My conclusion then was that while there was still some risk involved, one share in particular stood out as a potential value and recovery play.
The company was Aquarius Platinum (LSE: AQP), the world’s fourth-largest producer and a company that has lost 76% of its value so far this year.
Like its four London-listed peers, Aquarius’ operations are in South Africa and Zimbabwe — two countries that carry substantial political and economic risks, as has been highlighted by the terrible events at Lonmin’s Marikana mine recently.
In my original article, I concluded that I wouldn’t touch Lonmin shares at the moment, because the company’s tardy approach to cost cutting and its looming financial problems meant it was dramatically overvalued. I wasn’t keen on Impala Platinum either, and Anglo American — while the world’s largest platinum producer — is too diversified and large to be a meaningful recovery play on platinum.
A number of factors combined to make me interested in taking a closer look at Aquarius Platinum, and my suggestion to interested readers was to wait for the company’s full-year results and then take a closer look.
The results came out on 8th August — and the case now seems stronger than ever, especially given the share’s recent sub-40p price tag.
Let’s start with some statistics:
- Share price (closing 07/09/12): 36.3p
- Net tangible asset value per share (30/06/12): 124p
- Price/tangible book ratio: 0.3
- Cash (30/06/12): $180m
- 52-week high/low: 234.6p / 33.1p
My main case for investing in Aquarius Platinum is as a straightforward value play.It is currently trading at around one-third of its tangible book value, so something pretty disastrous would have to happen for the breakup/sale value of the company to be much less than 35p per share, especially as it has enough cash to cover a year’s operations (with one caveat, which I’ll come to).
Value & Recovery?
A volatile and cyclical industry like mining is not ideal material for a pure value play — there are simply too many other things that can go wrong. That’s why the remainder of my investment case for Aquarius is based on my belief the platinum market will recover and that the company will return to profitability.
The current platinum surplus will take some time to clear, but demand for platinum is not going to disappear. Aquarius has several mines that are running profitably at current price levels and the company has said that it expects that as long as platinum prices don’t drop below around $1,300/oz, then the company should be able to generate positive cashflow going forward. The platinum price is currently over $1,500/oz and has previously bottomed out around $1,400/oz.
Aquarius has been proactive and transparent in its approach to cost-cutting and idling unprofitable mines and I have been impressed with the quality and honesty of its communications with the market. This is a far cry from the head-in-the-sand approach adopted by Lonmin, which is about to breach its banking covenants and may need to raise as much as $1bn to continue trading.
It’s not all sweetness and light. Leaving aside the current depressed market conditions, there are a number of other possible risks that could derail Aquarius’ business or force it into a dilutive equity raising exercise.
Nationalisation: Some politicians in both Zimbabwe and South Africa would like to nationalise foreign-owned mines, in an attempt to keep the economic benefits at home, rather than exporting the profits.
I don’t think full nationalisation is likely, but tax hikes and ownership grabs are always a possibility. In Zimbabwe, royalties on gold and platinum production rose at the beginning of 2012 and the country’s Indigenisation & Economic Empowerment Act of 2007 required foreign-owned companies to cede 51% of ownership to local shareholders, a process that is still ongoing.
For Aquarius, this means 51% of its Mimosa mine (in which it has a 50% stake), will be transferred to local ownership. The details of this transfer are still being negotiated but it has been described as a ‘sale’.
The Booysendale Question: In May 2011, Aquarius agreed a $146m deal to buy the southern portion of the Booysendale deposit from Northam Platinum. Aquarius CEO Stuart Murray had been chasing the deal for a long time and it was hailed as a game-changer, with 31m oz of platinum group metals — an increase of 24% on Aquarius’ resource base.
Better still, it could be accessed by extending Aquarius’ existing Everest mine, a much cheaper proposition than building a new mine. But how things change…
Aquarius now can’t afford to pay for Booysendale and isn’t keen to go ahead with the transaction at present. It also has problems at Everest that have made it uneconomical and this mine has been idled for the forseeable future.
This quote from the recent preliminary results hints at the problem:
Aquarius is of the view that its present cash reserves are sufficient to manage its operating mines for the next twelve months based on present market dynamics but point out that Aquarius will need to secure additional funding if it was required to conclude the Booysendale acquisition. In noting the necessity for securing additional capital, Aquarius is taking advice on a number of alternatives.
Luckily for Aquarius, South African bureaucracy is such that as of February this year, the deal still hadn’t been approved by the relevant government department.
A long wait?
A recovery in platinum prices and demand is by no means certain and is almost certainly not imminent. Although the price of platinum has risen by around 10% since the Lonmin troubles started, it could soon drop back down again when Lonmin resumes operations.
I think that Aquarius is a fairly risky play and it could yet go horribly wrong — so it’s definitely not one to bet the house on. On the other hand, if things go well, it’s not hard to see the share price doubling or tripling quite fast.
That’s all for now, but in my next article I’ll give you the details of a gold share I’ve been admiring recently — and explain why I think it has serious takeover potential.