Implats’ unveils restructure as low platinum price the “new normal”

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Nico Muller, CEO designate, Impala Platinum

NICO Muller, Impala Platinum (Implats) CEO since April, rang in the changes amid “a new pricing environment” for platinum unveiling plans to restructure both its loss-making Marula and Impala Rustenburg (Lease Area).

He also referred to “portfolio rebalancing” related to possible strategic acquisitions, but wouldn’t be drawn on details in a media roundtable today. “Rebalancing is long-term aspiration,” he said. “The first objective is to optimise existing assets. Anyway, low cost mechanised assets are not generally for sale.”

Commenting in the results for the group’s 2017 financial year, ended June 30, Muller said it was “… clear that we cannot accept it being business as usual for Impala”.

“A comprehensive strategic review of this operation (Impala Rustenburg) is planned to ensure that it will operate at a cash neutral level in what is perceived to be the new normal pricing environment. The review will be focused on returning the mine to profitability by prioritising profitability and value over volume,” he said.

Impala Rustenburg produced 654,000 ounces in the 2017 financial year, but incurred a headline loss of R2.68bn, whilst Marula made a headline loss of R737m owing to community-related disruptions. Implats’ toal gross refined platinum production increased 6.4% to 1.53 million ounces for the year.

Whilst Muller’s comments fall short of the urgent action expected by analysts – especially Goldman Sachs which in August wrote of a “bigger than expected production cut” – steps have already been taken at Marula which under took a section 189 retrenchment process affecting 980 people aimed at restructuring its cost base.

“The target for Marula is to be at least cash positive at group level in 2018,” said Muller, who added the mine would be “strictly monitored”. He would have “no option but to suspend operations” if the cash burn continued.

“We cannot continue to feel sorry for Marula,” said group executive for growth projects, Gerhard Potgeiter said during the media roundtable. After failing to sell the mine two years ago, Implats recapitalised the operation and – now that unprofitable levels had been excised – there was no need to keep the same level of production. It produced about 77,000 oz in the 2016 financial year versus 69,700 oz in the year under review.

Implats’ other operations – Zimplats and Mimosa in which it has an 87% and 50% stake respectively, Two Rivers and the cash generative processing business, Impala Refining Services (IRS) – performed well in the year.

For shareholders, the impact of low platinum prices and under-performance at the Rustenburg and Marula mines was a loss in share earnings of 137 cents – a 149 cent per share reversal of fortune compared to the 2016 financial year. The figures were heavily affected by a R10.2bn impairment (R7.3bn after deferred tax) related to a royalty prepaid to the firm’s black empowerment partner, Royal Bafokeng, which has since declined in value.

Whilst Muller didn’t provide specifics on his short-term restructuring targets, and production guidance for the coming year at 680,000 to 720,000 ounces is as planned, there has been a notable change in long-term (five years) guidance out of Rustenburg which is now forecast to produce 750,000 oz by 2022 compared to 820,000 oz previously.

CASH BURN

Muller described the proposed restructuring of Impala Rustenburg as a gradual “phased” process in which the effect of unprofitable ounces in individual shafts would be minimised in such a way that free cash flow would be improved. Yet the company expects another year of cash burn at Rustenburg whilst the restructuring takes hold.

Said Brendan Berlin, Implats CFO: “The only mine in the company that is producing cash burn is Impala Rustenburg. The rest of the group is generating cash at current prices and IRS is doing well. Rustenburg will burn cash for another year, but this in no way affects our solvency,” she added.

There is a R700m shortfall in the capital required to complete the R2.2bn development of Implats’ 16 and 20 shaft projects at Impala Rustenburg after a review found that additional costs would be incurred in order for them to sustainably produce target production of 310,000 platinum ounces. This would not hurt the balance sheet, however.

“We have no intention of coming back to the market,” said Berlin when asked if Implats’ might ask for funds. The balance sheet is geared at 0.6% and we are very happy with the strength of it as we sit today,” she said. Implats had a cash balance of some R1.5bn.

12 COMMENTS

  1. “Gross refined platinum production increased by 6.4% to 1.53 million ounces for the year.” Price of platinum will only start to grow when producers start cutting production. But instead they increased production and incurred losses.

