Implats offers $1B for North American Palladium

Eyeing its first major operations investment outside of Africa, platinum group metals (PGM) producer Impala Platinum Holdings has struck a friendly deal to buy Canadian pure-play palladium producer North American Palladium (TSX: PDL; US-OTC: PALDF) in an all-cash transaction valued at $1 billion.

The proposed takeover gives Implats the Lac des Îles palladium mine, located 100 km northwest of Thunder Bay, Ont., its first PGM operation outside of South Africa and Zimbabwe.

The definitive arrangement agreement sees Implats acquire all of North American Palladium’s shares under a two-tiered pricing structure. Brookfield Business Partners (TSX: BBU.UN) — North American Palladium’s controlling shareholder, with an 81% interest — will sell its shares to Implats for $16 apiece, at a 19% discount to the trading price before the announcement. The remaining minority shareholders reap a better price, getting $19.74 per share, a 15% premium on North American Palladium’s 30-day, volume-weighted average price and the exact closing price of the stock before the takeover news.

In a conference call, North American Palladium president and CEO Jim Gallagher discussed the company’s turnaround and the merits of the Implats agreement. “We have a sale of the company in an all-cash deal at near-record palladium prices, and except for a two-day blip in March of this year, at near record-high share prices for the company,” he said. “From virtual bankruptcy four years ago, we now have a sale to the tune of $1 billion. The company has been described recently by two separate analysts that cover us as the best free-cash-flow operation in their coverage universe.”

Gallagher noted that Brookfield first got involved with the company in 2013, when North American Palladium was “in financial trouble, with a mine expansion that had gone somewhat poorly.

The headframe at the Lac des Îles palladium mine.
Credit: North American Palladium.

“In May of that year, the company had tapped out all its financial resources, had tapped out the equity market and was on the brink of insolvency,” Gallagher noted. “Brookfield Asset Management stepped in at that point in time and made an initial investment of US$130 million as a loan-debt facility.”

Despite making operational improvements, however, by mid-2015 — with palladium prices weakening, and North American Palladium posting a string of financials losses over multiple preceding quarters — the company tripped some financial covenants and was forced to recapitalize its loan agreement with Brookfield that saw the lender convert its debt into equity, and become a 91% shareholder.

Gallagher, who was promoted from chief operating officer to CEO around the time Brookfield became the company’s top shareholder, touched on the private equity group’s vision. “The mandate from Brookfield was simple: fix the asset,” he said. “I remember standing in front of the mine site team making the announcement of Brookfield’s ownership position at 91%, and the message was clear then: they would support management, they would support the turnaround, and when that was complete, they would look at selling their position either through a full sale or a sale back into the market so that they could redeploy that capital into their business. That day has come today.”

The company says it started looking for a suitor in 2018, with a major Canadian bank targeting potential parties on a global basis for expressions of interest. However, despite receiving several expressions of interest, including indicative (non-binding) offers, none were deemed satisfactory.

“Discussions with Impala began in earnest in July of this year, and obviously at that time there was a very different share price — under $14,” Gallagher said. “With a near 50% appreciation through the course of the discussions on the deal, of course, as you might imagine, this added some dynamics to the negotiation process. An agreement was reached at a certain price in the $16 range and then the share price continued to move forward. And ultimately both Impala Platinum and Brookfield wanted to ensure that the minority shareholders received their full value, and that resulted in arriving at a split price.”

North American Palladium’s initial business dealings with Implats date back to 2017 through a joint venture on the major’s partly owned Sunday Lake PGM project, 60 km south of the Lac des Îles mine. In August of this year, North American Palladium completed its stage-one option terms, vesting a 51% interest in the project by spending $1.5 million on exploration and making payments of $750,000.

North American Palladium’s Lac des les palladium-platinum mine, 90 km northwest of Thunder Bay, Ontario. Credit: North American Palladium.

“Of all the parties that took a look at us over the last few years, this is definitely the best financial deal that was put on the table, but also likely the best home for the mine and for the team,” Gallagher told analysts and investors on the conference call.

With the boards of both North American Palladium and Implats approving the deal, and major shareholder Brookfield entering an agreement to sell its 81% stake, it looks ready to go. However, there is a 30-day, modified go-shop period where North American Palladium can review other offers. If a better offer is accepted during the 30-day window, a $24.5-million termination fee is payable to Implats. Beyond the 30 days, the break fee rises to $37.7 million. Implats also has the right to match any superior proposal within five business days.

Both companies aim to close the deal by year-end, subject to standard government and regulatory approvals. The transaction also requires two-thirds of North American Palladium shareholders’ approval at a special meeting. But with Brookfield owning 81%, the vote looks like a formality.

North American Palladium’s Lac des Îles mine has operated since 1993, and is forecast to produce 220,000 to 235,000 payable oz. palladium in 2019. The company is in the process of an operational expansion program to ramp up its 6,000-tonne-per-day underground production rate towards 12,000 tonnes per day by 2021.

Some analysts were critical of the deal’s valuation. GMP Securities mining analyst David Stewart called the impact negative in his note, and points out that the deal values North American Palladium at just 0.58-times spot net asset value  (NAV) in his model and based on the cash offer to common shareholders, and at 0.49-times spot NAV based on the average cash offer to all shareholders. Stewart also notes that North American Palladium has been ramping-up underground output and was looking forward to seeing shareholders benefit from resource and reserve conversions after this year’s exploration programs.

Derek Macpherson, vice-president of research at Red Cloud Securities, described the impact as positive, but also thinks the deal “represents a significant discount to our prior fair value estimate of $28 per share, suggesting there is still room for a higher bid.” However, he does concede that the probability of a higher bid for the minority shareholder’s position is unlikely.

Implats is one of the world’s largest PGM producers, with operations focused around the Bushveld Complex in South Africa and the Great Dyke in Zimbabwe. In 2018, the company produced 1.47 million oz. platinum and 849,300 oz. palladium.

After the takeover announcement, North American Palladium’s shares closed up a cent at $19.75, giving the company a market capitalization of just over $1 billion.