PGM cash burn to top $400m without more restructuring

DESPITE a promising ripple in the price of palladium, a much hoped-for recovery in platinum group metal (PGM) prices has so far not materialised. This could have dire results for South Africa’s miners of the metals.

According to a report by RMB Morgan Stanley, published on March 13, mines owned by Sibanye-Stillwater, Impala Platinum (Implats) and Northam Platinum’s Eland mine could burn about $430m in cash, after stay-in-business expenses, by calendar year-end – a staggering sum.

Only the price of rhodium has improved since the penning of the report. The metal is currently trading $125 per ounce more today than in mid-March. Palladium, at about $1,014/oz, is largely unmoved and, alarmingly, the platinum price is weaker. A resurgence in automaker purchases would certainly change the picture, but accepting the bank’s snapshot, a portion of 5.2 million oz in annual production is vulnerable.

To be fair to PGM miners, they have stated their willingness to make further production cuts in the absence of price recovery. Sibanye-Stillwater cut about 50,000 oz in annual PGM output and declared it was ready to do more; Implats, which cut around 60,000 oz in output, said a further 210,000 oz in production could be phased out.

But it doesn’t make for a pretty picture. Implats’ Bafokeng and Rustenburg sections are set to be $190m cash flow negative at current prices and in the absence of additional cost cutting. Sibanye-Stillwater’s PGM operations will be about $170m cash flow negative while Eland will be lose about $70m this calendar year.

“On a forward-looking basis (updating for new guidance) the industry remains marginal at spot, however with a large dispersion in economics by mine,” the bank said.

Commenting on Sibanye-Stillwater, BMO Capital Markets’ Raj Ray estimated that despite some initiatives undertaken by the company, which includes a 50,000 ounce a year cut to PGM production, the company would burn about $461m in cash this year. This was owing to lossmaking production at its US PGM mine Stillwater and Sandouville, a nickel refinery in France.

These operations were “… a significant drag to the company’s profitability and cash flows and management might have to undertake drastic steps if we do not see a turnaround in PGM prices in the next six to 12 months,” said Ray.

He also expected Sibanye-Stillwater to sail close to the wind on its leverage convenants with lenders. “Assuming current spot commodity prices we see potential for Sibanye-Stillwater’s leverage ratio (net debt/adj. EBITDA) to increase to ~2.4x, which is just below the debt covenant requirement of 2.5x”.

“If spot persists, we expect further restructuring including potential supply cuts in August 2024, notably at Stillwater, Marikana, (Sibanye-Stillwater mines) Bafokeng, Impala Rustenburg and Two Rivers (a JV between Implats and African Rainbow Minerals),” said Adrian Hammond, an analyst for Standard Bank Group Securities.