Bloomberg News

Impala Bond Sale Bets on Platinum Revival: South Africa Credit

February 15, 2013

Impala Platinum Holdings Ltd. sold the first bonds by a South African miner of the metal this year, betting labor unrest and rising costs will give way to an industry recovery.

The world’s second-biggest platinum producer sold $500 million of convertible bonds in rand and dollars, with a coupon of 5 percent for the rand debt and 1 percent for the dollar securities, it said in a statement today. Yields on Aquarius Platinum Ltd.’s convertible bonds due December 2015 fell 227 basis points in the past month to 10.55 percent, compared with the 25 basis-point increase in average yields of companies in the JPMorgan Chase & Co. CEMBI Metals & Mining index.

Impala is sinking three new shafts at its Rustenburg mine, the world’s largest platinum operation, hoping to profit from rising metal prices after Anglo American Platinum Corp. Ltd., the biggest producer known as Amplats, announced plans to shut shafts and cut output by 13 percent. Impala targeted rand and dollar markets as the local market for convertible bonds wasn’t big enough to absorb the full amount, said investors including Rashaad Tayob at Abax Investments (Pty) Ltd.

“They’re going to have quite a big funding call, and they’re being pro-active,” Patrice Rassou, who helps manage the equivalent of about $40 billion at Sanlam Investment Management in Cape Town, said by phone yesterday. “Depending on how the Amplats review pans out, there should be some price action as production is cut.”

Industry Upheaval

Upheaval has plagued South African producers since last August, when thousands of workers began a series of illegal strikes, winning pay increases of as much as 22 percent. Impala, which accounts for a quarter of world output, yesterday reported that first-half net income fell 78 percent, missing analysts’ estimates, after a strike at its Rustenburg mine cut output.

Impala’s debt climbed to 2.97 billion rand ($334 million) in the six months through Dec. 31, from 2.70 billion a year earlier, according to regulatory filings. Finance costs rose to 293 million rand in the period, from 131 million rand.

The company, based in Johannesburg, sold 2.67 billion rand and $200 million of bonds due in 2018, it said.

Conversion Premium

The debt can be switched into shares at a premium of 35 percent to the market value of the stock. UBS AG and Standard Bank Group Ltd. will arrange the sales.

“We could get it all away in U.S. dollars, but we didn’t want to exclude rand investors” including the Public Investment Corp., known as the PIC, Chief Financial Officer Brenda Berlin said in an interview. The PIC, which manages the pensions of government workers, is the company’s second-biggest shareholder.

By selling bonds that investors may exchange for shares, the company is hoping to keep debt-service costs low, said Tayob of Abax Investments in Cape Town, where he helps manage the equivalent of $6.2 billion. Investors typically demand lower interest rates for convertible bonds in return for the option of profiting from an increase in the share price.

“They’re probably trying to keep their cost of funding at a minimum,” Tayob said by phone yesterday. “It’s a balancing act because there is the risk of dilution if the share price goes up,” forcing the company to issue shares to bondholders at a higher price than when the debt was issued.

Profit Drop

Impala’s profit excluding one-time items decreased to 1.28 rand a share, in the six months ended Dec. 31, from 5.73 rand a share, a year earlier. The median estimate of five analysts surveyed by Bloomberg was for adjusted earnings of 2.28 rand a share. The average price of platinum in the six months through December fell 6.4 percent to $1,547 an ounce compared with a year earlier. The price has climbed 12 percent since then.

The rand slipped 0.4 percent to 8.8179 per dollar by 10:39 a.m. in Johannesburg today. That extended its decline this year to 3.9 percent, making it the worst performer among emerging- market currencies this year, according to data compiled by Bloomberg.

While the “operating environment in South Africa continues to be challenging,” metal prices may rise “as a result of tight South African supply and on-going firm demand by the automotive industry,” Impala said in a statement yesterday. “Impala takes a long-term view on the business and will continue to invest in replacement shafts.”

Output Decline

Mining production slumped 7.5 percent in December from a year earlier, led by a 23 percent reduction in platinum output, Statistics South Africa said yesterday.

Investors are growing increasingly wary of South Africa, credit default swaps show. The cost of protecting South African debt against non-payment for five years using credit default swaps has climbed 26 basis points this year to 169, reaching an eight-month high of 177 on Feb. 4. The premium investors demand to hold South African dollar debt over U.S. Treasuries increased 24 basis points this year to 187. according to JPMorgan indexes.

With developed-nation bond yields near record lows, the extra yield offered by Impala attracted investors, given the option to convert the debt to shares, Abax’s Tayob said.

“From an investor’s perspective, you may be willing to take a lower coupon but with the potential to participate in any upside in the share price,” he said.

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net


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