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Steve Phiri, CEO, RBPlat

Jockeying for position

Brendan Ryan | Mon, 30 Aug 2010 09:00

[miningmx.com] -- EVENTS so far this year have borne out the prediction made by analysts at year-end 2009 that there was plenty of action imminent on the platinum consolidation front.

So it has come to pass, with a Chinese consortium grabbing control of Wesizwe Platinum; Shanduka taking over Incwala Resources; Kazakh resources heavyweight Eurasian Natural Resources Corporation (ENRC) moving on Northam Platinum; and Royal Bafokeng Holdings (RBH) laying out the strategic vision for its platinum arm – Royal Bafokeng Platinum (RB Plats).

There are plenty more on the way.

Pallinghurst chairman Brian Gilbertson has made it abundantly clear subsidiary Platmin is looking at acquisitions in its neck of the woods near Rustenburg, while speculation continues to swirl around the future of junior operators such as Eastern Platinum (Eastplats) and Sylvania Resources (Sylvania).

At the same time, newcomers continue to "knock on the door" wanting to break into the sector, with the latest being the former Absolute Holdings, now renamed Bauba Platinum (Bauba).

It's not an easy process, as both Bauba and Lesego Platinum have come to realise.

Lesego was forced to pull out of a planned listing on the JSE mid-2008 due to then grim equity market conditions.

It's now come back to the market through a deal with Bernard Swanepoel's Village Main Reef, which has taken over Lesego.

Bauba is the brainchild of entrepreneur Dennis Tucker, who signed up former Mvelaphanda Resources CEO Pine Pienaar to run the company, which owns a suite of exploration rights it intends drilling on the Eastern Limb of the Bushveld Complex.

In June, Bauba was forced to chop back radically on its fund-raising plans, reducing its target amount to R15m from the original minimum R60m it said it needed to carry out the drilling programme.

Demons for majors

All this activity is taking place against a backdrop of serious undercurrents in the platinum sector, where the three majors – Anglo Platinum (AngloPlat), Impala Platinum (Implats) and Lonmin – are battling with their own demons.

At AngloPlat the pressure remains on CEO Neville Nicolau while he waits for the benefits of the radical restructuring he's imposed on the group over the past 18 months to become apparent.

So far the signs are promising, with Nicolau announcing in April the group could raise its production for 2010 by 150 000oz to 200 000oz above the original stated target of 2.5m oz.

Reasons are the recovery in the prices of platinum group metals (PMGs), which reflects the gradual recovery in the global economy plus better cost control.

Nicolau succeeded in holding group costs flat last year and has put his "neck on the block" predicting the group will keep its costs unchanged at R11 000/refined platinum oz for 2010/2011.

But there has to be some concern in the upper management echelons of controlling shareholder Anglo American that AngloPlat still hasn't had any of its old order mining rights converted into new order mining rights.

That despite the conclusion of a string of deals that have placed control of world-class platinum assets into the hands of black empowerment-controlled mining groups, such as Northam Platinum, Anooraq Resources and RB Plats.

There's speculation among some market players that AngloPlat remains under pressure to carry out yet more empowerment deals, but that's denied by Nicolau. "We've done enough to secure conversion and aren’t being pressured to do more," he comments.

Implats also has production problems to deal with at its flagship Rustenburg mines division (the Impala lease) and has been criticised for its lack of mining expertise at top management levels, in particular by JPMorgan Cazenove analysts' Steve Shepherd and Allan Cooke.

In a series of research reports the two analysts stressed the requirement for a "hard-hitting professional mining engineer" to direct Implats' mining operations. They'd also praised the successes at AngloPlat achieved by efforts of Nicolau, who is a mining engineer.

Cooke and Shepherd compared Nicolau's impact on AngloPlat to that of two former Implats' CEOs – John Smithies and the late Steve Kearney – both of whom were mining engineers.

Implats CEO David Brown moved to address that in April, when he announced the appointment of mining engineer Gerhard Potgieter as consulting mining engineer and group executive: growth projects.

Potgieter was previously MD of the African operations of Norilsk Nickel and has an extensive track record in deep-level mining in SA.

Apart from the mining problems at the Impala lease the other major issue Brown has to grapple with is strategic, concerning the future of the group's operations in Zimbabwe.

At Lonmin it seems there's now one constant factor: the recurring problems with the group's main Number One smelter, where the latest shutdown happened at end-March. The smelter was closed for 40 days but, after being restarted on 12 May, had to be closed for another month from 24 May due to continued failures.

