Rand swings hurting growth, says Aquarius

[miningmx.com] — AQUARIUS Platinum expects the relatively low rand basket price for platinum group metals (PGMs) to persist, a view reflected in its decision to shut the R700m to R1bn Blue Ridge Platinum project at a write-down cost of $159m (R1.8bn) as well as cease operations at its Marikana 1 shaft.

Both shafts have been deemed uneconomic amid a mere 10% improvement in PGM prices in rand terms in the company’s last financial year versus an 18% increase in dollar terms. “Even in the last week, we’ve seen massive swings in the rand price for the PGM basket,’ said Stuart Murray, CEO of Aquarius Platinum. “The volatility is unprecedented and it makes us behave very cautiously,’ he added.

Aquarius Platinum approved a dividend of 4 US cents in the second half of the financial year, equalling the payout in the first half of the financial year, and taking the full-year dividend to 8 US cents. This represents a 2.5% dividend yield and is some 2 US cents higher than the previous financial year. Said Murray: “We are neither upbeat nor downbeat. We think things will just amble along.’

Pretax earnings increased to $203.2m in the year ended-June from $145.1m previously as revenue jumped 45% to $682.9m. However, Aquarius reported a net loss of $10.4m following the impairment.

The likely continued strength of the rand – which gained 12% against the dollar during Aquarius Platinum’s financial year – would spell bad news for new platinum mines in South Africa, Murray said. “It’s hard to find an incentive for digging new vertical shafts in South Africa. Greenfields developments are unlikely unless shareholders want to dig deep into their own pockets,’ he said.

Risk to Aquarius’ balance sheet was the key reason for suspending the redevelopment of Blue Ridge Platinum. Said Murray: “Some R700m to R1bn would have to be contributed by shareholders . The risk to Aquarius’ balance sheet was just too great,’ he said. A contribution from Imbibi, Aquarius’ 50% joint venture partner at Blue Ridge, was also unlikely. About 80% of labour employed at Blue Ridge was deployed elsewhere with the balance taking voluntary retrenchments, Murray said.

The view from analysts, however, is that Aquarius Platinum represents a growth stock. They are also informed by the hammering the stock has received this year which is trading well below their target levels of upwards of R40/share. Aquarius is currently trading at R26,59/share having shed 25% since January.

Commenting on growth prospects, Murray said production would be 15% higher in the current (new) financial year at 550,000 oz (attributable) – a forecast he said may have given himself “a stick to beat myself with’. Demand for platinum was recovering in the key segments and he agreed with Anglo American which said earlier this year that platinum had been mispriced.

Analysts agree that Aquarius Platinum represents among the best growth prospects in the South African platinum sector following deals announced earlier in the calendar year in which Aquarius secured Afarak Platinum and Booysendal South for a combined R1.9bn, and increasing resources to just below 50%.

Said one stockbroker: “Aquarius Platinum’s recent two acquisitions – Afarak Platinum and Booysendal South – at below average USD/resource oz prices, have positioned the company well for medium-term growth. In addition, we believe the acquisitions provide low-capex lift extensions which is not easy to achieve in the maturing South African Bushveld Complex’.

Booysendal South contains 31.1 million ounces of platinum group metals which on its own lifts Aquarius Platinum’s current resource base 24%. In addition, Booysendal South extends the life of the adjacent Everest mine to 30 years from the current eight, and allow a small increase in annual production. Completion of the deal is only due in the second half of 2012, however.

MacQuarie Research said today that there had been a poor operational performance in the 2011 financial year, but Aquarius had addressed some primary concerns. “We feel that the recent transactions undertaken by the company (Afarak and Booysendal South) have addressed the short asset life risk which was previously a primary concern,” it said.

Said RBC Capital Markets in a recent report: “It remains one of the few South African PGM companies that has been able to deliver growth, something we believe it is set to do again in FY12.’ The stockbroker also believes Aquarius Platinum has huge potential upside after taking a hammering in the markets.

Massive swings in the rand basket price of PGMs made planning “tough’ with gross margins oscillating between 10% and 20%, or even 30% when the rand weakened, said Murray. “Basically it makes life quite tough but we will be doing the things miners should always be doing such as strong cash management, improving efficiencies and productivity.’ Contracts with contractors might also be scrutinised in the pursuit of efficiencies, Murray said.