[miningmx.com] — ANYONE holding platinum shares must be wondering
when the pain will end. This was the year platinum shares would, at the very least,
bounce along the bottom, consolidate and then recover in 2013.
There’s no sign of that. In fact, 2012 continues to be grim for platinum, a precious
metal that, lest we forget, was once the darling of South Africa’s mining industry.
Recent share data is descriptive of the difficulties.
The JSE’s platinum index has shed 9% in the first three months of this year.
Considering, however, the index lost 28% in 2011 at a time when the JSE’s general
mining index was only 9% weaker, and the Top40 nearly 1,000 points stronger,
there’s reason to believe the market has recognised particular problems in the
platinum industry; problems discrete from other mining that may be systemic in
nature.
For the time being, SA’s platinum miners are not getting carried away. “At current
rand prices, the industry is marginal,’ said Andre Wilkens, Head of Strategy at
African
Rainbow Minerals (ARM) – a company that produced just under 400,000 oz in the
first
half of its current financial year.
Yet he believes a weakening rand and the recovery of European and even US
economies will stimulate the platinum price again. This may well be, given that the
platinum price is geared to car manufacturers as some 3.25m oz, or about half of
total platinum demand, is used in autocatalysts.
And yet, there’s also the feeling the easy money in the platinum sector has gone.
Platinum group metal (PGM) ore bodies are deeper and more technically difficult and
therefore, costlier to operate.
There’s also the problem with developing new mines. Capital cost estimates have
been undercooked, while the technical challenges have been underestimated. All of
this went unforeseen, or ignored.
“The platinum industry has been bullshitting itself for a long time,’ says a former
employee of a platinum company, who explains that capital expenditure set out by
the platinum producers more than a decade ago should have been allocated as
working costs in the first place. In his estimation, the billions of rand spent as
expansionary capital in the platinum sector have really served only to replace
platinum ounces rather than add new ones.
In fact, this misuse of capital allocations is a methodology common to the sector.
He describes how the company he worked for would frequently “borrow’ from the
capital budget whenever it was short of funds in the operating capital budget.
Certainly, platinum producers were too ambitious in the scale of proposed expansion
forecasts.
It’s often retold that Anglo American Platinum’s (Amplats) executive, in a meeting
with analysts in the early 2000s, passed the comment: “Tell us how much you want
us to mine [platinum] and we’ll dig it up.’
time.’
This was amid an expansion strategy first unveiled in 2000, in which Amplats’s output
was to be increased to 3.5m oz/year from about 2m oz in 1999. It was to cost an
estimated R20bn in 2000 money terms.
Two years later, with the prospect of game-changing empowerment legislation also
on
the horizon, Amplats continued to be optimistic about its growth plans: “As a result
of our ongoing market research, we’re satisfied that our plan to produce 3.5m oz a
year by 2006 remains entirely appropriate,’ Barry Davison, Amplats’s Chairman said in
the company’s annual report of that year.
Davison was spot-on about demand; it was to grow. According to data from Johnson
Matthey, the UK semi-fabricator and market consultancy, gross demand for platinum
alone grew about a third to 7.9m oz in 2010 from 6.2m oz in 2001.
In fact, year-on-year demand for platinum suddenly took off from about 2000,
growing
8.2%. Amplats was completely correct in planning to grow so aggressively.
It was the execution that went awry.
Again, data from Johnson Matthey helps tell the story: by 2006, platinum production
from SA had peaked at about 5.3m oz up from 4m oz in 2001. The country has never
since produced as much platinum with many of the metal’s miners struggling to build
new mines on time, or to plan, or to raise capital for them. In fact, in the case of
Amplats, output has actually gone backwards.
Capital estimates among analysts vary, but the sobering reality is that since 2000,
Amplats has spent between R60bn and R80bn for a net 300,000 oz increase in its
own
production.
It once reached 2.9m oz in production, but is now producing about 2.3m oz of its
own
output. Moreover, the company is undergoing a strategic review of its assets, known
as asset optimisation, which some analysts believe will see it sell mines in which it’s
in joint venture, resulting in a further decline in its annual production levels (in favour
of improving its overall operating margins).
According to David Brown, the outgoing CEO of Impala Platinum (Implats), everyone
misunderstood the challenge.
Amplats is not alone. Failed or restructured platinum projects in SA are almost an
industry pastime. Aquarius Platinum said its Blue Ridge mine, acquired from Ridge
Mining, would be kept offline as it was unlikely to make money.
