Amplats makes progress but Bokoni is unfinished business

Chris Griffith, CEO, Anglo American Platinum

ANGLO American Platinum (Amplats) has enjoyed a relatively successful second half of 2016 making strides in its portfolio restructuring and signing a wage agreement without mishap.

The run-out at its Waterval smelter will cost the company R750m in pretax earnings but the loss to production, at some 75,000 ounces, was not as bad as the 100,000 oz first feared.

Debt has been cut heavily. It is to sell mineral rights to Northam Platinum for R1bn which would lower net debt to R7.4bn. It was at R12bn to R13bn at the end of 2015.

Debt was also reduced through the sale of Rustenburg Platinum Mines to Sibanye Gold for an initial R1.5bn and the prospect of participating in future profits if Sibanye’s synergy-focused operating strategy proves a success.

Less clear is how much Amplats will earn from the sale of its 42.5% stake in the Pandora Joint Venture which will pay out 20% of distributable cash flow or R400m over a six year period; probably the latter given the asset’s loss-making to date.

“In the light of a cash burning operation, and our view that platinum group metal markets may take longer to recover than most, we view this as a small but incrementally positive move for Amplats,” said Citi analyst, Johann Steyn of the Pandora transaction.

“The new agreement envisages a 6.74% average annual increase in the labour cost over the three-year period which is broadly in line with our and industry expectation of 6% to 8%, but is less than the 10% agreements seen in previous years (reflecting the current downturn in the mining industry,” said Ed Sterck, an analyst for BMO Capital Markets.

“The conclusion of the wage agreement removes the overhang on the wage-related uncertainty in the platinum belt and allows the company to focus on its restructuring and cost optimisation initiatives,” he added.

Amplats’ efforts to move down the cost curve have been put into relief by the fact there seems no short term fix for the platinum market which Johnson Matthey said in November would be in surplus through 2017.

This is music to the ears of platinum bears, Goldman Sachs. “This coupled with the fact that 40% of the total demand [for platinum] comes from diesel vehicles – a segment which remains challenged especially post the Volkswagan controversy – means that the market is set up to be in a significant surplus,” it said in a recent report.

It believes there’s plenty of new production due to come on stream from South Africa. Northam Platinum said recently the purchase of minerals from Amplats will allow it to increase production to 870,000 oz/year, 70,000 oz more than expected annually and helping it to track its ambition to reach output of 1 million oz/year.

On top of that, Royal Bafokeng Platinum said it would pick up the pace on its 300,000 oz/year expansion at Styldrift 1 following a heartening improvement in the rand price of platinum. It had earlier decelerated the project until further notice.

There’s also the Waterberg project unveiled by Platinum Group Metals, a Toronto-listed company which recently published the results of a pre-feasibility study in which it worked on a $914m, 744,000 oz/year mine of which 60% of production would be in platinum sister metal palladium.

(It’s worth remarking at this point that not all see the platinum market this way. Northam Platinum CEO, Paul Dunne, observes that not many of these new projects have been financed. And there’s plenty of reason to believe the declining profile of production from South Africa, underway since 2005, is unlikely to miraculously reverse).

One piece of unfinished business for Amplats, however, is the sale of its 49.5% stake in Bokoni Platinum Mines which it shares with Atlatsa Resources, its empowerment partner.

The divestment is complicated by fuzziness over the interpretation of South Africa’s mining charter, and how a new mining charter will rule on empowerment targets. Certainly, Amplats will have to sell to another black-owned company.

First, however, it has to fix up the business. Strides have been made in this regard too.

Atlatsa said in its third quarter results earlier this week that it had completed the 9.6% reduction in permanent staff and a 47.3% reduction in contractors following the closure of unprofitable mining areas, including its open cut operation.

The outcome was “a modest” operating profit and a 75% reduction in the quarter-on-quarter share earnings loss of one US cent. But the company remains a drain on Amplats’ balance sheet.

During the quarter, Atlatsa agreed with Amplats to amend its debt facilities so that all loans cease to incur interest so as to minimise the stress on the company.

More operational improvements can only increase the possibility Amplats can get the asset away, although it isn’t being helped by the platinum market where prices have continued to bump along the bottom. Whereas improved commodity prices have allowed Anglo American, Amplats’ parent company, to pause on restructuring, there’s no such luxury in platinum.

It’s possible expedience will be the order of the day.

One recalls the words of Mark Cutifani, Anglo American CEO, in a presentation at the Gordon Institute of Business Science in Johannesburg during 2014 when he remarked that sometimes empowerment deals must be allowed to fail.

If Cutifani lives up to his word on this particular point, selling the stake in Bokoni Mines might just become Amplats’ least accretive deal of an otherwise constructive recent period.