THE Association of Mineworkers & Construction Union’s (AMCU’s) expectations of a new wage deal for its platinum miners significantly over inflation will be high – and justifiably so, it might be argued (at least by it).
The inescapable fact for the platinum miners – generally speaking – is that the sector is pretty cash-flush. The price of platinum may be bumping along the bottom, but rhodium and palladium prices are in fine fettle. Palladium, at about $1,504 per ounce at the time of writing, is about a third higher since the beginning of 2018 – the year in which its dollar price exceeded that of platinum. Rhodium is also at handsome levels.
According to René Hochreiter, a PGMs analyst for Noah Capital, the deficits in rhodium and palladium driving the price are a structural phenomenon with many years ahead of them. “Deficits in palladium and especially rhodium will tip PGMs into a serious deficit from 2020 until around 2026,” he said in a recent note.
“We see total PGM demand in deficit until 2025 with a combined deficit of over 2.4 million oz in 2020 and over 1.8 million oz in 2021,” said Hochreiter of the entire PGM basket.
Given that most PGM producers have become more cost competitive since about 2010 following market declines that precipitated restructuring – with the exception of Impala Platinum (Implats) which is in the throes of restructuring its Rustenburg assets now -, higher pricing is leading to significant free cash generation.
Christopher Nicholson, an analyst for RMB Morgan Stanley, estimated in a recent note that of the five PGM stocks covered by the firm, total free cash generation of some R33bn was expected over the next two years.
This raises the happy problem of sensibly allocating the cash which, incidentally, doesn’t seem headed for project work. There’s little appetite for more production growth. “Industry capex remains near cyclical lows and whilst we think there may be some upside risk to our stay-in-business capex forecasts, we do not yet see signs of an increased appetite among producers for new mine development,” he said.
As forecast by Nicholson, Amplats gave no indication it intended to alter its dividend policy, which had already been jacked up to 40% of earnings from 30% at the end of its previous financial year. A share buy-back policy is also unlikely in the future considering how that might affect the free-float of shares (those not already owned by Anglo American).
Nonetheless, Amplats is expected to generate R12bn a year in free cash flow and dividend repayments of some R11.5bn over the next two years assuming the 40% earnings payout. Net cash is expected to grow to R17bn by December 2020, excluding a R6.1bn customer prepayment that may fall due in 2022.
As for Implats and Northam: the latter is likely to buy back the shares of its empowerment partner, Zambezi Platinum, whilst buy-backs are still a possibility at Implats notwithstanding the early settlement on July 17 of convertible debt instruments that would have fallen due in 2020. It may resume dividends.
Both Royal Bafokeng Platinum (RBPlat) and Sibanye-Stillwater will channel cash they get from the improved price deck to their respective balance sheets which are heavily loaded. RBPlat’s higher-than-expected interim loss will be a concern as it so far indicates that its Styldrift project is proving more expensive to ramp-up than expected.
VALUE IN STOCKS?
This relative balance sheet health has been reflected in the way the shares have traded.
Macquarie’s Yatish Chowthee says shares in Amplats are currently over-valued in a demonstration of quality coming at a steep premium. At Implats, Northam and RBPlats, however, there is upside at current spot prices.
“We think these stocks have compelling investment cases, spurred on by our price deck lift, which adds the additional oomph in driving our stock upgrade,” he said of upgrades to neutral in each of the three companies.
The biggest leverage, however, is for Sibanye-Stillwater. “Running spot prices through our models shows further upside to our earnings and valuation forecasts of which Sibanye-Stillwater’s earnings rises +32% and valuation increases by more than 100%, again the demonstration of the company’s operational and financial gearing.
“We are still wary of Sibanye-Stillwater’s balance sheet constraints, and continue to believe the stock offers short-term opportunistic trades,” said Chowthee.
Getting back to AMCU and other unions, this message of cash generation will not be lost on the likes of Joseph Mathunjwa, the union’s president. It’s also interesting that the tone of platinum executives such as Chris Griffith, CEO of Amplats, is not to expect a disruptive wage negotiation period. The companies are well placed to agree good deals.
As Griffith told Miningmx in April: the company is always likely to pay above inflation wage increases – a view he modified at the firm’s interim results presentation on July 22 when he observed that prices go up; and prices go down, suggesting the group will continue to drive a hard bargain.
