[miningmx.com] – IT seems incomprehensible that the question of
cash flow and liquidity should raise its head in the South African platinum industry
after years of basking in the glow of record prices and ambitious expansion plans.
But that’s exactly what’s happening. Aquarius Platinum has 12 months of cash left,
and while Lonmin is unlikely to break any bank covenants, it’s nonetheless looking
to refinance its balance sheet.
But the most potent signal that a large slice of the platinum industry is unfeasible at
current production levels is provided by Anglo American Platinum (Amplats), the
balance sheet of which has swung into a level of precariousness within months.
In the six months to June, Amplats recorded a cash outflow of R1.8bn which, coupled
with capital expenditure of R3bn, has increased net debt to R9.5bn from R3.7bn at
the end-December point. At current production – which is likely since any
restructuring will not take effect until next year – and assuming similar pricing
levels, Amplats will remain cash-flow negative by the year-end.
In fact, analysts estimate Amplats could be cash negative to the tune of R4.2bn by
the year-end, partly owing to full-year capex of R7.3bn (which was adjusted
downwards recently). Amplats has R15bn in balance sheet headroom, but it’s
unclear whether there are material convenants it might break along the way,
especially as earnings remain pressured.
Amplats argued in its interim statement earlier this week that in 2008, it recorded
gearing of between 40% and 50% and that current gearing was only 19% by
comparison. This is quite true and valid, but it does remind one that Amplats, and
Anglo American, have trodden a road of restructuring and recapitalisation before;
very recently, in fact?
From 2008 to 2010, some 19,000 jobs, mostly contractors, were taken out of
Amplats’ system. There was also deep-vein surgery on the balance sheet with a
R12.5bn rights issue, fully underwritten by Anglo American, the aim of which was to
cut then-debt of R22.8bn. One only supposes Anglo American will ride to its
subsidiary’s rescue again now should it become necessary.
In any event, another downsizing exercise is necessary at Amplats and within the
rest of the industry. The expansion plans of several years ago, along with the
explosion of junior mining efforts, now appears to have constituted a period of
decadent excess and unchecked over-confidence. One wonders, however, just how
profound the restructuring will be from an industry-wide perspective?
At a platinum price of $1,400 per ounce, analysts suggest some 300,000 to 400,000
ounces could be cut from industry output. This would comprise 200,000 oz from
Amplats; 140,000 oz from Aquarius Platinum, while Lonmin, has deferred between
100,000 oz to 200,000 oz of future production, in terms of its ramp-up programme,
over the next two to three years. Impala Platinum is still to report. The Bokoni
project owned jointly by Amplats and Atlatsa Corporation, will not be affected,
Atlatsa has said.
Is this enough to breathe life back into the platinum price? There are limits on what
the producers can achieve; Amplats in particular. It can’t idle too much production or
risk closing a smelter. Amplats also has to consider closure costs.
But the great imponderable is the political and socio-economic opposition Amplats,
and other platinum producers, might receive from significant cuts; especially against
a backdrop of inter-union rivalry that won’t hestitate to seize on the cost-cutting in
order to win members and their fees.
Oh, to be a fly on the wall at the meeting last month between platinum producers
and Government, a discussion that fell under the auspices of MIGDETT. Will
Government be unpleasantly surprised by the extent of industry cuts?
Meanwhile, spare a thought for mid-cap platinum stock, Aquarius Platinum; it looks
at risk of becoming a major casualty in the current cost and pricing climate. Even
with a third of its platinum group metal (PGM) production idled, it might be forced to
cut yet more of its output. That’s if Amplats, a joint venture partner in Kroondal,
decides it can’t tolerate the unprofitable ounces from that mine. That would leave
Aquarius with only Mimosa Platinum Mines, subject to Zimbabwean indigenisation
laws, in terms of substantive platinum production.
