Amplats sacrifices leverage to platinum for more process margin

Chris Griffith, CEO, Anglo American Platinum

ONE of the interesting elements of Anglo American Platinum’s (Amplats’) divestments of non-core assets is how it has been able to dispense with the mining risk, but retain exposure to a processing margin.

It’s latest transaction, in which it sold its 85% stake in Union mine near Rustenburg to Siyanda Resources for R400m, is a case in point. In addition to the cash payment, and participation in 35% of free cash flow for 10 years, there’s also an agreement in which Amplats will buy for seven years the concentrate produced from the Union mine on a market related basis.

This means Amplats is able to keep its refining operations turning over which commands a higher margin than concentrate production. A concentrate purchasing deal was also agreed with Sibanye Gold to 2018 when Amplats sold its Rustenburg Platinum Mines. In that arrangement, Amplats has to take a share of any losses produced by Rustenburg, but it also gets free cash flow when it’s generated.

Elsewhere, such as the R400m to R1bn sale of its 42.5% stake in the Pandora Joint Venture to Lonmin, Amplats will have use of Pandor’a Baobab smelter which will allow it to process material from its Mogalakwena mine, especially if it expands it. Again, Amplats has a free cash flow participation.

The impact of these agreements has been to transform the structure of Amplats’ business.

In its 2016 financial year, roughly 71% of production was mine-to-market while the remainder was purchased concentrate from which it earned a processing margin. According to RMB Morgan Stanley platinum analyst, Christopher Nicholson, this will shift so that less than half (48%) of Amplats refined concentrate will have been mined from its operations; in other words, 52% of all concentrate will have been bought from other miners.

“Amplats remains our defensive pick of the major producers (over Impala Platinum and Lonmin) due to both a greater share of higher margin assets in the portfolio, and inclusion of greater annuity type processing income,” said Nicholson.

“However, the flip side is that Anglo Platinum has now lost sizeable upside gearing to higher metal prices with a greater percentage of production merely earning a processing margin,” he added.

Chris Griffith, CEO of Amplats, said that the current market, however, isn’t about to reward platinum miners for marginal ounces as yet, especially whilst macro-economic factors continue to dominate the price over the small supply deficit that has developed.

But when the market does recover, he believed Amplats has the growth options to supply into the demand. “One of our benefits is that we have a number of projects that are competing with each other. We have great expansion opportunities at Unki, Mogalakwena and Amandelbult,” he said.

“You can imagine in slightly different environments that some projects would get the go-ahead if the market wanted the metal such as Der Brochen or Unki, but our decisions on capital allocation will turn on whether the market wants the metal. We won’t automatically push projects.”

Griffith said Amplats expected more market clarity by the end of 2017 or in early 2018. “We’ll then get a sense of the projects that we want to push ahead with,” he said.

One of those projects is Unki, a small mine in Zimbabwe with potential to be expanded, government diktats and business conditions depending. Asked if there was any clarity in respect of operating in the country, Griffith said Zimbabwe’s indigenisation strategy continued to be “a bit of a blackbox”.

“There’s not huge pressure on things. We have got some work going on in the background but it’s a case of not waking sleeping dogs,” he said of the potential for policy change.

Zimbabwe has asked miners in the country sell 51% of their assets to locals but later replaced that with a requirement that 75% of all purchasing and spending power in the country. “If we do get policy certainty, investment further in Zimbabwe would make sense,” he said.