African Rainbow Vs. Impala Platinum: Which Is A Better Buy?

South African ADRs (American Depositary Receipts) are severely undercovered on Seeking Alpha, and we’re trying to ramp up coverage as the country hosts some of the best precious metals companies on the planet.

Today’s article covers two platinum group metals (PGM) participants, Impala Platinum (OTCQX:IMPUY), and African Rainbow Minerals (OTCPK:AFBOF). Although not perfectly correlated, both assets share proximities; one proximity is that they’re overlooked dividend gems.

Without further ado, let’s get into it!

Operating Comparisons

African Rainbow Minerals

African Rainbow Minerals is a horizontally integrated miner with exposure to an array of commodities. However, the bulk of ARM’s EBITDA derives from the platinum group metals space, which will likely continue for the time being.

The company’s flagship Modikwa mine has assisted its PGM segment in achieving incredibly impressive EBITDA margins. Modikwa’s life of mine remains above 30 years, and its extracts are sent to Anglo American Platinum’s Polokwane smelter for processing. After lengthy maintenance, Anglo’s smelter is set to ramp up operating capacity in 2023, which could assist African Rainbow Minerals’ operating capacity.

Furthermore, African Rainbow Minerals shares an interest in the Two Rivers mine via a joint venture with Impala Platinum, which is discussed later in the article.

Iron ore forms a large portion of African Rainbow Minerals’ revenue mix. The company primarily mines open-cast assets, with its Kumani mine possessing a life of mine worth more than twenty years. ARM’s iron ore segment predominantly serves the export market, which we think is a substantial value-add as it allows the company to bypass a fragile South African economy with a commodity that’s considered highly cyclical.

The mining house’s other ferrous metals activities include two midstream manganese operations. African Rainbow Minerals owns two smelters in Cato Ridge (Ferromanganese) and Sakura (Ferroalloys). Cato Ridge’s smelter is well-placed for export activities as it’s near the N2 highway that leads to Richards Bay port. Moreover, it’s approximately two hours away from the port, allowing prompt train routes.

A recent benefactor for African Rainbow Minerals has been its coal operations amid a global energy shortage that reignited demand for the commodity. African Rainbow Minerals’ thermal coal operations include two long-life open pit mines with approximately twenty years left to run (Participative Coal Business, Goedgevonden). Due to the rise in zero emissions activism, coal demand will likely fade in the long term. Nonetheless, African Rainbow Minerals’ financial results show that the commodity provides valuable short-term cash flows.

African Rainbow Minerals owns Gold interests via its 20% ownership in Harmony Gold (HMY). Harmony Gold’s operations span South Africa and Papua New Guinea as it mines numerous deep gold mines, such as Mponeng, which we’re not a fan of, as the stagnation of gold prices and the high costs involved (with deep mining) are a recipe for diminishing shareholder value. Having said that, African Rainbow Minerals owns gold interests via an “investment in associates”; thus, it has access to proportionate net income derived, yet, it’s able to sell its interest with relative ease as Harmony Gold is a publically traded company.

A drift away from hard operations and into the firm’s management team reveals that its Executive Chairman is Dr. Patrice Motsepe, who is a long-time ANC member and the brother of the nation’s current first lady, Tshepo Motsepe. My opinion is anecdotal, but South Africa’s private markets (and especially mining) are known to be more favorable to those that are ‘politically aligned’.

Will this drive ARM’s prospects during a time when the nation’s in a fight against an energy crisis? I’d rather leave that question unanswered.

Impala Platinum

Operational Update

We assessed Implats’ operations a few months ago when we initiated coverage. Thus, today’s analysis of Impala Platinum serves as an update on events rather than an in-depth overview. However, for pre-text, consider our initial analysis.

The company is extremely blessed with low-cost, long-life assets. During its fourth-quarter Implats revealed a 17% year-over-year increase in unit production costs. However, surging input costs are a uniform phenomenon, and we anticipate most costs to recede as inflation (especially wages) finds calm.

Eskom’s dysfunctional infrastructure could sustain non-core input costs. Although, Impala Platinum is planning to obtain approximately 30% of its new projects’ energy from renewable sources by 2030, which could phase out much of its long-term risks. In our opinion, Implats and African Rainbow Minerals could pivot aggressively (regarding energy alternatives) as Eskom’s situation has resulted in serious concerns within the mining community. Impala Platinum is a company with $2.15 billion in cash from operations, meaning it certainly is very capable of spending on renewable infrastructure or/and self-generation.

During its fourth quarter, Impala initiated the expansion of its Canadian operations by investing in its facilities to upgrade capacity. The firm’s decision to work on an old decoupling project is part of its new R50 billion (approximately $2.92 billion) CapEx commitment to upgrade its mining infrastructure. Impala Canada is already 95% powered by renewable hydropower, presenting tremendous cost-cutting potential.