    • Exactly. I raised this point at the media conference asking Nico whether it was time for someone to take a leadership position a la Glencore and start cutting output. I know there needs to be a demand side response as well but SA platinum can only help itself by cutting output provided this can be done in a way that creates cash flow. I think Nico wants to get to grips with this but he’s still piecing together how to do it. It actually sounds like quite a surgical process from what he was saying.

      By the way, apologies to all for the horribly edited article earlier today. All fixed up.

      • Dear David & MikeMM,

        Implats NEED NOT cut its production. Please see my previous posts & one on this results. The people ( Sibanye, Lonmin etc) who need to cut are those with forecasted high-costs & high capital intensity production, given the flatlining cost curve due to industry TCC deflation.

        Going forward, Implats SIB Capex = R2,5bn/yr on a production base of 3,1Moz PGM. Angloplat SIB Capex = R2,8bn for forecasted ±4,8Moz PGM. If you do the same calc for Sibanye & Lonmin, you will have your answer as to who are the “Mole Miners” ( those that just love digging for the sake of digging). “Mole Miners” are the ones depressing the PGM prices and should cut production for their shareholders sake!

        Implats strategy gets an “A+” from me and Nico must not mess-it by playing “industry hero” unnecessary.

        • The die is already cast. Nico wouldn’t confirm 300,000 oz was unprofitable today but it’s a significant number. And he doesn’t expect the price to improve. Rustenburg lost R2.5bn. This isn’t about being a hero, it’s doing what’s right for shareholders.

        • Implats need to cut its production. They said themself as much. So far they plan to cut 70 000 from previous plans. I hope that they will cut close to 200 000 after deeper analysis. I agree that mole miners need to do their part in balancing the market too. That pisses me the most is that in past quarter despite claims that capex constraints will provide decrease in pt output Lonmin, Sibayne and Impala all reported increase in production.

          • Gentleman,

            Nico has been Implats CEO for ±6months now. So if he doesn’t have a grasp of Implats ops by now, then there is a problem!

            The FY18 Forecast is 1,57 – 1,61Moz Pt (FY17: 1,53Moz Pt). SO IMPLATS IS NOT CUTTING Pt PRODUCTION!

            The R2440M loss necessitates the restructure of allocated costs & services which will be right-sized. But please don’t hold your breath for 200Koz/yr Pt production cut. IT IS NOT PLAUSIBLE!

            Impala Lease area is transitioning from older shafts to new generation shafts. This transition is akin to portfolio restructuring, all within this optionality endowed district-scale asset. Such a transition is governed by opex, capex and asset longevity consideration imperatives. Simply, that is the higher the Opex of the older shafts (E/F, 4,6 & 9), the quicker the transition given the prevailing PGM basket price. Old Shafts 7,7A & 8 have already been put to pasture. It’s going to be a process which will also entail ramp-up of new shafts(10,11, 14,16 & 20) coupled with overheads & allocated costs restructurings. Shafts 8, 17 & 12 are on C&M. Shafts 16 & 20 are Level 1 business plan projects which combined will contribute >300Koz/yr Pt. The production from older shafts is unpredictable and as such its managed for cash ( harvested). Key mining costs drivers of old shafts are scrutinised closely and swift action is taken given their small contribution ( 100Koz Pt). So Implats can close the older shafts NOW and still deliver the >1,5Moz Pt in FY18.

            The Impala Lease Area will continue to deliver >650Koz/yr Pt , with near term target being 750Koz/yr by 2022. Thats NOT cutting Pt Production!

            As per Implats management, the fantasy that Impala Rustenburg will be a 500Koz/yr Pt is just not commercially sound. Implats cannot be the OPEC of the PGM industry.

            Old shafts & Marula can be put on C&M ( or closed), and Implats will still deliver >1,5 Moz/yr Pt in FY18.

            MikeMM : Don’t believe the hype about ” claims that capex constraints will provide decrease in pt output”. My advise is that you conduct your own analysis NOT to leave it to journalists!

            Furthermore, the “Mole Miners” are to blame. Spare Implats management your wrath, they have and continue to do their part! Go after the real “Mole Miners” who are fascinated with running shafts at full-capacity etc ….

