- no, the answer is no. When assessing free cash flow available to us in terms of our buy -- our purchase program in terms of the pref -- remember, the pref is not our issue. It's a purchase. It's not a repurchase or a buyback. It's a purchase. It's a Zambezi issue. It's the Zambezi debt which we will be purchasing. We will consider our forward EBITDA. So the company has clear sight of the cash flows at least 1 year forward. I think that would be fair to assume. We've got a very good idea of what the EBITDA will be in 2020. We will set the EBITDA to that point, and any free cash above and beyond will be returned. Now if you've done that quick sum, you will see we're already well below that point. We're -- the current debt levels are already well below a forward EBITDA-to-free cash flow of 1:1, well below.

I hope I've answered the questions.

Okay, ladies and gentlemen, can you please join us for some tea and sandwiches in the foyer? And thank you very much for listening.