In other news, the firm had to deal with a range of wage disputes related to its Rustenburg PGM projects, which was an irregular occurrence as South African inflation reached a multiyear high. However, with all matters settled, Impala Platinum is more than capable of servicing its new wage deal as its net income per employee of $49.95K provides a cushion.

Lastly, Impala Platinum is planning crucial expansion projects at its ‘based assets’, such as Zimplats, Merensky, and Two Rivers. The firm’s debt-free profile and its substantial free cash flows allow it to expand while smaller competitors need to utilize their cash to survive a potential economic downturn.

Two Rivers – Collaboration

As already mentioned, both these companies are South African metals miners. However, they have more in common than that. Implats and African Rainbow Minerals share a strategic partnership pertaining to the Two Rivers PGM operation, of which ARM owns 51%. The Two Rivers mine is operated by African Rainbow Minerals and produces a cash operating margin of approximately 52%. The mine’s incredible long-life properties could see it deliver significant cash flows for at least another 15 years.

Key Operating Metrics

Time to look at a few key operating metrics.

First things first, let’s assess the respective companies’ topline growth rates and how they flow through their income statements. Based on recent data, Impala Platinum’s top line is growing faster than African Rainbow Minerals. However, Implats’ revenue mix holds a higher concentration, leading to higher volatility.

Additionally, Implats’ earnings yield trumps African Rainbow Minerals’, illustrating potential valuation advantages. Nonetheless, both companies are scaling rapidly.

Stock	Implats	ARM
5-Y CAGR	26.29%	15.70%
Earnings Yield	24.79%	19.53%

Click to enlarge

Source: Seeking Alpha; YCharts

As previously mentioned, Impala Platinum is PGM-centric, and African Rainbow Minerals is a diversified minerals firm. ARM generates the bulk of its revenue from PGMs; however, its exposure to thermal coal, manganese, and even gold could see the firm grow at a slower pace than the ‘renewable energy supply ready’ Impala Platinum.

• Note: The following annual growth rates are forecasted until 2026/2027.

Commodity	Market CAGR
PGM	4.5%
Manganese	4%
Iron Ore	3.2%
Thermal Coal	1.3%
Gold	2.7%

Click to enlarge

Source: Mordor Intelligence; Market Watch; Mining Technology

Despite its superior growth prospects, Implats lags behind African Rainbow Minerals in terms of profit margins. The firm’s gross and operating margins are lower than ARM’s. This indicates that ARM possesses marginal cost benefits, thus, presenting better residual value to its shareholders.

Valuation & Dividends

A relative valuation between the two stocks suggests that they’re evenly valued. On the plus side, both have price-to-book ratios below 3.00, meaning they’re in relatively good territory. Moreover, both have compressed PE ratios, indicating a potential value gap.

Stock	PE	PB
African Rainbow Minerals	4.57	1.16
Impala Platinum	5.61	1.48

Click to enlarge

Source: Yahoo Finance; Seeking Alpha

Even though both stocks provide tremendously attractive dividend yields, African Rainbow Minerals’ yield worth 14.03% is unparalleled. In addition, ARM’s stock beta of 0.89 means it possesses less price risk than Impala Platinum (1.48).

Stock	D.Yield
African Rainbow Minerals	14.03%
Impala Platinum	7.53%

Click to enlarge

Source: Seeking Alpha

Common Risks

As we’ve mentioned in previous articles, South African mining companies are faced with significant challenges relating to illegal mining activities and electricity shortages. Although illegal mining has ramped up in South Africa, PGMs are cumbersome to process, thus, leaving the PGM space less susceptible to illicit mining risk. At most, cable theft or comparable activities might set industry participants back.

On the other hand, gold and coal are subject to theft and illegal mining activities. African Rainbow Minerals is in the firing line with its interest in highly targeted commodities.

We’ve discussed Eskom’s issues on numerous occasions. Since we last published a related article, the company’s CEO, Andre de Ruyter has resigned. De Ruyter’s task was near impossible as South Africa’s state-owned utility company suffered from matters such as corruption, political overlay, lack of cohesion, and employee wage demands. Thus, we believe Eskom will slowly sink into the abyss while privatized energy becomes more likely.

Lastly, 2023’s recession talk is in overdrive. The yield curve suggests a recession is en route, which could add excess risk to cyclical stocks such as African Rainbow Minerals and Impala Platinum.

Conclusion

Both Impala Platinum and African Rainbow Minerals are high-quality stocks. Implats provides investors with a PGM pure play option. Although its beta sensitivity is elevated, the company is debt free, owns some of the best PGM assets available, and delivers a sound dividend.

African Rainbow Minerals isn’t PGM-centric, yet it holds exposure to the group. Ownership of valuable thermal coal, manganese, and iron ore properties explains why it can provide investors with a 14.03% dividend yield.

We maintain our Strong Buy rating on Impala Platinum and assign a Strong Buy to African Rainbow Minerals; there’s no clear winner here.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.