[miningmx.com] – THE four-week strike in South Africa’s platinum sector has echoes of Margaret Thatcher’s struggle to break the mining unions of the UK’s coal sector in the Eighties – the thirtieth anniversary of which occurs this year. Positions were so entrenched that the only outcome was a fracture.
On the evidence of numbers provided by Impala Platinum (Implats) CEO, Terence Goodlace on February 19, the platinum sector has nowhere to go. If it acedes to the wage demands of the Association of Mineworkers & Construction Union (AMCU) if faces restructuring and retrenchments.
If it stands firm, however, the outcome may well be the same. Here’s how the situation currently looks for platinum producers. AMCU is similarly hard pressed. It has promised a great deal to its membership which, according to reports, is not yet moving, but for a union so new in the platinum sector, it’s position must be fragile.
Hence the allusion to the coal miners’ strike: if attitudes harden, it becomes very difficult to compromise which is surely what is required. (One mining executive said last week a possible profit-based/productivity agreement could be one solution).
Revenue booked last year for the sector’s three largest platinum companies – Implats, Anglo American Platinum (Amplats) and Lonmin – was R50.7bn against which roughly half was spent on salaries, or R22bn.
A further R23bn was spent on consumeables and power whilst a further R8bn was spent on capital development, a level dangerously low to support industry growth when the platinum price recovers, in Goodlace’s view.
A further R2bn was expended on taxes and royalties whilst only R800m was provided to investors in dividends – a mere 1.5% of revenue. Considering the fact shareholders provide the capital, that’s a very slim reward. More than double was paid to the South African government even though government’s don’t invest in businesses.
In any event, the industry loss was just over R5bn last year before AMCU’s R12,500/month basic minimum wage is factored into the equation. Amplats, among others, has worked on improving cost controls, but the wage increases if applied will suck the benefits out of the pain currently being suffered.
Naturally this is bad news for South Africa Inc. which relies on the platinum sector for employment and foreign exchange and the like. Perhaps more worrying is that the international market has already taken cognisance of the dislocation between demands of labour and the inability of industry to meet them.
The platinum price has been surprising from when the strike was called on January 23, falling $20/oz in the one month period, but showing some volatility. It rose to a high of $1,470/oz and has been some $90/oz lower in the period.
That’s perplexing price activity given that about 60% of all newly mined platinum is sourced from the three companies involved in AMCU’s strike activity. Of the three producers, only Lonmin is completely shutdown, nonetheless, you would expect a price reaction in the positive.
Not so, say analysts, firstly because the strike was relatively well flagged allowing producers to build stockpiles of up to eight weeks. Chris Griffith, CEO of Amplats, is adamant that the stockpile build was normal inventory and not a premeditated warchest. Still, only if the strike extends to eight weeks might the platinum price start to respond to the prospect of a real deficit in supply.
The other more worrying factor is that in the words of one analyst the platinum market has been weaning itself off the South African dependency by building it stocks of its own and develop a recycling supply chain in the autocatalyst industry, especially given the persistence of industrial action over the past three years.
For investors this must present a confusing picture. Piet Viljoen, founder of asset management company Re:CM says, however, the business risk currently assailing the platinum producers should not be confused with investment risk which, given the low valuations of the platinum is currently low.
“Mining platinum out of the ground … is by default a risky business. However, if a low price is paid for the company’s shares, this asset is a low risk investment, despite the riskiness of the business,’ he says.
This article first appeared in Finweek
