JOHANNESBURG (miningweekly.com) – The capital expenditure (capex) of platinum mining company Northam in this financial year is expected to reach the R1.3-billion mark, well above the R774-million in the 12 months to June 30.

Northam, which is in the midst of significant expansion, sees project execution as the key to its foreseeable future.

All current acquisitions and expansions are fully funded from current financial resources, with most of the capex being spent at Northam’s promising projects at Booysendal, a resource that straddles the border of South Africa’s Limpopo and Mpumalanga provinces, 35 km from the town of Mashishing, formerly Lydenburg.

Ahead of the commissioning of the company’s new smelter at the Zondereinde platinum mine, 56% of the company’s inventory, worth R968-million, is in ore stockpiles and concentrates, largely because of current smelter constraints.

Northam CFO Ayanda Khumalo said during Friday’s results presentation that the value of inventory in the 2017 financial year to June 30 increased by 122% to R402-million owing to ore production exceeding smelting capacity.

The combined impact of the higher stockpile and concentrate volumes resulted in group operating profit rising to R613-million, a 60% increase.

The commissioning of Zondereinde’s new drying plant has already lowered accumulated concentrate stocks and the commissioning of the new furnace by year-end will destock 70 000 oz of platinum, worth R1-billion.

To date, R672-million has been spent on the Zondereinde smelter expansion.

However, in both this financial year and the 2019 financial year, the Booysendal projects will take up most of the capex.

Northam Platinum CEO Paul Dunne said in response to RMB Morgan Stanley research head and equity analyst Chris Nicholson that an estimated R1-billion a year would be required for the Booysendal South project.

After funding the expansions and acquisitions, the company expects to end up with between R500-million and R1-billion cash on hand at the end of the 2018 financial year and be in a similar position by June 2019.

From there, cash generation is expected to hockey stick upwards and become significant in relation to the size of the Northam business, depending, of course, on the rand basket price of the metals produced.

On the company’s cash position, Dunne said in response to Macquarie analyst Gerhard Engelbrecht that the R3.8-billion in cash and near-cash immediately available to the company this year is made up of R1.8-billion cash on hand, R1-billion arising from turning excess stock into cash, and R1-billion that will be generated operationally in the current financial year to June 30.

Dunne estimated that the outflow of cash would be roughly R3-billion, made up of a R1.9-billion outflow into Booysendal and Zondereinde development, a R1-billion outflow to Anglo American Platinum (Amplats) for Tumelo, and a R175-million outflow to Glencore for Eland.

The company is working with Amplats to conclude the Tumela transaction, which will be followed by the establishment of access drives through Zondereinde’s western boundary.

It has received approval to adjust its mining right to include Tumelo but the corresponding issuing of the “abandonment” to Anglo American Platinum is still awaited.

In addition, Northam needs environmental authorisation to continue with taking in the additional Tumela ground, which will add 16.7-million ounces to the Zondereinde resource base.

Even though there is neither surface impact nor groundwater impact, owing to the depth of the project, a 300-day process needs to take place, after which development will take two years to conclude.

Once a 12-month off-reef development programme has been completed followed by six months of first-raiseline development and another six months of stoping preparation, the addition of Tumela will enable Zondereinde to increase its production profile to 350 000 oz a year.

The increased production is poised to arise from quality Merensky ore and result in real unit cost improvement.

Keenness on the approval for the transfer of the mining right of the Eland mine from Glencore to Northam stems from the UG2 at Eland being similar to the UG2 at Zondereinde, dipping as it does at 18 degrees with a 1.8-m width and a grade of 4.4 g/t across the mining cut.

Northam has already taken control of the care and maintenance of Eland while it plans for the restart of the mine once the Section 11 mining right transfer is obtained.

The company is confident that it can establish a long-life operation at Eland at a production rate of 150 000 oz/y.

The Eland transaction also resulted in the establishment of Northam’s successful chrome-marketing arrangement with Glencore, with chrome now a “very important part” of Northam’s product basket.

Dunne foresees the chrome price returning to the $200/t level, which at R13 to the dollar translates into R2 600/t less R1 300/t for cost of operation and transportation, giving a pre-tax profit to Northam of about R1 300/t.

The company expects to produce 900 000 t of chrome, giving a pre-tax profit of more than R1-billion.

Meanwhile, Northam’s Booysendal North project is taking shape. Booysendal North’s Merensky project is already beginning to pay some of its way by producing at a rate of 25 000 t a month.

The deepening of the decline and further development of the ore reserve is under way at the Merensky project, and two new levels have been established at the Upper Group Two project.

The creation of ore-handling infrastructure, including conveyors and transfer boxes, is 65% complete and the development of shaft-bottom pumping arrangements is 55% complete.

In its financial year to June 30, Northam achieved record 12.6%-higher revenue to R6.9-billion, at an operating margin of 8.9%, which was up on last year’s 6.3%.

Group operating costs rose 13.4% to R5.7-billion on increased labour and power costs, as well as greater production volumes from Booysendal North mine.

Largely because of a stronger rand to euro exchange rate in the 12 months to June 30, refining and other charges fell by 9.4%.

Shortly after the financial year-end, Northam bought the suite of PGM recycling machinery and buildings from A1 Specialised Services for $10.7-million.

This transaction is expected to be concluded on September 1 for the assets and premises, which are in Croyden, in the state of Pennsylvania, in the US.

As most of the business will be conducted on a toll basis, the working capital requirements will rest largely with customers rather than Northam, which is cognisant of the fact that a recycling business has a considerably longer life expectancy than most mines.

The company has already received many telephone enquiries from enterprises keen to enter into recycling arrangements.

Included in the purchase are multiple ceramic catalytic converter processing lines as well as sampling and separation equipment, a transportation fleet and a materials-handling plant.

The premises consist of 30 acres of land as well as the buildings measuring 300 000 square feet.

The company believes that it has secured an excellent asset base to meet a forecast decline in primary production.

Northam is confident that over time PGM demand will grow in line with world gross domestic product and primary supply from South Africa will contract, resulting in a more positive environment for PGMs.

The company expects South African platinum supply to fall below four-million ounces this year and that the decline will continue as a result of the low investment in the replacement of platinum ounces.

Northam has a stable production base at Zondereinde and a growing production profile at Booysendal, which is on its way to an output of 500 000 oz/y, and describes both operations as being in a competitive position on the cost curve.

While Northam beats Mining Charter Three’s proposed black economic empowerment levels with Zambezi’s 31.4% equity holding, it finds many other aspects of the third iteration of the charter as being unsustainable and supports the efforts of the Chamber of Mines to find a solution to the current impasse.

On the corporate front, it will continue to assess opportunities to expand its portfolio of assets but only if they contribute to its strategy of growing down the cost curve.

It has sold its stake in the Pandora Joint Venture to Lonmin and is tidying up some of the corporate structures and winding up superfluous subsidiaries.