THE rally in platinum producers Anglo American Platinum (Amplats), Impala Platinum (Implats), and Lonmin has been nothing short of impressive this year. The obvious question is: how long can it continue?
In the last week there’s been evidence of an easing in the shares prices, a development analysts have been forecasting since April. They argued then that the shares were pricing in improvements in the price of platinum group metals (PGMs) that were out of whack with what most expected for the medium term.
In a note on April 14, Macquarie acknowledged the positive impact of Amplats’ restructuring efforts, which it said it would support positive cash flows. However, it thought the price improvement in the company’s share had been over-cooked.
“The metal prices reflected in the share prices, however, exceeded our assumptions significantly and we maintain our under perform rating on the share,” said Gerard Engelbrecht, a mining analyst for the bank.
To put this into numbers, Engelbrecht lifted the target price on Amplats to R235 from R165/share in recognition of the restructuring – which has seen it announce the sale of its Rustenburg Platinum Mines to Sibanye Gold – but the share price is currently around R385.30/share. That’s an improvement of 112% in three months, although there’s been a decline of just over 3% in the last seven days.
Other platinum counters have recorded a similar improvement. Implats is trading at R50.50/share, a 18% improvement over the last 30 days while Northam Platinum and Lonmin are 7% and 41% higher over the same period.
The factor behind the share price increases is mostly the platinum price which was last at $1,063/oz. This is $171/oz more than the average spot price – $892/oz – estimated by RMB Morgan Stanley in a report written around the same time as Macquarie’s.
Given a rand of 14.98 to the dollar, this translates into revenue of R15,924 per platinum ounce which gives the industry the blush of more profitability although a significant swathe of the sector remains cash flow negative after capital expenditure even with a platinum price close to $1,000/oz.
Writing in March, Citi analyst Johann Steyn said downward pressure on platinum and its sister metals palladium and rhodium would reassert itself before long owing to some long-term structural issues in the industry that have formed over a period of years.
One factor is the growth in above ground stocks which the World Platinum Investment Council estimated stood at 2.32 million ounces at the end of 2015. Another is growth in autocatalyst recycling which supplies about 18% of demand as well as supply growth. SA platinum miners may be economically constrained but technically there is over capacity.
“We believe these four factors will continue to cap a sustained rise in platinum group metal prices above our forecast profile over the next three years,” said Steyn in his report.
Implats R5.5bn bonds
Responding off-the-record a few months ago to a question about its ability to tackle its balance sheet, an Implats executive responded testily: “We’re not doff” – adding that the company would match its spend against its capital management duties.
That may well be true, but the question of Implats’ ability to redeem R5.5bn in convertible bonds, due by 2018, has been raised again; this time, by Goldman Sachs in a recent report following an earlier BMO Capital Markets report which commented on the debt.
Goldman Sachs analysts, led by Eugene King, said: “The biggest concern investors have is Impala’s ability to redeem the R5.5bn convertible bond due 2018. Our our estimates (and spot) the company will just have enough cash to meet the obligations – which implies that it will have to tap other sources of funds”.
As of the half-year point this year, Implats has R4bn in debt facilities available to it and that renewal of its revolving credit facilities and therefore the redemption of the convertible bond should be achieved. Unless ….