          • Dear Goldspeculator

            You wrote: “My advise is that you conduct your own analysis NOT to leave it to journalists!”

            Thanks for that!
            I would like to remind you, however, that without a journalist, you wouldn’t have this platform for your analysis.

            Regards

            David

            PS By the way, it’s ‘advice’.

  2. Dear Fellow Readers,

    I had earlier in the week commented on the Implats upcoming results. As usual, I am delighted that Implats confirmed and seems to concur with my previous analysis vis-a-vis their asset portfolio performance. Here is my take on Implats FY17 results :

    SALIENT POINTS

    1. Implats achieved Pt refined production of 1,53Moz ( FY16 :1,44Moz) & PGM = 3,1Moz ( FY16: 2,91Moz) and generated Net OCF = R1bn ( FY16 : R2,73bn). To provide context, in FY11 Net OCF = R8,3bn. THE PGM MINING INDUSTRY HAS TRULY CHANGED FOR THE WORSE!
    2. Total costs ( CoS +SIB Capex ) at R41bn ( FY16 : R39,5bn) for a 4% y/y increase. The problem is no longer costs BUT PGM basket price.
    3. Pleasingly, Implats maintains a strong cash balance at FY18 with ±R8bn ( FY16 : R6,8bn) with total liquidity at ±R12bn. Excellent strategy at this uncertain times.
    4. Impala Rustenburg restructuring is welcomed, but must NOT compromise Growth Optionality of this district-scale operations. Sure focus on Value NOT Volume , but don’t comprise business longevity. Impala Lease Area FY18 Prod fcast = 680 – 720 Koz Pt . I still maintain, and was correct, that this district-wide operation can be profitably support a >650Koz/yr Pt in the current low PGM price climate.
    4. Implats forecasted production profile of ±15 yrs , is supported by mainly level 1 business plans. So the production cuts , as advocated by others, are unlikely to come from Implats. But rather from those whose production forecast of >5yrs is supported by Level II & Level III business plans , thus will entail significant yet-to-be-determined investments ( Sibanye, Lonmin etc). Angloplats has similar forecasted production profile as Implats, thus Level I for >10 yrs.
    5. Impala Rustenburg production transition(modernisation from old to new generation shafts) remains on track. This will reduce the production costs profile going forward. The decrease from >800koz/yr Pt by 2019 to 750koz/yr Pt in 2022 in immaterial for now. In mining, prudent investment across the cycle is a critical success factor, implying that for Implats it’s the modernisation of this core mining asset.

    IMPLATS OPERATIONS ANALYSIS

    1. IMPALA LEASE AREA (RUSTENBURG) : I am biased as this is my home town (for disclosure purposes!). This is what we call in mining a district-wide scale operations. Its marvellous thing to have during high commodity prices. However, during low PGM prices it requires serious thought and analysis to realise inherent costs efficiencies. Impala Lease Area is 335km2 , with 120km2 still undeveloped, thus 35% making up R+R= >55Moz . So the forward-looking growth optionality is enormous.Its estimated that the development of this 120km2 mining lease area, should PGM price environment improve , will need an eye-popping R20bn. The immediate , here and now, core shafts are no. 1,10,11,12,14,16,17 & 20 and they should be the focus for Impala. Therefore, district-wide maximum profitability should be pursued for maximum operational cash flow generation. This entails ramping-up 16 & 20 shafts , deferring key 17 shafts installations and driving costs ever lower for the remaining shafts. Shafts 8 & 12 remain on C&M. This will require another round of overhead & services restructuring for lower production base, which will still be > 650koz/yr Pt , post the announced. Going forward, operational discipline (maintaining mill-widths, stope extraction efficiencies, crew efficiencies etc)is paramount for those other old shafts WITHOUT capex.

    2. ZIMPLATS : This ops makes for 2P = 12Moz 6E at 3,5g/t with TCC = ±R10K/4Eoz being 33% of 2P of Implats Group. The book value of the assets is R18,4bn. From the aforegoing, Implats is committed in Zimbabwe , and there is no turning back or any form of monetisation or investment recoupment which is sensible. Furthermore , $264M is going to be spend on Portal 6. So when 3,5x Earnings are declared as dividends , thus R3,5bn payout to group level , its a welcomed relief given the forever deteriorating Zimbabwe operational environment. The assets remain net cash flow positive due to their profitable nature in this ± R12K/4Eoz PGM price environment.

