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Summary of Industry Outlook for South African PGMs (2018)

Core Content

This document outlines the outlook for the South African Platinum Group Metals (PGMs) industry in 2018, with a focus on the performance of key companies including Amplats, Lonmin, Impala, Northam, and RBPlat. It highlights the financial and operational challenges faced by the industry, the implications of the Rand basket price changes, and the potential for capital projects and M&A activity.

Main Points

• Industry Challenges:

  • 2017 was a difficult year for PGM producers with significant cash flow issues.
  • Many operations are cash flow negative, particularly at the lower end of the cost curve.
  • The industry is expected to continue with marginal cost pricing in 2018 due to the balanced market outlook.

• Rand Basket Price Adjustment:

  • The Rand basket price is updated using a blended 30- and 90-day trailing average.
  • The price is set at the 90th percentile of the cost curve, reflecting the marginal cost basis.
  • A weaker Rand is expected to increase the basket price, but this is offset by lower USD platinum prices.

• Company-Specific Outlook:

  • Amplats:
    • Recommended as a "Buy" with a target price of R420.
    • Has a more favorable position on the cost curve and is expected to generate significant free cash flow.
    • Its portfolio repositioning is largely complete, with a shift to a more streamlined and focused operation.
    • Expected to increase EBITDA margin from 16% to 24% over the next three years.
    • Anticipated to be net cash by the end of 2018.
  • Lonmin:
    • Recommended as a "Sell" with a target price of R4.90.
    • In a precarious position due to being a marginal producer in a low price environment.
    • Faces the risk of breaching banking covenants due to potential withdrawal of financing.
    • May need capital injection to continue operations.
  • Impala Platinum, Northam, and RBPlat:
    • Recommended as "Hold".
    • All companies are expected to see increased price targets due to higher Rand basket price assumptions.
    • Capital projects and M&A activity are critical for their future performance.

Key Information

• 2018 Key Events:

  • Advancement of key projects (e.g., RBPlat's Styldrift, Northam's Booysendal North).
  • Strategic reviews and M&A transactions (e.g., Amplats' sale of Union and Tumela, RBPlat's acquisition of Maseve plant).
  • Inventory release in H2 2017 contributing to free cash flow.
  • Lonmin's operational review may result in the sale of downstream processing capacity.

• Valuation Metrics:

  • Amplats is considered the most attractive investment due to its strong position on the cost curve and cash flow generation.
  • Lonmin is seen as unsustainable in the current environment and may face production closures.
  • The industry is expected to see continued volatility in cash flows due to inventory movements and operational changes.

• Financial Forecasts:

  • Amplats is projected to generate significant free cash flow, with a forecast of R5.8bn for FY17E.
  • The company's EBITDA margin is expected to increase significantly over the next three years.
  • The long-term incentive price for PGMs remains unchanged at around R25,400 per 4E ounce.

Conclusion

• Amplats is highlighted as the preferred investment due to its strong financial position and operational improvements.
• Lonmin is at risk due to its marginal status and potential liquidity issues.
• The industry is expected to see continued challenges, but opportunities for growth and value creation exist, particularly through capital projects and M&A.
• The outlook for 2018 is shaped by the Rand's depreciation, regulatory environment, and operational performance.