Platinum on the back foot

[] — THESE are difficult days for platinum shares. In the
words of Stuart Murray, CEO of Aquarius Platinum, the platinum sector has “caught
the gold disease’.

This means that the margins and seemingly unlimited market promise that led Anglo
Platinum to consider a 1.2m-ounce expansion strategy in 2000 have dried up. As with
gold, platinum mining is hard, dangerous and unfulfilling.

There also seems to be worrying unrest among the labour ranks.

Added to this is the fact that the platinum market hasn’t properly recovered from the
2008 crisis. Whereas gold provides a hedge against world economic disaster, platinum
is an industrial metal that depends on economic growth. “Thank goodness for the
ETFs,’ says Aquarius’s Murray, who believes that, without investment demand, the
platinum price would be under even greater pressure.

He doesn’t think there’s huge demand for new production, but the investment market
frequently thinks in terms of expansion, production growth and market share. Murray
thinks that’s foolhardy.

“Everything you make, you put into another hole,’ he says of the market’s seemingly
blind demand that all platinum producers do is make more metal.

Aquarius Platinum has been a particular target, with analysts frequently expressing
fears that the company hasn’t acquired the property in which to grow.

But Murray, a rumbustious character, is unrepentant. “I think I’m the only one who
closed a mine last year,’ he says of shutting his Everest mine. “Ounces that don’t
contribute get culled.’

True, volumes drive costs lower – and runaway cost inflation is a bit of a bugbear for
the platinum sector – but the platinum industry has ploughed billions into mines with
little actual production expansion.

Take Anglo Platinum. Once aiming at 3.5m oz/year, the company only narrowly made
2.6m oz in its 2011 financial year, and then only because it used inventories to
bolster production. Worse, Anglo Platinum’s capital profile over the last decade
shows it spent R17bn for a net increase of only 200,000 oz/year.

That means that most of its capital was actually stay-in-business expenditure.

David Brown, who’s set to leave Impala Platinum in June after five years as CEO,
describes the difficulties of the sector. “South African mining is relentless,’ he said,
with feeling. There’s also been a disturbing worsening in industrial relations at
Impala’s Rustenburg mine, where about 2,000 workers from a splinter union have
allegedly coerced 18,000 NUM members into joining its strike.

The effect of the industrial action, unresolved at the time of writing, was to disable
half of Impala’s annual output.

Lonmin experienced a similar situation last year, when an illegal strike led to mass
firing at its Karee mine. As for Impala, it’s already on the back foot barely a month
into its new financial year.

As if this weren’t bad enough, the platinum sector has been hit with a spate of
Section 54 stoppages; a clause in the Health and Safety Amendment Act that allows
the chief inspector of mines to close shafts in the event of mine fatalities and other
safety abuses.

According to Joel Kesler, an executive director of Anooraq Resources, the situation is
out of control. Sabotage by disgruntled former employees and an over-zealous
wielding of power by the chief inspector have seen production stoppages increase
hand over fist. “In a 23-shift cycle, you only need to lose three shifts and your
margin is gone,’ says Kesler. Anglo Platinum had 32 safety-related stoppages at its
mines in the fourth quarter. That means that every third day, one of the company’s
shafts lay idle.

David Msiza, the Chief Inspector of Mines who operates in the Department of Mineral
Resources, quite rightly defends his position.

“Workers are dying. The situation is improving, but if you can’t mine safely, you
shouldn’t mine at all,’ he says.

A task team involving Government, labour and industry is setting about finding a
compromise between the need to mine profitably while striving to attain zero
fatalities on South Africa’s mines.

So what should investors do in this new environment for platinum miners, once the
darlings of the resources sector?

“We prefer defensive stocks in the sector,’ says Neil Young, a platinum analyst at
Coronation Asset Managers, who adds that for all their problems, platinum shares still
don’t look that cheap. “We’d be cautious,’ he adds.

– The article first appeared in Finweek. If you want to subscribe to the digital
format of Finweek visit