Decision time looms at AngloPlat

[] — SPECULATION is rising in platinum mining and banking circles about possible big structural changes in the offing at Anglo Platinum (AngloPlat) – the world’s largest platinum mining group.

According to one source certain banks – one of them with close links to Anglo American (Anglo) – have recently been sounding out other platinum producers about their willingness to participate in deals to buy assets that could be put up for sale by AngloPlat.

The background to this situation is said to be a heated debate between Anglo CEO Cynthia Carroll and financial director Rene Medori over the future of AngloPlat and the extent to which Anglo should be prepared to prop it up financially.

Reason is said to be Medori’s extreme reluctance to pump any more money into AngloPlat which may need to hold a substantial rights issue in the near future.

AngloPlat management estimated in October – when the group released its third quarter production report – that its net debt was expected to reach R21bn by end-December.

Most of that has been provided by Anglo which owns just under 80% of AngloPlat and last year agreed to boost the debt facility available to AngloPlat to above R13.5bn.

Should AngloPlat go for a rights issue the obvious move would be for Anglo to convert its loans into equity but the group needs the cash for, amongst other things, propping up its other major problem child which is diamond group De Beers.

Anglo has major financial problems of its own which have led it to pass – so far – two dividend payments.

AngloPlat investor relations executive Anna Poulter did not return calls. Anglo American spokesman James Wyatt-Tilby declined to comment when approached.

The situation may become clearer on February 8 when AngloPlat releases its 2009 financial year-end results. The group published a trading statement on January 15 saying headline earnings would be between 89% and 99% lower.

That’s also the date on which AngloPlat has stated it will announce its recommendation on the various options being looked at to restructure its balance sheet.

Sources indicate one of the options being looked at is a downsizing of AngloPlat to cut the group back to its profitable operations.

Not only would that restore healthier profit margins more rapidly but it would bring in cash through the sale of assets and also help control AngloPlat’s huge capital expenditure burden.

That’s one of the burning financial issues at the group which has spent R40bn on capex in the five year period from 2004 to 2008 for no tangible reward so far.

Capex for financial 2009 was estimated in October at R9.7bn “excluding capitalised interest’.

In return for that outlay shareholders have watched production from AngloPlat’s own mines drop from 2.3 million ounces (m oz) of refined platinum in 2004 to 1.95m oz in 2008.

The group has compensated for this shortfall through purchases of metal in concentrate from other platinum mining companies. These have risen from 127,000oz in 2004 to 440,000oz in 2008.

That was not the outcome envisaged by former CEO and chairman Barry Davison when he announced in 2000 that AngloPlat’s strategy was to increase the size of the global platinum market and expand its own production to fill that growth. He set an annual production target of 3.5m oz by 2005.

There are a number of implications that would flow from a decision to cut AngloPlat back to a smaller operation.

One of the key motivations behind AngloPlat’s expansion programme was to re-assure platinum consumers that sufficient metal would be available to meet their needs at a time when demand was forecast to rise sharply.

Doubts over future supply can result in damaging price spikes such as happened during 2008 because of the Eskom crisis.

Sharply higher prices plus uncertainty over supply also spurs research into finding cheaper alternatives to platinum for its main application which is in the autocatalyst used to clean up engine emissions.

Extreme volatility in the platinum price can also badly affect demand from the jewellery industry which is the second largest consumer of platinum.

Some platinum industry observors are already predicting a price spike later this year or during 2011 caused by the production problems on the major SA mines coupled with rising demand as the global economy recovers.

Rising investment demand is also locking up increasing quantities of platinum in exchange traded funds (ETFs). That adds to the volatility of the platinum price both on the upside and on the downleg when the ETF investors decide it’s time to head for the exits.

According to one analyst who requested anonymity the market rumours over asset sales by AngloPlat appear to have some credibility.

Another – RBC Capital Markets analyst Leon Esterhuizen – believed any disposals would be minor and aimed at “streamlining’ the group.

He commented, “we believe AngloPlat management is not happy with the present group structure in terms of the various strings attached to it.

“We think AngloPlat would like 100% control of the assets it operates and may be looking to sell its stakes in some of the joint ventures that it has set up in recent years.’

A platinum industry source reckoned attempts to sell wholly-owned assets would be difficult given the complex structure of AngloPlat’s Rustenburg operations.

Stepping back and looking at the bigger picture throws up the issue of Anglo American’s continued commitment to South Africa.

The group has just announced plans to sell a string of base metal assets after previously getting out of AngloGold Ashanti and shifting other assets into Exxaro Resources and Kumba Iron Ore.

AngloPlat is its most important remaining asset in South Africa as well as one of the most important assets owned by the group.

But, as one analyst puts it, ” if you can’t turn AngloPlat around and you face a strong rand/dollar exchange rate scenario which offers little hope of relief on the revenue front..what’s the point?’