[miningmx.com] — JP MORGAN Cazenove has rung the alarm over the profitability of South Africa’s platinum producers following an “unprecedented slump” in platinum production during October.
The fall in production was revealed in numbers released by Statistics South Africa on Thursday, which reported a year-on-year drop in platinum group metal (pgm) production of between 27.3% and 36.3%.
JP Morgan analysts Steve Shepherd and Allan Cooke said follow-up interviews with the platinum companies had confirmed a “sharp acceleration” in safety-related Section 54 stoppages in the Rustenburg region enforced by the Department of Mineral Resources (DMR).
Platinum mines in the Rustenburg region on the western limb of the Bushveld Complex accounted for around 80% of South Africa’s total pgm production in 2010.
The analysts have linked the upsurge in stoppages to the establishment of a new Principal Inspector’s office at Rustenburg. Previously this region was overseen from the DMR’s Klerksdorp office.
The new office is responsible for platinum operations from Northam Platinum to Eland Platinum.
“We gather that the DMR’s activity in eastern and northern Bushveld has not been abnormal,” the analysts said.
Shepherd and Cooke said it was not yet possible to verify the Stats SA data from the platinum companies which publish production numbers, either quarterly or six-monthly.
“From our broad discussions with the major and mid-tier producers, we find it hard to see how the reported production decline was derived – it appears extreme to us,” they said.
“This said, it seems that there has probably been a material decline in production from the Rustenburg region – possibly of as much as 10% to 20% in October. Moreover, we gather that serious production disruptions may in a number of cases run into November.”
The analysts pointed out the impact on mine profitability of such production interruptions “would be profound” as most of the mines have a high level of fixed costs – probably around 70% on average.
They quoted a mine manager who stated, “we have about 23 full production days in an average month. We cover our costs after about 18 days and make our profit from days 19 to 23. If we are unable to produce on those days then we cannot make a profit.”
The analysts said the negative implications from this situation included “immediate job losses and a reduced opportunity for job creation/preservation in the future”.
The reasons were that the viability of existing marginal operations could be called into question while planned capital expenditure – such as the construction of a major new shaft system – could be reviewed given the uncertainty over maintaining planned production volumes.
“If cash flow is crimped, the funding of capital projects can become distressed,” the analysts said.
They also pointed to losses of tax and royalty revenue to the State because “the mines pay tax based on cash operating profit less capital expenditure. Sub-optimal production volumes could lead to materially lower tax receipts for the fiscus”.
The analysts queried whether the DMR’s actions were justified, stating “we believe that possibly some of the issues might have been resolved safely without recourse to stop orders.
“Indeed, one of the executive we interviewed in this context expressed a view that the production disruptions were leading to a higher incidence of minor accidents.”
The analysts pointed out the rise in work stoppage orders had resulted from increased unannounced or surprise mine inspections which were not directly or necessarily linked to accidents.
Turning to the investment implications the analysts commented “we are concerned about the outlook for profits for the platinum miners.
“Were the miners to be constrained/prevented from achieving optimal production volumes on an ongoing basis due to stoppages, there would be negative implications for profits and valuations.
“The data to hand suggest to us that there could be some downgrades of earnings per share forecasts as the mining companies begin to report their production outcomes, commencing early February 2012.
“We are currently in the process of considering how to factor the latest production data released by Stats SA into our models now, and on an ongoing basis.
“One thing is for certain, it cannot lead to upgrades. We are also mindful that the rand pgm basket price has stagnated in 2011 at around R325,000/kg – a level that cannot sustain the industry in SA.”
