[miningmx.com] – SPEAKING in March, Wesizwe Platinum CEO, Paul Smith, warned of the effects on the platinum price of failing to take hard decisions with unprofitable South African production, a risk he described as a potential disaster.
“The industry is blindly producing flat out, irrespective of the reality of the metal price,’ he said. “We all expected a huge deficit and an enormous bounce in the price, but that’s not going to happen. We just have to get real on oversupply otherwise we will destroy our own industry’.
Less than a month later, Eastern Platinum announced it had moved a deal forward with Chinese company, Hebei Zhongbo Platinum to sell its South African platinum group metal (PGM) business – including its failed Crocodile River mine – for $113m – a development that drew some barbed comments from Investec Securities.
“We watch this deal with fascination but caution that the Crocodile River mine is very aptly named,’ it said in a note to clients. “Many tears may yet be shed, and crocodiles are known to bite.’
With Anglo American Platinum (Amplats) seeming to prefer a partial unbundling and listing of its non-core Rustenburg PGM assets in the absence of a buyer, Wesziwe Platinum’s Smith may be right that restructuring of South Africa’s platinum sector is unlikely to materialize.
Wesizwe Platinum itself is planning a steady-state production of 420,000 ounces a year from its Bakubung mine with first metal some six months ahead of its 2017 schedule whilst new production is also planned by Ivanhoe Mines and Platinum Group Metals, the Toronto-listed exploration and development firm.
According to a report by Deutsche Bank analysts Anna Mulholland and Patrick Mann, however, meaningful consolidation in the PGM supply may be possible through the ‘logical’ combination of Impala Platinum (Implats) with Lonmin.
At a market value of R13bn, Lonmin’s 750,000 ounces a year in production would equal the replacement cost of one of Impala’s Lease Area shafts in Rustenburg.
They also calculated potential savings of R1bn a year through the elimination of duplicate processing costs given that Implats has spare capacity in its refining services. As a result, the capacity utilization of IRS would increase to 80% from 50%, a step that would also improve unit costs.
The combination of Implats and Lonmin is not a new idea, however. Attempts to achieve this in the Nineties was torpedoed, amid a great deal of hue and cry, by the European Commission which judged the union ran foul of anti-trust regulations.
But Deutsche Bank said the emergence of primary production outside South Africa, the development of platinum recycling, and the emergence of tier two producers such as Northam Platinum, and junior miners gave the supply side of the market a different, more diversified look.
“We think the recent deterioration in the share prices of an already poorly performing sector presents an opportunity for consolidation,’ the analysts said. “Rationalistion of Western Limb platinum mining and processing assets looks logical and could be made to work to create value.’
Another analyst is doubtful, however, such a fundamental joining of businesses could take place. “How can this sector consolidate, there’s only four notable players: Norilsk, Amplats, Implats and Lonmin?’
“You could take Norilsk out of the equation as it’s a very different business, therefore leaving you with three. So it’s a bit like saying that Rio [Tinto] and BHP Billiton should merge as iron ore is collapsing thereby enabling rationalisation,’ he said. “Do you think any government or industry body would be a supporter of this?’
Leon Esterihuizen, an analyst for CIBC Capital Markets, believes combining assets would be more dilutory to Implats and, anyway, mining companies ought to be steering away from the “failed strategy’ of seeking scale.
“If you could combine the two and generate a lot more free cash flow from the combination, it would make sense, but this will not happen; certainly not unless we see much better prices, and there lies the rub,’ he said.
“All efforts continue to focus on more output, like this one rescuing the current and future output profile of Lonmin, rather than stepping away from that failed mining strategy,’ he added.