    3. OTHER MINES : These are Mimosa, Two Rivers & Marula. Marula lost R700M ( FY: – R430M) PLUS Capex = R 113M ( FY16 : R89M). MARULA MUST BE SOLD.It does not fit the portfolio of Implats. The JV Assets ( Mimosa & Two Rivers) needs to be evaluated q/q and optimised for cash. Two Rivers has other complications relating to BEE compliance , whilst Mimosa has R+R = 7.2Moz ( 100%). Mimosa is a consistent operational performer, support by Level 1 business plan for >15 yrs of >120Koz/yr. But its y/y costs reduction to ±R2,7bn (FY16:R3,4Bn) is most commendable.

    CONCLUSIONS

    These are tough times for the PGM mining industry, but Implats seems to be doing things right. Muller has truly inherited a well-managed enterprise , with a strong BoD. I wish that he continues on that vein. All of my points on this company has been proven correct. I am bullish about Implats.

    Those who are advocating that implats cust production willy-nilly are mistaken and misinformed. Implats has reduced its PGM production form 3,8Mo in FY11 to 3,1Moz in FY17. The Impairment just muddies the numbers , but these were overall solid results WITHOUT the help of Cr2O3 production. This underscores the operational deftness and agility of this PGM miner. Implats latent installed production is second only to Angloplat BUT with shorter timelines and low capital intensity to bring to production. It is a better positioned PGM miner than AngloPlat going forward under the pending and long-awaited PGM price recovery scenario. Implats must consider buying RBPlats , after paying-off the convertible notes in 2022 ( or having made sufficient repayment provisions) and selling Marula.

  3. It would seem that Mr Muller is getting on with what Implats’ management should have started almost five years ago. Indeed, if Sibanye, Lonmin and others follow suit – culling marginal and loss-making production – supply will reduce and PGM prices WILL rise, making the remaining ounces sustainably profitable, and leaving the industry in a healthy state. This approach aligns with simple commodity theory, something that seems to have been lost on a number of platinum CEOs in the past.

    Doubtless the government and the unions will “go off on one” in the face of the upcoming and long overdue rationalisation. Well they both need to think long and hard, in my view. The GRATUITOUS application of Sect 54 stoppages has structurally raised the costs base for just about all the miners. And, the demands by unions for real wage increases not linked to productivity has also had the effect of rendering vast tracks of ore sub economic causing the loss of many tens, if not hundreds, of thousands of jobs. That said, there cannot be a justification for paying wages that cannot sustain a reasonable and fair standard of living.

    As I used to write in research in the past, what has been and remains desperately needed is a more collaborative (as opposed to the long-standing combative) approach by the key stake holders in the industry – management, organised labour, government and the host communities. The midnight hour approaches in this respect, in my view, and yet the relationships appear to be worse than ever to me.

    Crunch time is upon us for the platinum mining industry (and gold too for that matter). It’s surely time to stop the corruption and the dogma and, for the sake of the hard working miners and their host communities, let a bit of pragmatism shine through. But if the past is a guide to the future, it won’t. What a criminal waste of opportunity!

  4. Pt production has been sustained by free capital from the bond and equity markets. So the normal retrenchment in supply as prices have declined has not happened. PTM investors stand to lose 100% of approx. 200M$. Hopefully this will curtail supply of capital which is the real problem. But for long term investors the price of the metal is less than op costs plus cap. costs (which are really op costs as production isn’t increasing), and the capital markets are contributing 50-100$/ounce subsidy.
    I would appreciate comment on the price ratio at which Pt is substituted back into gasoline cat converters. Seems to me we are there given Pt’s inherent higher catalytic activity than Pd. If Pd has a deficit of 1M oz/yr. and is only mined as a by product (excepting N.A.) and Pt and Pd are interchangeable at today’s price ratio, looks to me like the Pt market is potentially going to be called on for 1M oz./yr.
    Finally, with China and MB adopting dual battery and FC vehicles, when will Tesla?

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