Amid soaring palladium prices, Impala Platinum Holdings Ltd. CEO Nicolaas Muller pointed to a bullish medium-term palladium outlook while countering concerns raised on an Oct. 7 conference call that the company could be deal-making at a market top after its recent C$1.0 billion bid for Canadian miner North American Palladium Ltd.
The offer from South Africa-based Impala Platinum, or Implats, comes as the price of palladium is trading around US$1,650 per ounce, having more than doubled in the past three years.
Given the aggressive price run, Citi analyst Johann Steyn probed Implats management during the call on the timing of the deal. "It seems like quite a big bet at this stage of the cycle," Steyn said.
But Muller, acknowledging palladium's record prices, argued that favorable supply-demand fundamentals would hold palladium up for years to come. "I believe that there's going to be continued support for palladium."
Palladium is used in catalytic converters, especially in gasoline-fueled vehicles, to help remove pollution from exhaust. As some countries move to strengthen emissions rules, palladium's supply fundamentals have garnered increasing investor attention with little new supply in the pipeline and inventories being drawn down.
"It is our view that medium-term palladium fundamentals are strongly underpinned by a structural shift in demand as a result of tightening emissions legislation as well as substantial financial and processing constraints on projected near- and medium-term primary supply growth," Muller said.
Muller said physical surface stocks of palladium globally have fallen from 17 million ounces to 12 million ounces in recent years. "And when it was 17 million ounces a decade ago, it was equivalent to two years of demand," Muller said. "The 12 million is now equivalent to one-year demand."
For GMP Securities analyst David Stewart, who covers North American Palladium, the deal comes too soon. Stewart said in an interview that North American Palladium's stock has yet to bake in potential cash flows and additional resources.
"That's why we said it's a bit too soon to sell the company," Stewart said. "It does seem like they're leaving some money on the table."
In an Oct. 7 note, Stewart said the deal values North American Palladium at 0.49x net asset value, at spot prices and based on the average bid to all shareholders. The Implats bid was split between shareholders. Its majority shareholder, Brookfield Asset Management Inc. subsidiary Brookfield Business Partners LP, is to get C$16 per share, with the rest of the shareholders receiving C$19.74 per share.
"Our disappointment in the Implats offer stems not only from the implied 15% discount but also from the timing," Stewart said in the note. "North American Palladium is in the midst of its ramp-up to 12,000 tonnes per day from underground, which has progressed well up until now."
North American Palladium owns the Lac des Iles platinum group metals mine in Ontario. The operation has a nine-year mine life, but with expected resource-to-reserve conversions, Muller expects mine life to grow to about 15 years.
Still, Stewart said it was hard to be overly critical of North American Palladium for doing a deal amid strong palladium prices. He also noted that there was potential for a bidding war to emerge.
"And they won't even have to offer a premium to the deal to come in higher," Stewart said, noting that a suitor could simply offer more to Brookfield, which agreed to a discount in the bid.
Stewart said there might be a couple of other suitors for the company, but the list of would-be buyers is short, in part given the specialty nature of the palladium sector, which is dominated by production from South Africa and Russia.
Others doubt that a bidding war will emerge. "It is a good bid and I see no one else coming in," Haywood Securities analyst Kerry Smith said in an email.
Implats' bid also marks another example of a South Africa-focused miner looking to North America for diversification. In 2017, Sibanye Gold Ltd. bought Stillwater Mining for its platinum group metals assets in the U.S. in a US$2.2 billion deal.
