David Brown: CEO: Impala Platinum

Continuous dividend payments remain a key highlight

BARRY SERGEANT:  I am with David Brown the Chief Executive Impala Platinum that today announced half-year results to December 31.  David you've had a very interesting day - what kind of reaction have you had to the results?

david brown:  Very favourable - quite clearly people understood that we had a very difficult start to the half year.  We obviously had that significant tragedy at 14 shaft and we also had a two-week industrial action, so between those two we lost in the region of about 70,000 to 71,000 platinum ounces.

BARRY SERGEANT: The markets as you've heard it today - because you have spoken to a lot of people today.

DAVID BROWN:  Absolutely.

BARRY SERGEANT:  And the reaction?

DAVID BROWN:  The reaction was very favourable - there is a common understanding that we've got to grips with the problems that were plaguing the Impala Rustenburg area. They understand that the difficulty we had with regard to the strike and the 14-shaft tragedy are non-repeat items and once offs and therefore if one looks at a normalised production profile going forward - in fact they are very positive - so are we.  If you were to look at the unit cost increases if we strip out the effects of the strike and the safety issue - we would probably have had increases of only about 4% which under the current circumstances would have been an extremely good cost increase.

BARRY SERGEANT:  It is correct to say that the Impala mine as such is the biggest single platinum mine in the world.

DAVID BROWN:  Yes it is.

BARRY SERGEANT:  The one theme that came out of your presentation this morning - you use the word continuous in terms of dividend payments - it's a very striking feature in connection with Impala.  The last year or so we've seen Lonmin which is probably number four in the world in terms of platinum, output Anglo Platinum first followed by Impala, Norilsk where the platinum is really a by-product to nickel and then Lonmin.  Lonmin was forced into a $500m rights issue and just recently Anglo Platinum announced a $1.6bn rights issue.  Norilsk already suspended dividend payments for 2008.  Impala has continued paying dividends, never mind looking at a rights issue. Therefore, certainly in the tier one global platinum group it stands out and in tier two as one will expect there have rights issues as well.  We saw in 2009 Aquarius Platinum go into the market for debt and for equity and we saw a lot of difficulty in certain corporate transactions.  Just to give some perspective on that - your cash-flows - if you go back to some of the peak years, bearing in mind that your fiscal year-end is June30 - in 2007, in round numbers, Impala's operating cash flow was R10bn and about R11.2bn in 2008.  The dividends have been also very substantial in 2008 - cash dividends around about R6.1bn. What is it that characterises Impala's very powerful status in this sector particularly from a financial point of view?

DAVID BROWN:  Barry, there were two factors.  The first one obviously we did not have a holding company - ala Anglo  - and therefore we have always been an independent company - we've had to always look after ourselves.  Therefore we've never had the ability to rely on anyone else to bail us out of trouble if need be.  The second order point, was for my sins, as you might recall I was CFO for eight years as well and I was always teased as having the laziest balance sheet in the business - which is not quite true but certainly we had a very conservative balance sheet - but the conservativeness around that balance sheet has helped us to weather that storm.  We also then in 2008 began to put in a cash preservation strategy where we cut back on certain projects.  We also looked at reduction in operating costs and generally have managed to save money where we can, so I think we took a very pro-active stance in terms of what was happening in 2008.  But we were also very mindful of the fact that when one looks at the economic environment that we're in - the easiest thing is to say is that the shareholders must actually bear the full brunt of the impact.  We took a view that said "No" we need to balance it between obviously company cuts and you might recall in 2009 - the senior management - we didn't take any salary increases.  So we did quite a lot of internal transactions with people internally; with other parties in order to try and reduce the cash out-flow - so it was a combination of factors that we put together plus the fact that we did have a conservative programme anyway, but despite that we've returned probably over R25bn to shareholders over the last six to seven years.

BARRY SERGEANT:  You've made the point that your capital expenditure programme has not been affected by the background factors.  Second-half of calendar 2008 your capital expenditure was running at about R3.9bn. Second-half of 2009 calendar down to about R2.2bn. It's quite a sharp decline - is that part of the planning or were there distinct measures in place to cut the capital expenditure recently?

DAVID BROWN: It was two-fold.  The one was part of the plan quite clearly we are sinking thee major shaft systems in Impala Rustenburg and quite clearly the reduction is just a factor of the cash flows falling into different periods.  There was also a conscious effort to try and limit capital to what we've deemed what was necessity for the business.

BARRY SERGEANT:  Right.  The latest reporting date 31 December 2009 - your balance sheet's still showing net cash of R941m - and going back for, you mentioned, a good number of years there - that's been the position at Impala - having net cash in the balance sheet, but having said that it's come down by quite a lot.  If you go back to 30 June 2008 the net cash in the balance sheet was around about R8.5bn...

DAVID BROWN:  Sure. 

BARRY SERGEANT: ... so you've clearly got some view that that company has taken on the period ahead and you're comfortable with the anticipated cash-flows for calendar 2010, if not beyond.

DAVID BROWN: Yes.  It's a factor of two things.  Quite clearly we are very happy with the operational recovery that is currently underway at Impala Rustenburg.  Quite clearly that will deliver additional production units, which will obviously generate additional cash as well.  Also the market fundamentals look remarkably strong for 2010 and beyond.  As you are aware 2009 we had a great jewellery underpin and the great Chinese story generally in the industrialisation - we then latterly had the investment element coming to the fore and certainly those two elements carried prices significantly higher than where they were a year ago.  Obviously looking forward we're looking with much glee in the fact that we're going to see some industrial pick-up at the end of 2010 and moving into 2011.

