TRADING updates from Impala Platinum and Anglo American Platinum this week are telling the story of last year’s wipeout in share prices. According to RMB Morgan Stanley dividends will be cut to “minimal levels” and capital expenditure will be slashed when the companies publish their definitive numbers later this month.
The year 2023 was not a good time to be a platinum group metals (PGM) miner. Amplats, Implats and Sibanye-Stillwater shed between 64% and 36% in value as prices for palladium and rhodium cratered. After a hopeful ripple in the palladium price during the first two weeks of January — likely driven by traders covering short positions — another price correction followed. Share prices so far this year have been a continuation of last year’s form, slipping by between 12% and 14%.
So much for the rainbow following the deluge of bad news. Nedbank Securities precious metals analyst Arnold van Graan has told clients to be underweight PGM shares. He foresees industry pain and for miners to continue to underperform the metal basket price, which will be volatile.
“This year could be tough for PGM producers from an operational and cash flow perspective,” he says. Sector restructuring, and with it some heavy one-off charges, will hurt short-term cash flow. Large restructuring will also dampen investors’ confidence in PGM miners’ ability to capitalise on a recovery, once it comes. Even then, it won’t be on the scale of the price rises in rhodium and palladium between 2019 and 2022.
Estimates of the growth rate in electric vehicle (EV) consumption, which Van Graan acknowledges may be “overly optimistic”, is one of the main factors keeping the lid on a PGM price recovery. For some, only a significant change in recent EV/internal combustion engine (ICE) trends will trigger a sharp and sustained recovery in PGM prices.
Van Graan considers this unlikely but opinions are divided, including an intriguing view that analysts have been counting EV consumption incorrectly. If the data is spliced in such a way that hybrid sales are recategorised as ICE — on the basis that they consume some PGMs — there’s a different outcome. On this basis ICE vehicles will continue to grow, albeit by a marginal 3%, says Standard Bank Group Securities analyst Adrian Hammond.
Growth of 3% in ICE consumption is hardly an investment case for PGMs, he says — but other factors such as metal substitution, increased autocatalyst loadings (in line with emissions legislation in places such as China) and supply cuts lead Hammond to “a bullish conclusion”, particularly for platinum and rhodium.
But he still thinks the current earnings consensus for platinum miners is too high. “The upcoming reporting season might begin with a shock to the market given our expectations,” says Hammond. While outright shuttering of mines is unlikely, Standard Bank expects a major reallocation in capital and a focus on credit lines, given the metal prices. Production downgrades are also likely.
UBS also thinks year-end and interim results next month will be worse than expected. “After material underperformance in 2023, the risk/reward for the PGM miners has improved with the PGM basket price finding a floor, but the equities still face negative earnings momentum, unattractive dividend yields and potential for further operational disappointments which could weigh in the near term in the absence of a price recovery,” says UBS analyst Steve Friedman.
Implats to regroup
As for the individual shares, perhaps the company with the most to do — and it’s hard to choose which has the most — is Implats. The group suffered a blow to morale after the disastrous underground accident at its Rustenburg 11 shaft, which cost the lives of 13 miners. Morale is also low at Royal Bafokeng Platinum(RBPlat), the firm Implats bought after an acrimonious tug-of-war with Northam. An underground sit-in at RBPlat shafts in December suggests a communication rebuild is in order at a time when jobs are being cut.
Sibanye-Stillwater’s Neal Froneman faces challenges of a different order. Not a PGM-only miner owing to its gold output, the company raised the hackles of investors last year after issuing a $500m bond for capital expansion in battery metals. At the same time, the group will expand on this week’s news it would cut up to 60,000 oz in annual PGM production and halt the expansion of its US mine Stillwater.
Northam remains Standard’s top pick. “At spot the company can return dividends and remain cash break-even,” says Hammond. “Northam has become the flagship producer and premium rated PGM stock. Its relative outperformance as the sector approaches trough earnings could continue.”
A version of this article first appeared in the Financial Mail.