Ahead of a detailed global platinum group metal (PGM) review explaining the rationale underpinning forecasts, analysts at RBC Capital Markets have slashed price targets for Impala Platinum, the world's second biggest player in the sector, to R147 from a previous R255 a share. The stock was trading just below the revised stock price target in mid-day trade in Johannesburg on Wednesday.
The dramatic downward change in the stock price target follows massive falls in commodity prices, where PGMs have not been spared. Over the past seven months; dollar platinum prices have dropped by more than 50%. RBCCM has lowered its short-term platinum price expectation (years 2008-2010), but has left its long-term (2011 onwards) price forecast unchanged at $1 500/oz.
For palladium, the short-term (years 2008-2009) price forecast has been reduced; the long term number of $250/oz remains unchanged. For rhodium, short-term price expectations (years 2008-2011) have been reduced; the long-term (2012 onwards) price remains unchanged at $3 000/oz.
RBCCM analysts state that that Impala "seems to have been sold down to levels that are roughly in line with our value estimates given a [PGM] metal price basket of around $1 100/oz. However Impala could see at least 30% more downside if metal prices remain at current levels, in our opinion".
In a report dated October 8 2008, the RBCCM analysts said that "the near vertical decline in the PGM metal price basket over the past three months has seen share prices halve. Unfortunately, we find there to be at least 30% more downside potential in Anglo Platinum, Impala Platinum, and Lonmin (the majors), with possible exceptions in Aquarius, and Northam, where we believe selling has now been overdone.
"In contrast to this, we put the junior names through the mill - assuming 100% equity dilution for all outstanding projects at current share prices (given the apparent evaporation of debt funding capacity) - and still find enough reason to be invested in a selection of names.
"Even without an increase in the future metal price basket, we find Pt Australia, Sylvania, Anooraq, Platmin, Eastplats, and Ridge to offer solid investment opportunities. Our analysis shows the market generally undervaluing these shares even on the basis of just the first or flagship projects becoming mines. On this basis and looking to an improved future metal price basket, we also continue to see these shares, in particular, offering most likely targets in the ongoing sector consolidation".
Earlier this month, on October 2, Impala Platinum said it would offer the-then equivalent of R21bn to acquire all of Tier II PGM miner Northam, 62% held by Mvelaphanda Resources, "to create a South African controlled platinum champion". Impala is also bidding to acquire the balance of Mvelaphanda Resources.
Impala is proposing to settle 70% of the purchase of Northam in new Impala shares, and the 30% balance in cash. Upon completion, Northam shareholders would receive 24,50 Impala shares for every 100 Northam shares held, and the cash equivalent of 10,50 Impala shares.
Impala's bid followed hard on the heels of an announcement from Anglo-Swiss diversified miner Xstrata that effectively delayed its acquisition of Lonmin. On August 6 2008, Xstrata announced intention of a hostile £33 a share cash bid for Lonmin, effectively valuing Lonmin, then, at around $10bn.
In the days prior to Xstrata pulling its intention to make a full bid, Lonmin traded as low as £21 a share, indicating the market's disbelief that the bid would be formalised. In a further announcement, Xstrata said it had acquired additional Lonmin shares, such that it now holds around 25% of the entity. Lonmin is currently trading just under £15 a share.
Earlier this month, the broad recommendation from the analysts at RBCCM was to "sell the major SA PGM Producers - in particular relative to the major SA gold producers, but take this opportunity to build a good quality portfolio in the junior names that we believe could be winners in sector consolidation".