BARRY SERGEANT: Without asking you specifically about competitors as such, you mentioned the shafts going down at the Impala Rustenburg.  Looking at builds across the industry the past two or three years or so - it's been limited to a large extent by a number of factors.  We've seen platinum, which heavily backed by Pallinghurst building - what is the net build closure rate in the industry at this stage - without being specific if you don't want to butt competitors?   Platinum is building some very good potential mines - Wesizwe for example - have been delayed again and again - what is the net position as you see it?

DAVID BROWN:  The net position for growth for 2010 will be very small, bearing in mind that 20 Shaft, 16 and 17, which we are sinking presently, are really replacement shafts for the older shafts that are nearing the end of their life.  Therefore, the net growth factor from the sinking of those shafts will not be significant at all.  In terms of looking at projects that are going to deliver additional ounces - these are few and far between.  If you see one or two come to the market that will probably be the limit of it.  Quite clearly the biggest increases come actually from Zimplats in the last period...

BARRY SERGEANT: Where Impala is the majority shareholder...

DAVID BROWN: Absolutely - and that's really the one that probably has grown.  I would say net-net you probably still going to see tight supply coming into the market in 2010.

BARRY SERGEANT:  Therefore on the fundamental side that's got to be good news for prices in the sense of your supply and demand being limited as such on the supply side, giving a lot of leverage on the upside - if prices keep rising.

DAVID BROWN:  Absolutely.

BARRY SERGEANT:  Looking at the pricing on the market and valuations for platinum stocks, Impala at the moment has got a cap market value that is around about $16bn - Anglo Platinum about $23bn - Lonmin right down at $5.7bn. What kind of expectations is the market pricing in here, bearing in mind that in fiscal 2008 your operating cash-flow was right up there - above R11bn - so the potential leverage going forward for Impala Platinum is substantial from where we are at the moment.  Do you think the market pricing at the moment is looking for too much - do you think it's fair?

DAVID BROWN:  Valuations have run-up quite significantly in the last three or four months and quite clearly that were on the expectations on the back of the higher metal prices.  The one element that is somewhat of a joker in the pack is obviously still the Rand/Dollar exchange rate and that is still quite strong.  Quite clearly if we would see a weakening of the Rand/Dollar exchange rate, we would definitely see those platinum stocks run quite hard.

BARRY SERGEANT:  Going back to 2008 before it was clear that a lot of commodities were falling out of bed.  There was a good amount of corporate activity - real potential imagine going on in the platinum sector and Impala was one of the parties that was potentially involving Mvela Resources and particularly its subsidiary Northam for among other things its Booysendal project.  We've seen Xstrata in the market - and half pulling out in taking over Lonmin and there have been other transactions, smaller ones that have come to fruition.  Do you see any further consolidation in this sector, and if so, what would be needed to trigger it - because there is an apparent unwillingness for particularly the foreign investor as such, to come into this sector on a build basis, as opposed to a corporate basis or an institutional basis where they might buy some stock. What are the constraints? 

DAVID BROWN:  The constraints are around value expectations and quite clearly in terms of looking the merger and acquisitions space, without a doubt the market was really caught between two places.  Quite clearly there was an expectation that because metal prices came off valuations should be a lot lower and therefore people who were acquirers should be able to pick up assets a lot more cheaply than anticipated.  Coupled with the expectations of the sellers was the fact that this was potentially a sort term reduction in value and therefore I can hang on because eventually my value equation will turn up and I will be able to sell for a lot higher.   There was that dichotomy that was taking place in the market, certainly back in 2008/9.

BARRY SERGEANT:  So if I understand that correctly you would anticipate that the corporate activity potential side - which of course a lot of investors are interested in might remain more quite than noisy...

DAVID BROWN:  It's going to be more muted certainly for the first six months of this particular year on the basis that people are still waiting to see what recovery they can build into those valuations and therefore get more for their assets that they are selling.

BARRY SERGEANT:  If you're speaking to a global audience which Platinum is increasingly becoming - what would be your message to platinum investors - not just in stocks like Impala, but also in the various metals that come out of the sector - platinum - palladium, etcetera?

DAVID BROWN: Platinum certainly looks very robust in terms of the market fundamentals going forward.  But the one that's interesting us more at this particular time is palladium - quite clearly we've seen the significant uptick in terms of Chinese car sales. India has also risen quite considerably - in fact ranks only behind Germany now in European car sales, therefore certainly a very significant number of vehicles that are coming through from sales in India as well.  China, if you were to analyse the January sales, it could almost match the American sales in their hey-day, which is above 15 or 16 million units.  The outlook is very positive for palladium because obviously this is mainly in the gasoline sector which uses palladium predominantly - so I think the outlook for palladium is probably the most exciting.  Rhodium with its predominant use in the auto sector - there is a trade-off between use of rhodium and palladium that's done on the pricing and a mix ratio and certainly the economics seem to support that we probably will not see further moves away from rhodium but perhaps even maybe a switch back into rhodium.  I think rhodium is probably looking a little more robust that it was.  Obviously it had a very weak year in 2009, but going forward it looks certainly a lot more robust but palladium is the exciting one where we could see some significant upside pressure on the prices and that despite being quite a significant stock-pile of physical metal above ground - we certainly see that potential for quite large deficits going forward.

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