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Warnings sounded on SA platinum output

Brendan Ryan | Mon, 17 Jan 2011 11:43

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[] -- BOTH JP Morgan Cazenove and RBC Capital Markets have published bullish reports on prospects for platinum group metals (pgm) over the next year.

But both research firms also have sounded strong warnings about the state of play in the SA platinum mining industry where a string of economic, social and political issues are likely to hold back increases in output.

That’s serious because the SA producers dominate world supply of pgm accounting for around 75% of platinum output, 40% of palladium production and 85% of rhodium supply.

The analysts’ assessments have been made after a year in which the SA platinum industry has been widely affected by production disruptions from strikes and safety stoppages while planned developments have been delayed because of opposition from local communities and BEE partners.

According to JP Morgan Cazenove analysts Steve Shepherd and Allan Cooke, “the status quo in South Africa looks unsustainable to us if the supply of pgms to the world is to be adequate to keep prices at sensible levels.

“If prices rise excessively, substitution could lead to collateral damage to the industry.”

The analysts added, “ It is clear that mining is becoming more complicated than it used to be and that costs and capex are escalating as a result.

“ Vested interests that now have increasing influence in the way mining is conducted include; local communities, government, organised labour, holders of title to mineral rights and financiers and banks.”

The analysts commented, “as things stand, and despite much rhetoric, the four key role players in the industry - the miners themselves, government, organised labour and local populations – seem to be working against each other to the detriment of the future of the platinum industry.”

They added, “there appears to us to be an increasing risk that state interventions/involvement will slow the already reduced rate of new pgm capacity investment in SA, which over time will add to pgm market tension.”

According to the analysts there were possible solutions to the “multiple issues that are impeding the efficient operation and growth of what should be one of SA’s most lucrative and important sources of growth and employment.”

These included “a real need and a way for producers to become more pragmatic when it comes to combining land holdings in order to avoid inefficiencies - financial, fiscal and operational. To us, the level of dogma regarding relative valuations is negatively affecting shareholder and national value.”

The analysts also suggested a form of “part nationalisation” based on the successful example of Mali where government owns 20% of various gold mining operations.

They commented, “let’s consider possible implications of a scenario whereby government opts for, say, a 20% state ownership level for new mining projects that are not already empowered and pays up its share of capex, acquisition costs and may allow some extra tax/royalty breaks.

“In our view such an outcome could offer a level of certainty to mining investors that is currently lacking.”

Shepherd and Cooke added government, “has co-responsibility with industry to protect the lives of workers and ensure that injustices of the past are addressed.

“But, if government’s duties are discharged in a way that scares off or impedes the flow of capital investment, nobody comes out a winner – quite the opposite.

“Industry, in most cases, has been dragged kicking and screaming into the empowerment process which means the government is not solely to blame for the problems that have arisen from the BEE process. “

Turning to organised labour the analysts said, “it continues to cite the evils of the past as a reason to demand super inflationary wage settlements that have led to the ongoing demise of the gold industry and the insidious erosion of margins in the platinum industry.

“It continues to refuse to allow pay to be linked to productivity which has declined substantially over the past decade. “

RBC Capital Markets analyst Leon Esterhuizen in his report recommended that investors “buy palladium and buy outside South Africa” declaring that South Africa has “dropped the ball”.

The two institutions have come up with totally opposite recommendations on the platinum shares that investors should go for.

Esterhuizen said that, for investors who had to buy SA platinum shares, then, “Aquarius Platinum remains our preferred choice for investment in South Africa while, for large market cap (stocks) Lonmin remains the vehicle of choice. “

According to Cooke and Shepherd the top SA platinum stock is Anglo Platinum. They have just downgraded their recommendation on Lonmin to “neutral” from “overweight” citing lack of clarity on the group’s growth outlook.

The JP Morgan Cazenove analysts maintained their “underweight” recommendation on Aquarius and stated, “our cash flow model suggests that the share is relatively expensive, so fundamentally it is hard for us to see it outperforming its platinum peers.”

They also expected two junior producers – Anooraq Resources and Eastern Platinum - to outperform the three majors - Anglo Platinum, Impala Platinum and Lonmin – over the next two years.

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