[miningmx.com] — SOUTH African platinum shares have underperformed a
recovery in the dollar price of the metal by about a fifth so far this year. The lag
suggests that a recovery in the equities is possible especially if assistance can be
provided by the mines themselves in the form of consistent production and cost-
control improvements.
The market has already shown a promising uptick. In dollars, the platinum price is
18% higher year-to-date. And despite the strengthening of the rand against the
dollar over that period, the price received for platinum in rand is 12% higher.
Still, there’s huge pessimism. Says Simon Kendal in a recent report for Morgan
Stanley: “The platinum group metals sector is currently a difficult sector. Economic
uncertainty is likely to continue to result in weak demand fundamentals. This
weakness, coupled with industry-wide operating challenges, means we stay negative
on the sector.’
Unfortunately, production growth and cost controls are not features easily
associated with the likes of Impala Platinum (Implats) and Anglo American Platinum
(Amplats) lately. One analyst estimates SA’s platinum counters won’t contain costs
lower than 4% or 5% above CPI this year.
The outcome of this assessment is that while the worst may be over for platinum
stocks, they will bump along the bottom for most of this year. Yet in these
particularly dark days for platinum shares, it’s perhaps worth asking whether there’s
a means of playing the sector.
Broadly speaking, there are short-term platinum opportunities such as Implats, which
has defensive characteristics, and then there are medium to longer-term prospects –
shares with production growth potential such as Amplats and Northam Platinum.
Production growth lowers unit costs. The risk is the track-record, however: real
production growth has been very hard to achieve for platinum miners.
Production at our platinum miners, however, has been hammered by the well-
documented Section 54 safety stoppages, as well as industrial action.
According to one analyst, it would be unrealistic to expect Government’s mineral
resources department (DMR) to soften its stance on stoppages, especially those
related to fatalities, although a task team comprising Government and industry
representatives may look at more judicious ways of enforcing stoppages.
For instance, one compromise is to stop non-localised shutdowns of mining areas –
those not directly connected with the accident – which Amplats chairperson Cynthia
Carroll estimated to have cost her company 100,000 oz in the last financial year.
Production has also been struck by strikes, the most recent at Implats’s lease area in
Rustenberg – although some of the lost production will be offset by using metal held
in inventory.
It also isn’t alone. Lonmin and Royal Bafokeng Platinum (RB Plats) have both
struggled with industrial relations, the latter losing nearly 4,000 4E (four elements of
PGMs) ounces of production and earning a downgrade from Morgan Stanley.
Amplats struggled to meet its production target of 2.6m oz for its 2011 financial year
courtesy of metal in inventories. Aquarius Platinum is also unlikely to see production
growth from its Everest expansion as quickly as has been forecast. “Aquarius is
cautious about the short and long-term production outlook in both South African and
Zimbabwean operations due to widespread Section 54 stoppages and increased
regulatory oversights,’ stated BMO in a recent report.
Against this background, here’s a best effort guess at what to think of SA’s most
prominent platinum stocks.
IMPLATS:
Full-year earnings could be hit hard by the ongoing labour dispute at Rustenburg. But
since it reacts the least to spot prices, it’s the most defensive of our platinum
stocks. Its exposure to Zimbabwean platinum reserves is not really in the stock, so
the downside of negative news relating to indigenisation is not likely to knock the
share. Current CEO David Brown is leaving the company in June. Although an
extremely sound manager, he’s being replaced by Metorex’s Terence Goodlace, who
is highly regarded for his meticulous operational nous.
NORTHAM PLATINUM:
It’s all about the company’s project team. Without its two growth projects,
Zondereinde and the R3.9bn Booysendal UG2 project, Northam is ex growth. If the
team can deliver on project schedules and stay within capex – it’s fully funded –
then Northam will have achieved a first in the SA platinum sector of near-painless
growth. There’s difficult geology at Zondereinde. This is a crucial year. One last
observation, Kazakh company ENRC has a board seat and a minority shareholding,
which could presage a takeover at some future point.
AMPLATS:
The gnawing problem at Amplats – once called “The Big A’ by Aquarius Platinum CEO,
Stuart Murray – is that roughly half of its production is mined from the western limb
of the Bushveld near Rustenburg, where the local Mines Inspectorate’s newly
established office has been handing out work stoppages like fliers at a set of traffic
lights. So it’s most exposed to regulatory risk of all of SA’s platinum miners.
Much turns on ramping up production at Mokgalakwena on the eastern limb of the
Bushveld and Unki in Zimbabwe.
Ominously, Amplats CEO Neville Nicolau seems to be battening down the hatches. He
recently announced a R1bn cut in capital spending to R8bn, and lower sales of 2.5m
oz to 2.6m oz compared to initial estimates of 2.7m oz. Meanwhile, Anglo American
CEO Cynthia Carroll has raised the possibility of a restructuring at the troubled
subsidiary. Worth avoiding.
ANOORAQ RESOURCES:
The company that can’t fail? Anglo Platinum helped create Anooraq by selling it
assets back in 2009 that ultimately had to be repriced several times. In its latest
financial engineering exercise, Anglo Platinum’s empowerment gambit now sports a
new structure, a new balance sheet and an accelerated project pipeline.
In Dawid Stander, Anooraq’s Bokoni Platinum Mines in the northern part of the
Bushveld has a mine manager of some repute. The share hasn’t responded to the
restructuring as one would have thought.
Watch and wait.
DÉJÀ VU
It has been noted that platinum shares are starting to behave like their gold
counterparts, where returns are slim and yield is poor to non-existent. Any residual
capital is poured into the next hole in the ground in an inexorable race for market
share. If that’s the case, then platinum shares become the trading instruments of
professionals only, not the kind of investment to be putting in the bottom drawer.
But it’s a question of perspective. If platinum shares have hit the bottom, it might be
worth stepping in cautiously.
Consider the optimism of James Allan, founder of Allan Hochreiter, which is standing
behind the upcoming listing of Sable Platinum. “We’re listing at what we think is the
bottom of the market, therefore the timing is brilliant for our shareholders,’ says
Allan. “It makes good sense to get in now and ride the share upwards.’
Sable is also raising exploration finance of some R40m, with Allan hopeful it can be
achieved.
That means at least some investors think platinum has long-term potential. It’s worth
noting that Sable is being formed through a reversal into Newcorp Capital, a cash
shell consisting of some R45m that will complement the pre-IPO capital raising.
Taking Allan’s approach, the only way is up for the platinum shares. But if you’ve
been in the shares from when the platinum price was trading at $2,200 in 2007, you
can be forgiven for experiencing a sense of deja vu. By the end of 2008, the price of
platinum was down to $800/oz. It recovered to around $1,800 by mid-2011 but has
generally been on the slide again amid eurozone debt crises and a sluggish US
recovery.
Of course, there’s always the view of veteran analyst David Davis, an analyst at
Standard Group Securities. Although no longer a platinum analyst, he’s an
indefatigable student of supply-and-demand dynamics in precious metals markets.
He recommends buying platinum metal in the short term, possibly through an
exchange traded fund. Why, after all, make the stresses of management part of your
portfolio when all you want is exposure to renewed industrial demand?
– These articles first appeared in Finweek. If you want to subscribe to the digital
format of Finweek visit www.zinio.com.
