Impala Platinum Holdings Ltd. (IMPUY, Financial) is a South African platinum group miner that has been down with low metal prices. Along with gold and silver, platinum has been down in value for several years. We like investing in Impala because the stock and underlying metal have been out of favor for a long time. This could change, however, with a drop in overall financial markets.
The stock trades for 2,350 South African rand, there are 735.1 million shares and the market cap is 17.3 billion rand ($1.48 billion). It takes 11.63 rand to buy one dollar. According to the Financial Times, earnings per share amounted to a loss of 10.97 rand. The stock does not pay a dividend.
As of today, the price of platinum is $952.20 per troy ounce. The price has ranged from the high $800s to low $1,000s for the last year. In 2014, the price was in the $1,400 range, so you can see the price has dropped substantially. In 2008, the price was over $2,000. Approximately 60% of platinum is used in the automotive industry. Around 80% of platinum group metals are mined in South Africa. There is a theory that since platinum is rarer than gold, the price of platinum should be higher. This theory has not panned out for the last six years. The price ending in 2017 was slightly lower than 2016. Management attributes this to lower demand in Chinese jewelry and diesel engine problems that the Germans (Volkswagen (XTER:VOW, Financial)) have been experiencing.
For the first half of 2018 (ending in December), Impala mined 726,000 ounces of platinum, which was 6.7% lower than the same period last year, 406,000 ounces of palladium, which was 13.3% lower, 98,800 ounces of rhodium, which was 8.1% higher, and 7,900 tons of nickel, which was 4.5% lower.
For the first six months, sales were 17.28 billion rand, down from 18.48 billion rand in the prior period. Lower platinum prices and mining an area with lower ore grades contributed to this drop. Impala has lost money every year for the past five years with low metal prices. It’s no wonder the price is so low.
The balance sheet is pretty solid. There is 4 billion rand in accounts receivables, 4.2 billion rand in cash and 11.1 billion rand in inventories. I’ll include inventories since they are comprised of metals which can be readily sold. The liability side shows 9 billion rand in debt and 1.1 billion rand in payables.
The four main mines are named Zimplats, Marula, Mimosa and Two Rivers. Impala also has a refinery. Because of low platinum prices, the company is laying off 1,400 workers and closing production at its Rustenberg mine. Competitors Lonmin (LSE:LMI, Financial) and Anglo American (LSE:AAL, Financial) are also laying off workers and reducing expenditures. The number of deaths per year is absolutely staggering. In 2014, four miners died. Seven deaths were reported in 2015, 11 in 2016, nine in 2017 and six in the first half of 2018. This is tragic. Other challenges with mining in South Africa include labor disputes and issues getting enough electricity to operate. In 2014, Impala’s miners went on the longest strike in the country’s history.
The South African currency, the rand, has been pretty strong lately with higher commodity prices (but not platinum) and a new president. This hurts profits from commodity producers because while their sales are in dollars, expenses are in the home currency. It’s hard to believe the rand used to be two to one with the pound.
So why do we own this little ugly duckling? We like commodities that are way out of style. In the past, we have doubled our money on Impala and sold off the winnings. No doubt, Impala is a volatile stock. We buy the stock over the counter in the U.S. and haven’t had much of an issue for smaller purchases. The stock is down a lot today and we think it’s a buying opportunity.
The stock has several things going for it. One, it’s way out of favor and only trades for a few bucks a share. Its 52-week high is $3.68 and is now trading for $2. At some point, precious metals may trade higher. With all of the exuberance with FAANG stocks, the S&P 500 and real estate, who wants to own precious metals? A drop in the financial markets may change this. Of course, there is always the demand in catalytic converters, but that’s tough to gauge. We like Impala for a small portion of your portfolio that can be in a risky stock.
Disclosure: We own shares.