Central to the problem is how to deal with the high chrome content in the predominantly UG2 concentrates being smelted. Too high a chrome content causes blockages in the furnace, leading to excess temperatures and "run outs" or "leaks" of the molten material, which penetrate the walls. Lonmin had carried out a two-month long rebuild of the furnace late in 2008 to deal with precisely those issues.

When the main furnace is off-line Lonmin has to rely on its three back-up pyromet furnaces to treat concentrate production. Those are more expensive to operate and only have a combined production capacity equivalent to around 40% of the main furnace.

That means Lonmin must have some of its concentrate production toll-treated by competitors, such as Implats, which sharply reduces the profit margin on that output.

Lonmin is stumping up around R2.2bn in vendor financing to bring Cyril Ramaphosa's Shanduka Resources in as its empowerment partner to replace financially troubled existing partner Incwala Resources.

Shanduka kicked in R300m in cash as its up-front contribution to the deal, through which it's acquired a controlling stake in Incwala.

Lonmin placed just more than 9m shares to raise ₤160m to help finance the deal, of which CEO Ian Farmer commented: "The securing of a new empowerment partner via a robust funding structure is critical to the future of Lonmin. Following an extensive process in that regard it has become clear this objective can only be achieved with significant funding from Lonmin."

Future rosy

Despite its problems, the platinum sector is the one with arguably the greatest future in SA mining for the simple reason that, if you want to mine platinum, you have to come here.

SA produces 80% of the world's platinum and has by far the lion's share of the world's known reserves and resources. The only real competition is Zimbabwe (see separate report).

Hence the interest from the likes of ENRC and the Jinchuan Group/China Africa Development Fund, which in June bought 51% of Wesizwe for R6.6bn at a subscription price of 207c/share.

On the face of it, that looks a great deal for the Chinese and a poor one for Wesizwe, as the Jinchuan-led consortium has bought control at a rock-bottom price. Wesizwe's share price has certainly gone nowhere since the deal was announced.

The counter argument is that Wesizwe has signed up guaranteed funding to build its proposed Frischgewaagd-Ledig mine at a time when junior miners are having severe difficulties finding backers.

The key clause in the agreement is that Wesizwe won't be called on to kick in any funding until the project reaches full production – defined as 230 000t/month run of mine for three consecutive months.

In the event of a funding shortfall, Jinchuan will provide the extra money needed through a shareholder loan to Wesizwe.

"We hold the key to the future of platinum mining in our area. We're the kingmaker – if the not the king himself"

Wesizwe occupies an interesting space in the platinum universe because the Frischgewaagd-Ledig mine sits adjacent assets belonging to TSX-listed Platinum Group Metals (PTM) as well as RB Plats' Bafokeng Rasimone mine.

RB Plats CEO Steve Phiri has spelt out in no uncertain terms the huge ambitions his group has for future growth once the company lists on the JSE before year-end 2010.

Says Phiri: "We hold the key to the future of platinum mining in our area. We’re the kingmaker – if the not the king himself."

Not only does RB Plats own the operating Bafokeng Rasimone mine, it also owns the undeveloped Styldrift deposit, which Phiri reckons is the best in SA and more attractive than Northam's much-touted Booysendal deposit.

Says Phiri: "Styldrift is big, it's high-grade and it's shallow. It's the best undeveloped Merensky reef deposit left in SA. The reefs are easy to mine because they're consistent and flat-dipping. What other company has that kind of asset?" ENRC finally bought a 12.2% stake in Northam for R2.2bn in April after extensive speculation surfaced in January that the Kazakh group was looking to make a takeover bid for Mvela, which controls Northam.

Clearly, that's not the end of it. But what ENRC does next may be linked to the unbundling of the balance of Mvela's stake in Northam, which is being held up by legal action involving the Khumama consortium.

Let's not forget the "the usual suspects" in the platinum consolidation game: Xstrata and Aquarius Platinum (Aquarius). Both have been suspiciously quiet for some time following Xstrata's failed run at Lonmin in 2008 and Aquarius's takeover of Ridge Mining in 2009.

Aquarius CEO Stuart Murray has plenty of cash on his balance sheet and, according to analysts, needs to do more deals to grow his firm.

Murray has made no secret of its desire to become involved with Booysendal – which sits adjacent to Aquarius' Everest South mine – and Aquarius is continually being linked to speculation over plays on other juniors, such as Eastplat.

Xstrata made its ambitions in the platinum sphere abundantly clear with its bid for Lonmin. Though it's now free to go after Lonmin again, what happens next has been complicated by the subsequent unsuccessful overture to Anglo American and the speculation surrounding a link-up with parent Glencore, should Glencore decide to list.