Production targets planned by Impala Platinum for its Two Rivers project have been
lowered, and Eastern Platinum, a company primarily listed in Toronto, has mothballed
its Crocette project again. As for Jubilee Platinum, a UK-listed firm, its plans to dig
1.1km to build its Tjate mine were abandoned in favour of the less glamorous
discipline of platinum dumps retreatment.
“In broad terms, it’s the capital management that’s the biggest issue,’ says Justin
Froneman, a platinum analyst for Standard Bank Group Securities (SBG Securities).
“The cycle is also taking longer, whether it be labour issues, technical, political. The
easy pickings are gone,’ he says, adding that the exhaustion of quality ounces is
being replaced by platinum that’s deeper.
A lot of money has been lost on platinum ventures. Implats spent R3.5bn in 2007 in
the takeover of African Platinum, which owned the proposed 300 000 oz/year
Leeuwkop mine. The mine never came into being.
But the most spectacular victims of platinum boom Schadenfreude can be drawn
from
the empowerment companies where fortunes were first founded, then foundered.
The apogee of the new “black-owned mining house’ was in 2007 when Anglo
American
unveiled three transactions: the sale of 50% of Booysendal and a 22.4% stake in
Northam Platinum to Mvelaphanda Resources for R4bn; and a R3.3bn employee
share-
ownership programme representing 1.5% of Amplats’s shares.
The third transaction was the sale of 51% of Lebowa Platinum, now renamed Bokoni
Platinum Mines, to Anooraq Resources, together with a 1% controlling share in the
existing 50-50 GaPasha, Boikgantso and Kwanda joint venture projects between the
parties. The Anooraq deal price totalled R3.6bn, of which R2.2bn was to be raised in
debt by Anooraq.
Anooraq accepted the deal based on the fact Bokoni Platinum Mines, while as
Lebowa, had generated R700m in operating profit the year before, and it held the
promise of two key growth projects at its Brakfontein Merensky and Middelpunt Hill
UG2 operations. So what could go wrong? Well, quite a lot, as it would turn out. For
one, Bokoni never generated as much cash flow again; in fact, it dipped with terminal
velocity.
At the time, Anglo American described its transaction as “a landmark transaction,
which further enhances transformation of the South African mining sector’.
The transaction created two major HDSA-managed and -controlled PGM producers in
Mvelaphanda Resources and Anooraq Resources. Both predicated their mining-house
status on the platinum prospects, with Mvelaphanda already invested in 15% of Gold
Fields, and Anooraq with expansion dreams aplenty.
In the case of Anooraq’s Bokoni Platinum Mines, the empowerment deal structured by
Anglo American Platinum has been restructured no less than three times.
The phrase “mispriced deal’ is a bit of a swear word in the corridors of Anooraq’s
Sandton offices, but no matter how you slice and dice the original sale of Bokoni
mines to Anooraq, that’s exactly what appears to have happened. As it turns out,
the
refinanced deal between Anooraq and Anglo American Platinum is a deal the latter
can’t afford to let fail, or risk falling foul of SA’s mining charter.
For some empowerment companies, the best will in the world hasn’t been enough.
Mvelaphanda Resources was delisted last year, its platinum ambitions hived off to
shareholders. What a pity.
The platinum-based mining-house strategy was mirrored elsewhere – with disastrous
results. Lonmin created Incwala Resources, a largely passive investment in platinum
which is now heavily restructured and rehoused in Cyril Ramaphosa’s Shanduka
Resources.
In the case of Incwala, and many other deals in the sector, vendor-financed
structures
were to be repaid with dividend flow, little knowing what lay in store for the platinum
price.
Clearly, the financial and economic crisis of mid-2008 blew industrial demand
asunder,
an outcome that inevitably flowed into sentiment about the platinum sector. It’s a
period from which the platinum sector never really recovered, according to Stuart
Murray, CEO of Aquarius Platinum.
Only the onset of investment demand for platinum in the form of several exchange-
traded funds (ETFs) helped prop demand. Depending on when you invested,
incidentally, shares in physical platinum could have worked out okay for you.
In 2000, the platinum price was trading at $600/oz. By 2007, it had ramped up to a
record high of $2,200/oz before more than halving amid the financial crisis, which
truly hit home in the second half of 2008. That proved a hammer blow for the likes of
Incwala Resources. For the record, the platinum price is currently trading at $1
600/oz, a $200/oz gain this year, and was recently worth more than gold.
