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Platinum on the back foot

David McKay | Fri, 10 Feb 2012 11:54

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[miningmx.com] -- THESE are difficult days for platinum shares. In the words of Stuart Murray, CEO of Aquarius Platinum, the platinum sector has “caught the gold disease”.

This means that the margins and seemingly unlimited market promise that led Anglo Platinum to consider a 1.2m-ounce expansion strategy in 2000 have dried up. As with gold, platinum mining is hard, dangerous and unfulfilling.

There also seems to be worrying unrest among the labour ranks.

Added to this is the fact that the platinum market hasn’t properly recovered from the 2008 crisis. Whereas gold provides a hedge against world economic disaster, platinum is an industrial metal that depends on economic growth. “Thank goodness for the ETFs,” says Aquarius’s Murray, who believes that, without investment demand, the platinum price would be under even greater pressure.

He doesn’t think there’s huge demand for new production, but the investment market frequently thinks in terms of expansion, production growth and market share. Murray thinks that’s foolhardy.

“Everything you make, you put into another hole,” he says of the market’s seemingly blind demand that all platinum producers do is make more metal.

Aquarius Platinum has been a particular target, with analysts frequently expressing fears that the company hasn’t acquired the property in which to grow.

But Murray, a rumbustious character, is unrepentant. “I think I’m the only one who closed a mine last year,” he says of shutting his Everest mine. “Ounces that don’t contribute get culled.”

True, volumes drive costs lower – and runaway cost inflation is a bit of a bugbear for the platinum sector – but the platinum industry has ploughed billions into mines with little actual production expansion.

Take Anglo Platinum. Once aiming at 3.5m oz/year, the company only narrowly made 2.6m oz in its 2011 financial year, and then only because it used inventories to bolster production. Worse, Anglo Platinum’s capital profile over the last decade shows it spent R17bn for a net increase of only 200,000 oz/year.

That means that most of its capital was actually stay-in-business expenditure.

David Brown, who’s set to leave Impala Platinum in June after five years as CEO, describes the difficulties of the sector. “South African mining is relentless,” he said, with feeling. There’s also been a disturbing worsening in industrial relations at Impala’s Rustenburg mine, where about 2,000 workers from a splinter union have allegedly coerced 18,000 NUM members into joining its strike.

The effect of the industrial action, unresolved at the time of writing, was to disable half of Impala’s annual output.

Lonmin experienced a similar situation last year, when an illegal strike led to mass firing at its Karee mine. As for Impala, it’s already on the back foot barely a month into its new financial year.

As if this weren’t bad enough, the platinum sector has been hit with a spate of Section 54 stoppages; a clause in the Health and Safety Amendment Act that allows the chief inspector of mines to close shafts in the event of mine fatalities and other safety abuses.

According to Joel Kesler, an executive director of Anooraq Resources, the situation is out of control. Sabotage by disgruntled former employees and an over-zealous wielding of power by the chief inspector have seen production stoppages increase hand over fist. “In a 23-shift cycle, you only need to lose three shifts and your margin is gone,” says Kesler. Anglo Platinum had 32 safety-related stoppages at its mines in the fourth quarter. That means that every third day, one of the company’s shafts lay idle.

David Msiza, the Chief Inspector of Mines who operates in the Department of Mineral Resources, quite rightly defends his position.

“Workers are dying. The situation is improving, but if you can’t mine safely, you shouldn’t mine at all,” he says. A task team involving Government, labour and industry is setting about finding a compromise between the need to mine profitably while striving to attain zero fatalities on South Africa’s mines.

So what should investors do in this new environment for platinum miners, once the darlings of the resources sector?

“We prefer defensive stocks in the sector,” says Neil Young, a platinum analyst at Coronation Asset Managers, who adds that for all their problems, platinum shares still don’t look that cheap. “We’d be cautious,” he adds.

- The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.

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