Impala warns of 'toughest time'

IMPALA Platinum (Implats) boss David Brown has warned the next 12 months could be "the toughest the company has had".

At face value, that's a strange claim given the economic period in which companies such as Implats find themselves. A near 50% recovery in Implat's share price, equal to some R80 to R188 per share, suggests the worst of the economic crisis is over for mining counters.

Brown's worries, rather, relate to internal company matters such as focus and productivity, and the sense that the next two years need to be big on operational delivery.

"We disappointed with our previous figures. We need to prove to the market that we can fix it and get on," Brown said.

In August, Implats reported a 52% decline in share earnings for the year ended June. Lower revenue was a major factor - sales were R10bn lower and mining sales at Impala mine alone were R5bn lower - but it was the 32% unit cost increase that was most worrying.

There's also been a switch from growth to cash preservation. Implats kept the dividend steady, but all eyes were on the balance sheet with net cash at R1.36bn.

Compare this with the R4.3bn the company dished out to shareholders in a special dividend in its 2006 financial year. Even in 2008, the company could report cash net of debt of about R8.8bn, albeit ahead of a major dividend payout of R7.1bn.

"The next 12 months will be the toughest we've had at this firm. It will be a very depressed window of time. But post this, we see a very different set of circumstances with higher output and where the revenue equation is more robust," said Brown.

No market to flatter

Brown was Implats' chief financial officer before succeeding Keith Rumble. At the time, the market was stirring nicely and talk of a super cycle was widespread. This was helpful to Brown because it distracted attention away from questions about whether he could make the transition from the company's top accountant to the CEO post.

I dare say, some of those questions might be back on the table now that there's no market to flatter underperforming mines.

Implats' difficulties relate mostly to mining matters such as improving development at its key Rustenburg mine, known in the past as the Impala Lease Area. In mining, development of the orebody - preparing it for mining - is a key deliverable because it allows for flexibility.

This, and productivity in general, had been in trouble for up to 18 months before a recent operations management reshuffle. "We knew about the problems for a while and we weren't making headway," said Brown of his decision to change his operational team.

Other decisions were easier to make, however. To continue with certain projects, even though they made the company cash negative after capex, were "bread and butter decisions - decisions I made all the time as CFO," said Brown.

More worrying is that the firm has little chance of reaching 1.8 million ounces of platinum in the current year, even with extra shifts in place. "Our production target was based on steady production from Rustenburg and Zimplats doubling production. But the tragedy at No 14 shaft and the strike will impact on production," said Brown.

On July 20, Impala suffered its worst ever single mining accident in which nine of its employees were killed in a fall of ground. Safety-related changes to how the company mines in that section will result in less production, while recent strike action has slashed millions of rands off the revenue line equal to 50 000 ounces of production.

All in all, Brown says output in the current financial year will be 100 000 oz lower than expected, some 1.7 million ounces - at least. News out on Monday is that safety has again been compromised at No 14 shaft with a methane explosion killing another miner. The outcome is that the shaft will be shut until an investigation is complete.

It's a blow for Brown ahead of a trip to the US, no doubt where he'll be tested by the group's shareholders.

RBC Capital Markets thinks there's too much "good news" factored into Implat’s share price. With late development and falling grades and with efficiencies dropping, it expects a poor performance for the first half of the financial year.

"This, coupled with the strong rand and the expectations of sharp cost increases (higher electricity tariffs and wage increases) is likely to have a negative impact on H1-FY10 earnings [first half of the 2010 financial year]." "We continue to believe that the stock is pricing too much good news."