And it’s not all doom and gloom.
SBG Securities’ Froneman remains convinced the platinum sector will, eventually,
storm back to prominence. “Demand for platinum is fundamentally attractive,’ he
says.
He also believes that mining difficulties will actually place the platinum market in
balance this year. “Risk to platinum supply is definitely on the downside,’ he says.
“We still like the sector; we see value in it.’
Another optimist is Rene Hochreiter, formerly a top-rated platinum analyst and now a
market participant. Allan Hochreiter, an advisory company he runs with former
diamond analyst, James Allan, is backing Sable Platinum, an exploration company.
“The market will come back. We just have to get through this year,’ he says.
In the meantime, there are some short-term headwinds that may subdue the sector
some time longer. The chronic shift in labour relations on SA’s platinum mines is one.
For years, the National Union of Mineworkers’ influence in the platinum mining sector
was controlled by Archie Palane, Deputy Secretary-General. Unfortunately, the
departure of Palane for the private sector left a hole in NUM’s coverage of the
platinum sector that was never plugged.
In fact, it provided upstart union – the Associated Mineworkers and Construction
Union (Amcu) – with the opportunity to target the platinum sector for new members
among coal-mine workers in Mpumalanga province. Amcu’s activities most recently
came to light in a six-week strike at Impala Platinum’s Rustenburg-based Lease Area,
which eventually cost the company R2.5bn in lost revenue; equal to 120,000 oz or
some 7% of total annual platinum Impala sells.
Another, probably short-term crisis for the platinum sector, is the targeting of
platinum mining by the Department of Mineral Resources’ (DMR’s) safety
inspectorate,
which has led to unheralded stoppages – developments that have worked to blunt
SA
production and remove some 160,000 oz of platinum production in the first three
months of this year. From a market perspective that’s a positive development, as it
helps to ease the expected market oversupply this year. But demand is relatively
poor.
European autocatalyst sales have been sluggish so far this year with registrations of
new vehicles in February, for instance, down 11%, and 10% in the year-to-date.
Overall, European production is forecast to be down 6% to 16.3m units. The
European
autocatalyst sector is hardly the whole demand market – investment and jewellery
demand for platinum is significant – but the loss of SA production led to a price spike
in platinum, and that only serves as reminder of how volatile and jittery the platinum
group metals (PGM) industry has become.
Joel Kesler, Business Development Director for Anooraq Resources, says there’s no
underestimating the importance of Europe to autocatalyst demand. But he also
believes a shift in platinum industry habits must happen. “The industry will start to
do the right thing,’ he says. Farm boundaries have to be removed, and infrastructure
sharing where sensible has to occur. This is evocative of pressures for restructuring
in
the gold industry from the mid-Nineties that, for one reason or another, never quite
happened as anticipated. Perhaps the platinum sector will be different.
“Declining grades, a higher percentage of UG2 ore (deeper, costlier), decreasing
productivity and rising costs with real inflation of about 11% have made the current
position of the platinum sector unsustainable,’ says Kesler. “And the industry can’t
keep relying on macro-factors. The entire industry needs to deconstruct.’
Niall Carroll, who recently resigned as chairman of Royal Bafokeng Holdings, which
owns Royal Bafokeng Platinum (RBPlats), also calls for the “wholesale lowering of
farm boundaries’, although he remains upbeat. “The long-term profitability of the
sector remains intact,’ he says.
His comments about improving cooperation between platinum companies are said
with some feeling – it was RBPlats that was frustrated in its plans to conclude a
cross-border deal with Implats in 2010 by Amplats. Perhaps the latter’s optimisation
strategy is like turning a new leaf.
“I think Amplats can help lead the industry,’ says Kesler.
As with Froneman, however, Hochreiter believes the demand side of the platinum
business is extremely positive viewed through a longer time horizon.
“Platinum is a legislated metal,’ he says of US and European regulations that impose
increasingly tough restrictions on car emissions requiring more and more platinum to
do the job in autocatalysts.
Attempts to substitute platinum and palladium with electric engines, for instance, are
likely to prove in vain, he says.
“The internal combustion engine is here to stay as its emissions will continue to be
cleaned up. By 2020, when the world is flying again, people will be sucking up
platinum and palladium until the cows come home,’ says Hochreiter.
– This article first appeared in Finweek. If you want to subscribe to the digital
format of Finweek visit www.zinio.com.
