SA platinum miners “dysfunctional” says JP Morgan

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South Africa’s platinum miners resemble a “dysfunctional oligopoly” and are currently increasing supply despite depressed platinum prices with no meaningful improvement in the situation expected until 2020.

That’s the view of JP Morgan Cazenove in its latest review of the SA platinum sector which singles out Impala Platinum (Implats) as being the “most vulnerable” producer and Northam Platinum as the “most preferred”.

The report – by analysts Dominic O’Kane, Anna Antonova, Luke Nelson and Itumeleng Molefe – commented “the outlook for the platinum price in 2018 -19 is bleak. South Africa accounts for 70% of global mine supply and, at current prices, we estimated about 60% (2.6m oz) of SA mines are cash negative.

“Yet balance sheets are comfortable and we see no prospect of supply reform until around 2020 when unsustainable cash burn at Implats is likely to result in cathartic shaft closures, in our view. Implats looks the most vulnerable – its assets are high-cost and we expect on-going cash burn until its $500m convertible bonds mature in 2022.”

The analysts estimated the Impala Lease area at Rustenburg – which produces around 800,000oz of platinum annually – “will burn more than $1bn cash at current metal prices across 2018 – 2020, equivalent to Implats’ market capitalisation.”

They added, “transformational supply reform is inevitable in our view, but we do not expect it in 2018/19.”
The analysts commented, “prospects for supply reform are poor at present because high-cost producers are delaying restructuring decisions and are instead raising supply in 2018 apparently in an attempt to dilute unit costs given that more than 60% of operating costs are fixed.

“In our view, this dynamic is indicative of a dysfunctional oligopoly – five South African companies control more than 65% of global primary mine supply and more than 80% of SA supply.

“We expect the status quo of attritional strategies will persist in 2018/19 as the prospect of retrenchment is politically unpalatable ahead of SA’s 2019 presidential election and producers wait for high-cost competitors to capitulate on mine supply cuts.”

JP Morgan’s negative view stands in sharp contrast to the more positive assessments from the main South African platinum producers on their particular situations. Various SA platinum executives have also played down the accusation about holding off on shaft closures and the accompanying retrenchments for political reasons.

They have pointed instead to the high costs involved in shutting down a shaft – only to incur more costs in subsequently re-opening it – and the fact that not all the costs involved may be removed from the business but instead could be transferred to the remaining operating shafts.

But the JP Morgan report has focussed the spotlight on the man in the hot seat at Implats – newly appointed CEO Nico Muller – who recently told the Joburg Indaba Platinum Industry Seminar that he was,”continually optimistic in a declining price environment.”

In March Muller commented, “our cost-cutting has taken out R1bn over 2019 and 2020 owing to labour reductions. But, assuming prices stay the same, we need to go a lot further.”

Muller is currently carrying out a review of Implats’ operations to make additional savings and which could involve possible shaft closures; putting shafts into harvest mode and re-examining the capital profile at shafts providing replacement production.

13 COMMENTS

    • Hi Miles, the report is not available on the internet. You have to be on the JP Morgan mailing list to receive it. regards. Brendan

      • Dear Brendan,

        Thanks for the article. As far as understand Lonmin and Sibanye-Stillwater were not taken into consideration in the report. Do you perhaps know why this was the case? Thanks

        • Hi Shannon, you are correct. The report only covered Amplats, Implats and Northam. I have no idea why they left out Sibanye-Stillwater and Lonmin. regards.

  1. Dear Fellow Readers,

    I urge all to remember this article when the report cards are finally released. Implats will release on 26/04/2017 , Amplats released today. So i will provide a fulsome response then.

    For the record, I diametrically disagree with the view expressed by the JP Morgan analysts. To prefer Northam over Implats is plainly outrageous and akin to preferring Fortesque over Vale in the FeOre sector in a depressed price scenario! ITS NONE SENSICAL!

    • Dear Fellow Readers,

      I had undertaken to respond to the JP Morgan chaps regarding their preference of Northam and bearish on Implats. To make a market, there are sellers and buyers, therefore yours truly is not adverse to persons disagreeing with him on particular company securities. As all readers know by now, am a fan of Implats, and not averse to Northam. Therefore, this is NOT NHM bashing article BUT rather to contrast my choice (Implats) as opposed to NMH. I just don’t believe it offers value going forward. As is customary, one needs to proffer reasons for such a stance and duly do so below.

