What happened to the platinum sector?

First published 29 June 2011.

[miningmx.com] — THERE’S lots of talk of how regulatory and legislative uncertainty, the threat of nationalisation and the strength of the rand are preventing South Africa’s mining industry from participating fully in the latest chapter of the super cycle (not a fashionable term any more but there, I’ve said it).

But of all the lost opportunities, what on earth happened to the platinum sector? In the words of Philip Larkin, the British poet, things have long fallen wide.

Or short. It’s 10 years now since Barry Davison, the former CEO of Anglo Platinum, announced plans to expand the company’s production to 3.5 million ounces from 2.3 million ounces, or thereabouts. In that time, the group has spent R60bn in capital expenditure, but its platinum production is only at 2.6 million ounces. That’s a lot of capital expenditure for replacement ounces and a little expansion.

I’ve heard one cynical interpretation that Anglo Platinum under-estimated capital requirements for expansion and that its parent company, Anglo American, bled Anglo Platinum dry of funding ammunition by insisting on dividends. More specifically, that Anglo Platinum compounded its own expansion problems by handing poor quality “growth ounces” to empowerment groups.

But Anglo is not alone in under-achievement. The problem is sector-wide. According to data provided by Johnson Matthey, the UK-based semi-fabricator, platinum production from South Africa peaked at about 5.3 million ounces in 2006, up from just over 4 million ounces in 2001, but has fallen ever since. Many platinum firms have struggled, quite simply, to build new mines.

Earlier this month, for instance, Impala Platinum announced that its production targets at the Marula Platinum joint venture with Bridgette Radebe’s Mmakau Mining would not be met. Aquarius Platinum has said its Blue Ridge mine, acquired from Ridge Mining, will be kept offline as it was unlikely to make money even though some 75% of the mine has been redeveloped, a step taken originally to make it viable, and safer.

Platinum Australia’s Smokey Hills mine, the Pilanesberg pit owned by Platmin, and Eastern Platinum’s Crocodile River Mine all continue to underperform. And if the basket price of platinum group metals (pgms) does not improve, further capital expansion plans could be halted.

“Such a move would just reconfirm our view that any growth from this sector should be questioned, but it would also likely lead to further, significantly bigger problems longer term as the mines all fall behind on developing new reserves,’ said Leon Esterhuizen in a report for RBC Capital Markets.

Balance sheets of most platinum producers remain under pressure even after significant capital raisings. “Almost unbelievably, against this background every single company in the space continues to talk expansion,’ says Esterhuizen. “The majors in particular continue to stick to their guns that 2011 will see good volume expansion.’

Against this background, there’s the role played by the platinum sector in the execution of South Africa’s empowerment strategy.

Empowerment in South Africa’s mining sector was quite rightly hitched most publicly to the prospects in the platinum industry. Global supply is dominated by South Africa while fundamental demand growth is virtually guaranteed. It really made sense and one would suppose it would be relatively easy to finance empowerment companies in such a scenario.

In fact, many of the red letter empowerment deals were in platinum. Remember 2007 when Anglo Platinum unveiled three simultaneous transactions: the sale of 50% of Booysendal, and a 22.4% stake in Northam to Mvelaphanda Resources for R4bn, and a R3.3bn ESOP representing 1.5% of Anglo Platinum’s shares?

The third transaction was the sale of 51% of Lebowa Platinum (now renamed Bokoni) to Anooraq Resources, together with a 1% control stake in the existing 50-50 GaPhasha, Boikgantsho and Kwanda joint venture projects between the parties. The Anooraq deal price totalled R3.6bn, of which R2.2bn was to be raised in debt by Anooraq.

Anooraq accepted the deal; after all, Lebowa had generated R700m in operating profit the year before and it held the promise of two key growth projects at its Brakfontein Merensky and Middelpunthill UG2 operations. What could go wrong?

At the time, Anglo American described it as “a landmark transaction. which further enhances transformation of the South African mining sector’. The deals were the “creation of two (Mvela and Anooraq) major HDSA managed and controlled pgm producers.’

There was also Incwala Resources, Lonmin’s empowerment play which was meant, like Mvela Resources and Anooraq Resources, to be the platform for a new style of mining house; a mining house for the new millennium. Of these various groups, only Anooraq survives (if you accept Incwala has effectively been taken in-house by Lonmin in a kind of intensive care. or retirement home).

To say Anooraq survives, however, is a moot point. The company is, as I write, feverishly working out its third restructuring which, this time, could see it actually hand back growth ounces from Ga-Phasha to Anglo Platinum. It’s ironic, and a little bit sad.

If you recall, Anglo Platinum’s empowerment structures were a means of avoiding litigation since the company was considering taking the South African government to court in 2002. It decided not to do that, opting for an agreement, to which government assented, that allowed Anglo Platinum to conduct asset level deals on selected mines. In other words, sell all of Lebowa – which soon after saw production halve to 116,000 ounces, costs rise, etc, etc… while keeping 100% of gems like Amandelbult. In retrospect, government shouldn’t have agreed to this proposal but ultimately, it’s Anglo Platinum that’s paying.

Soon after announcing in May that Anooraq would have to bailed out, the platinum counter’s share price rose. That’s because the market knows Anglo Platinum can’t allow Anooraq to fail, or its empowerment credits will be thrown asunder.

Speaking at the Coaltrans conference last week, Radebe, also head of junior mining association Samda, said empowerment just hadn’t panned out. I can’t agree with Radebe’s conclusion that that’s why we should embrace the nationalisation debate, but at this juncture, I’m inclined to agree: empowerment hasn’t worked.