SA platinum in troubled waters

[miningmx.com] — ANYTHING less than an annual output of 2.6 million
ounces from Anglo American Platinum, which reports its fourth-quarter production
figures on Thursday, will support the growing perception that the South African
platinum industry is headed for troubled waters.

Analysts and fund managers polled by Miningmx said the flow of negative news from
the platinum sector pointed to fundamental cost and regulatory problems. Moreover,
industry-wide production growth was proving difficult to achieve notwithstanding the
capital set aside for it. In fact, the bulk of capital expenditure was aimed at
maintaining output or for stay-in-business purposes.

“There’s no doubt the sector is in a challenging space,’ said Neil Young, a platinum
analyst for Coronation Fund Managers. “The regulatory environment ‒ especially in
the Rustenburg area ‒ has been stepped up, and there’s an element of truth to the
view that it’s becoming more difficult to mine [platinum],’ he said.

Section 54 stoppages ‒ where production is halted in the event of a fatal accident ‒
are the result of well-intentioned legislation, but they are hurting production volumes
without seeming to make the mines any safer. Although it may seem cynical,
especially in view of a commitment to zero tolerance for underground accidents of
any kind, platinum mining companies are budgeting for Section 54 stoppages.

“Anything less than 2.6 million ounces for Anglo Platinum this year would be a bad
result,’ said Justin Froneman, a platinum industry analyst for Standard Bank Group
Securities in Johannesburg. The omens don’t look great.

Amplats said in a trading update on January 19 that full-year headline earnings to
end-December would be between 24% and 34% lower. This was owing to a once-off
charge related to a community scheme, but Amplats also alluded to cost inflation and
work stoppages as contributing factors.

It may make up its 2.6-million-oz target by releasing metal from its pipeline, said
Froneman, but the figure to watch is what the company has actually produced. “The
fundamentals have changed for the industry,’ he added. “There’s now a
recognition that platinum producers are firmly price takers, not price setters.’

The platinum price has not helped matters. Depressed consumer activity had led to a
decline in car purchases. “The platinum price is slightly below where it should be, but
we’re not seeing it at the moment,’ said Young.

Amplats is not alone in its distress. The resignation of Impala Platinum CEO David
Brown is indicative of pressure in the industry.

Brown told Miningmx the pace of the platinum industry in South Africa is
“relentless’. For its part, Impala is also expected to be behind the previous year’s
production by some 20,000 oz, prior to this week’s stoppage among 5,000 rock drill
operators at its Rustenburg mine, according to Froneman. Impala’s estimates are
that rehiring the RDOs could take two weeks, during which time output would be
severely interrupted.

“I don’t think they’ll [Impala] make that production back,’ said an analyst who, in
terms of company policy, cannot be quoted. To compound matters, a strike has also
broken out at Impala-controlled Zimbabwean platinum miner, Zimplats, amid claims
the company should compensate workers for power costs.

Lower-than-forecast production figures and runaway cost inflation are not restricted
to the major mining companies, operating off high fixed-cost bases and high volumes.
Eastern Platinum this week said fourth-quarter production at its Crocodile River mine
totalled the lowest of any quarter in its financial year at some 19,854 oz; 12,898 oz
lower than in the 2010 fourth quarter at a time when the company should be ramping
up.

Liston Meintjes, a fund manager for Abercrombie Asset Management, said the
platinum industry had probably hit rock bottom. He was slightly more optimistic about
the coming year, however: power increases are unlikely to be as steep, and he
thinks autocatalyst sales should improve.

One way for South Africa’s platinum miners to improve cost controls is to increase
production ounces, but this has proved difficult in the past.

Amplats has spent roughly R60bn since it announced plans to grow production to 3.5 million oz more than a decade ago. Output has only grown 200 koz, however.
Similarly, it is expected to spend R50bn over the next five years. “If the company
adds another 300 koz that would be a lot,’ said Froneman, who had commented that the majority of capital spent on South Africa’s mines was to maintain output.