      PGM Market Review

      It is non-sensical to analyse PGM miners without the context of the industry. Readers are undated with slogans like “ 1st quartile cost curve position” or “ bottom half of the cost curve” etc. Yes readers, these are slogans with no basis whatsoever in precious metals mining, because they are well-traded and prices are readily available. They are meaningless in precious metals mining BUT NOT SO in bulks mining ( i.e Bauxite , FeORE etc). Cost curves acquire importance when the mined product needs to be marketed and delivered to specific customers (steel mills etc). In that your cost curve position NOT only affects your bargain price range BUT ALSO profit margin and sale price realisation. Therefore, I find it difficult to justify a precious metal miner based on their cost-curve position.

      I prefer OCF/4Eoz (post CapEx) per share, calculated as follows: Net OCF – With this metric, you avoid the value traps which happen to the at the bottom of their respective cost curves ( i.e Sylvinia Pt etc) BUT lacking the cash flow gearing to metal prices.

      As per GFMS/Angloplats, the following are R/oz costs of PGMs for 2013-2017:
      Fiscal Year…..CY12……CY13……CY14….CY15 …..CY16 ….CY17………..YTD18
      PGM(R/4Eoz)…R10,8k…. R10,9k… R12,6k …R11,8k….R12,5k….R12,9k….R12,7k

      So clearly the basket PGM price has NOT gone anywhere with a 17,6% increase in ±6yrs, more concerning is the pedestrian CAGR =3% over the said period. Importantly this is on the back of R/$ FX , which weakened from R8,46/US$ in 2012 to now R12,5/US$, rather than any structural changes within the industry itself (i.e PGM mines are NOT being closed in other parts of the world except in RSA). If GFMS is to be believed, dawn is still 2-3yrs away and highly dependant on other factors beyond PGM miners’ control. I hereby propose that now is the time to step-up marketing, including efforts for marginalisation of metal recycling. PGM recycling accounts for ±2,7 Moz /yr supply which is extremely counter productive given installed mine/brownfield supply of ±20Moz/yr as of 2016. This anti-recycling might including buying such facilities and shutting them down thereafter given that they are generally low-margin, but their costs structures are flexible and adaptive ( i.e can be pushed down or up the value chain). More importantly, their existence is putting a cap on PGM metal prices because they provide auto manufacturers with a readily available supply without the need for bulk contract purchasing or volume/quantity commitments that tend to support market prices expectations by traders and other participants. This is because prices (or mechanisms thereof) are agreed now for later deliveries, thus giving support to the forward price curve of the PGM prices. This is a phenomenon that is well developed in coal market etc despite their daily trading.

      But this comment is NOT about PGM mining in its entirety, but about 2x companies. I hereby wish to put numbers to my thesis, and as such lets consider the financials of NHM and Implats :

      REVIEW : NORTHAM

      I have advocated in this forum that mining is a business enterprise, and as such financial performance matters. The following are key financial metrics of Northam :

      Fiscal Year….FY13…….FY14….FY15 …..FY16 …..FY17……FY18e
      PGM (Moz) …0,344…0,396… 0,423….0,452…..0,454…. 0,419
      COSTS (R’B)….R3,8B .. R4,5B….. R5,7B…. R5,3B…… R5,9B….R7,4B
      Op Margin(%) ..13,7%… 1,2%….10%……..6%…………..9%……….10%
      Net OCF(R’B)..R0,59B…..R0,89B…R0,34 ..R0,84B….R1B…… (R0,6B)
      Rev/IC (%) ….. 36%……42%………35%…….36%……….40%…….35%
      CapEx (R’B) …R1,8B…R0,77B….R1,1B……R1,1B……R2B……R3B
      EBITDAX(R’B)…(R2,7B)..(R1.3B)….(R1,7B)…(R0,18B)…(R0,94B)….(R0,62B)
      Liquidity (R’B)…R0,3B…R0,67B…R4,1B… R3,1B….R2,8B….R0,9B
      Net Debt (R’B):.. R1,6B… R1,57B.. R6,73B… R5,6B ..R7,2B…R10,5B

      Worryingly, is the ballooning net-debt position of the company, even if Zambezi Prefs (R8,5Bn) are excluded given that they are held by a beholden crowd given that their source of cash is still NHM. Structurally debilitating is that as things stand, this company is over-capitalised. Its Revenue /Invested Capital (Invested Capital Turns) , which measures essentially productiveness of its capital, is woefully low at avg of 50%, this company will not exceed its WACC = ±18% (after Tax), let alone earn a superior return of ROIC > 25%.

      Sure its operating margin is now 10%, thus reflecting considerable operating environment progress, but its ballooning costs forbade ill for this company at current PGM prices give its well telegraphed CapEx binge. Therefore, the only salvation is higher PGM prices which are still years away. Hopefully, the high PGM prices arrive well before the Zambezi Prefs are due and well after achieving 1Moz PGM production. BUT “Hope for High PGM prices “ is not a strategy or sound balance sheet management practice.

      AT this point in the cycle, given the gloomy PGM prices forecasts, only the gullible and incorrigible speculators will buy this company, which is trading at par with its Invested Capital at MCap ±R20Bn. Not only that, you have extremely expensive cum Zambezi Prefs at Primerate +3,5% and notes at Jibar ( 6.6% ) + 3,3 % ahead of the common stock. To add misery, EBITDA is forecasted (by management) to be negative for the next 1-2 yrs , thus unable to cover the financing costs. So debt will accumulate henceforth, thus the Net-Debt position will get larger , a per % of Enterprise Value, and further weakening this frail balance sheet. That’s what you get when you get a “mole-miner” CEO who has known nothing else but increasing production as a measure of corporate performance.

      The Cr prices did help the OCF for a while, but that was a once off with FY17 at 925M (FY16: R355M) (FY15: R105M), without which our discussions might be different. Now it seems the margin enhancement from this has been so good that management is starting to allocate capital towards this fickle metal, with Tailings retreatment projects (CapEx = R100M for 1,3 Mt of Cr) , which will needlessly be placed u/g. The TSF to be reclaimed at 1,28Mt/yr is a mere 8,7Mt. So truly mickey-mouse size stuff! Frankly, it will NOT make a contribution towards paying back the now R2Billion RCF in 2021 OR Medium Term Notes (R422M).

      Fiscal Year….FY13…….FY14…….FY15 ……..FY16 ……….FY17……….FY18e
      PGM (Moz)..0,344…0,396……. 0,423……..0,452………0,454…….. 0,419
      COSTS (R’B)…R3,8B .. R4,5B……… R5,7B…….. R5,3B…….… R5,9B……….R7,4B
      Grade ( g/t)..4,9 ……. 5 ………… 4,9 ………. 3,7 ………… 3,6 ………… 3,3
      AISC(R/t)..R4521/t…R1920/t …R1560/t…R1203/t… R1194/t…R1242/t
      AISC(R/4Eoz)..R15,5k…R15,6k….R15,7……R12,5……..R13,7k……R13,7

      Clearly, from the above it seems that NHM has been growing for growth-sake NOT for value. The R/t unit costs improvements have now reversed and the AISC /4Eoz costs have remained stunboornly high mainly due to Booysendal being low-grade (R&R = ±2,5 g/t). Booysendal mine is a high PGM price environment mine NOT for current climate. It is a giant drag given the invested capital (R12Bn) to develop it. Sure, it is vast PGM resource at >100M 4Eoz (2P= 13Moz) BUT there is still more CapEx to go into this mining lease.

      Booysendal is a supposedly a mechanised mine, but its “cheap mining” impact has not been apparent since its commercial production in FY16:

      Fiscal Year….FY14…..FY15 …… FY16 …….FY17……….FY18e
      PGM (Moz)..0,093….0,122……. 0,161…..0,199………0,200
      Milled (Mt) … 1,52 …… 1,79 ……….. 2,17.……. 2,49…….… 2,65
      H/G (g/t).. ….2,6 ….. 2,6 ………. 2,7 ….…. 2,7 ………… 2,7
      AISC(R/t)…R715/t…R765/t…..R719/t…R778/t ….. R871/t

      By comparison, for Q1FY18 Kroondal ‘s unit costs are ±R700/t at yield grade = 2,4 g/t at avg 3,7Mt/yr. Furthermore, note that the period FY15 – FY17, the 39% increase in Milled tons resulted in a flat unit costs at R770/t , thus there is NO operational leverage and hence to lower unit costs further , the mining operations need to be expanded. AT current PGM price of R12700/4Eoz, the break-even yield grade if 2,21 g/t , as compared to operational yield of 2,32 g/t, thus rendering this mine marginal. This is an orebody mining method phenomenon, thus it’s a high OpEx mining operation despite it being mechanised etc. It’s a geological structural challenge (i.e pot-holes , ore extraction efficiencies , poor mine planning etc). Booysendal treated more tons (2,65 vs 1,79 Mt) at similar grade, and yet the unit costs remain stubbornly high. Well , Booysendal was planned, and capitalised ,as a 1600 persons complement mine, but at FY17, this complement is 4305, therefore negating all the benefits of mechanisation. Its productivity measures are some of the industries poorest. Incompetence come in various forms!

      Not all PGM mines can build their own Smelters, but Zondereinde Mine has proven that its possible if you have >100M 4Eoz in R+R. The production is admitted low at avg of 280Koz/yr . Albeit unfair, given the differences in scale, I always benchmark this operation to Angloplat’s Amandebult Mine. They share a lot in common ( i.e depth , ore mix etc).

      Fiscal Year…..FY14……FY15…….. FY16 ……FY17………..FY18e
      PGM (Moz)….0,24….…0,26………0,28……..0,28………….0,3
      Milled (Mt) …… 1,7……….. 1,9 ….……… 2 ………..… 2……………… 2
      H/G (g/t).. …….5 ……… 4,9 ……… 4,9 ……….4,8 …………. 4,9
      AISC(R/t)….R1526/t…R1746/t…R1722/t…R1786/t ….R1449/t

      I am a fan of this operation because it’s world-class potential. It is a company maker and has consistently delivered. But there is evidence of mining discipline slippage, which might be related to localised geological factors. The dog that is Booysendal Mine is overshadowing this mine’s brilliant operational performance. At AISC unit costs of R1450/t , its break-even yield grade = 3,76 g/t at R12700/4Eoz , thus implying >1 g/t margin at current grades. The more MR than UG2 the better. Tumela ‘s Resource purchase makes no sense to me given that its still long-dated ( > 3 yrs) even for NHM.

      Now, if this mine was a standalone business, it would be delivering EBITDAX (EBITDA less SIB-CapEx) = R2B (Yes, TWO BILLION RANDS) on an Invested Capital = R14B, thus ROIC = 15%/yr for calendar year 2017.EBITDA Margin >35% . This stupendous result at this point of the PGM cycle worthy of a TIER1 asset-class. Mogalakwena delivered EBITDAX = R6291 in 2017 over a production base of 1,1Moz PGM. So apples-to-apples, clearly Zondereinde faring well given that the carrying book asset value of Mogalakwena is >R40B. There is NO need to compare it to Amandelbelt Mine, which is more appropriate, when we talking best-in-class returns on invested capital of a substantial scale (NOPAT >R1Billion).

      NHM is poorly positioned and will struggle going forward to maintain its current high nosebleed valuation. The saving grace is its shareholder ownership is very supportive in that Institutional shareholders (50,3%) and Zambesi (31,4%) own a total >80% of shares outstanding. Therefore, it is tightly held thus less volatile. It will be moribund (±R20Bn MCap) for which is more appropriate. But it is extremely overvalued, despite my admiration of Zondereinde Mine.

      REVIEW: IMPLATS

      I am bullish this company., but am slowly loosing patience with the new management. The operational metrics are deteriorating across the board and all we hear are sound bites like “furnace problems”, “adjusting CapEx higher” , “Inventory Increases” etc. The most frustrating being the trepidations in making a move for RBPlats despite the glaring business rationale, which will materially enhance the Impala Lease district economics. I say break the bank on RBPlats with a R8B equity offer PLUS debt.

      My frustrations aside, I sill believe in the value proposition of Implats going forward . The following is a summary of the key finance metrics:

      Fiscal Year….FY13…….FY14…. FY15 …..FY16 …..FY17……H1FY18
      PGM( Moz) …3,23……2,37…..2,62…..… 2,91…… 3,1……..1,43
      COSTS (R’B)..R24,3B .. R24,9B…R30,1B….R33,2B….R35,8B….R18,4B
      Op Margin (%): 8,2%….0%………6%……….. 0%…………..1% …… 1%
      Net OCF(R’B)..R5,6B….R4,1B… R2,3B…..R2,7B…….R1,0B…… (R1,1B)
      Rev/IC (%) …..50%….. 49%….. 59% ….. 58% ….61%…. 60%
      CapEx (R’B) …R6,3B……R4,4B….R4,5B……R3,7B……R3,4B……R1,9B
      EBITDAX (R’B)… 0,77 … 1,2…. (1,4) …0,56 … (0,38) … (2,2)
      Liquidity( R’B) … 7… 7,3…. 6,6….. 10,8 …. 11,8 … 8,2
      Net Debt (R’M) …3,4 ….3,5….4,8 ….1,9 ….. 0,53….3,4

      With regards to this co., I ask myself this questions about it:

      1. What are the business prospects of this PGM should current spot prices prevail for longer (3-5 yrs)?
      2. Is its capital structure conservative for the current phase of its development or project pipeline vis-avis PGM cycle?
      3. Is the Board of Directors people with mining business acumen and success (not depended on Board fees) and thus likely to guard their credibility and reputation jealously? (Not the Lonar or Wiese’s of this world though!)
      4. It there significant (>50%) institutional shareholders, including the PIC?
      5. It is selling at P/adj-IC (Invested Cap – Net-DEBT) of 0 and sufficient liquidity.

      Readers must be alarmed that my assessment does not rever to position in cost-curve /first-quartile Cost position OR “must be Tier-1 assets” etc. This is because in precious metals, including diamonds, such DOES NOT matter to the same extend that it does for bulk metals mining. But that’s my vantage point when I look at a precious metals mining company.

      My assessment of Implats is that it meets the criteria, except for no.3, which is a weakness in South Africa’s business community as a whole.

      Net-Debt is only an issue if not compensated by high Liquidity. Furthermore, for Implats , the borrowings costs are low (R800M/yr on debt of R9,5B) for its Convertibles notes ( due 2018 for R2,7B and $200M). This are well catered for in the ample liquidity that the co. There are other Convertible Notes which are due in 2022, for total of R5,1B then.

      Operationally, I will concede that there is room for improvement. Fellow readers , to earn its WACC of 13% ( A-T) , the EBITDA Margin needs to be a mere >5%. This is due to its extra-ordinarily low Capital Intensity Production as exemplified by the high avg Rev/IC >55%. It is a stunning revelation. A 10% improvement in Operating Margin (NOT 60% as for NHM) will yield earnings kick upwards like no other. It is truly ready to benefit from the upturn better than any PGM producer out there.

      At current MCap = ±R18Bn, it offers “All this and Heaven too”…

  2. It’s always difficult to read something that you used to do yourself. But I must say well done to Dominic and his team. I think his note is pretty near the mark. I agree the industry (in SA) needs to shed, not add, capacity.

    But the capacity “hooligans” that run some of the platinum mines have yet to digest that they are damaging their profits by oversupplying the market. IF adding 100,000 ozs pa to an existing 1,000,000 ounces pa causes the price of the product to be 10% lower, then you end up with similar revenue but higher costs and, you have to spend hundreds of millions to create the unnecessary/unwanted capacity.

    I have yet to encounter a platinum miner that does not factor perpetual demand and commodity price growth into medium term plans. And then they react to market developments. I will never forget the famous quote from Mr Platinum himself; (big) Barry Davison when he was commenting on Amplats’ expansion plans many years ago. He classically said: “There will be blood on the streets but it won’t be ours”. Many have dined out on that one over the subsequent years. In the end a lot of it was “his” as the history clearly shows.

    I’m so tired of hearing the mantra that “if we increase ounces we’ll reduce costs”. Well guess what? It never worked like that. Costs went up at about 10% every year, on average, for many, many year – and you could set your watch by that.

    Platinum miners seem to be blind optimists that really believe they can do it better than the other guy. They can’t. Many still think the internal combustion engine is here to stay and that electric vehicles demand growth forecasts are exaggerated. They’re not, in my view, they are still grossly underestimated. But I cannot be sure I’m right – anymore than the ICE bulls can be sure they’re right… What do you do when you’re not sure? You wait – focus on grade and efficiency management. What don’t you do? Commit billions of rand to expansion that may not be required.

  3. You cannot own a bus and let your passengers pay you as and when they wish. Of course your bus-business will be dysfunctional and go down the drain.
    In the same breath you cannot account for 70% global supply of Platinum and not set the price of Platinum. The Platinum industry will remain ‘dysfunctional’ until the cows come home. Learn from OPEC, they co-ordinate the petroleum prices and everyone else has NO say but to pay.
    The comparison of Implats & Northam is neither here nor there. What the analysts are saying in NOT NEW. Analyst have been predicting and saying ‘this-and-that’ about Pt upswing since the 2008/2009 downswing, but reality is totally different. The timeline for the upswing is always pushed forward, it is now 2020. Lies lies lies lies. No one knows what is happening in the Platinum sector and that is a FACT. Both companies are on the rat-race, surviving on the ‘hope’ that the Prices will rise. They have no direct influence to the current prices. The analysts can only speculate and hope for positive reaction that will augment their ‘preferences’ primarily for gains that are associated with speculations.

    • One major difference…there is an actual demand for oil which is still growing despite electric cars…Platinum is used in diésel cars, which is being outlawed in most places. Palladium is used in catalysts for petrol vehicles which are still on the increase… Guess where most of the Palladium comes from?

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