ROCKETING platinum group metal (PGM) prices, especially palladium, is good news for the South African government as well as for shareholders of the companies that produce them.
Government is not often mentioned in the same breath in a discussion about shareholder returns, but it benefits significantly from a strong financial performance by the sector (if only Government officials would recognise it more when it came to policy).
Rand-based prices for a number of South African metals and minerals were significantly higher in 2019 year-on-year: up 38% for the PGM basket (platinum, palladium and rhodium); 20% higher for gold whilst iron ore was 46% higher. The only down side was for thermal coal where export coal prices fell 22% but have started to record an interesting bounce this year.
This has been reflected in the anticipated tax take. According to RMB Morgan Stanley, corporate tax paid by Anglo American Platinum (Amplats) will be about R5bn for 2019 whilst Kumba Iron Ore will pay close to R10bn. There are also important contributions from Sibanye-Stillwater, Impala Platinum and Assore, an investment holding company that has access to the manganese of the Northern Cape province.
The total tax take for the sector is about R27bn in 2019 up from about R18bn in the previous year. The numbers could have been better if not for certain capital allowances provided for previous years of losses incurred by mining firms, such is the commodity cycle.
“The single largest boost to the take take arises from the PGM industry,” said RMB Morgan Stanley analysts in a report. “We estimate that the increase in 2019 taxes will possibly be less than would otherwise been expected due to the dampening impact of carried forward capital allowances and assessed losses from prior years,” it said.
Nonetheless, 2019 was a very good year for the mining sector and stakeholders, including unions which extract wage increases in the PGM sector, well in excess of inflation. And these numbers look chicken-feed compared to the likely contribution in 2020 provided gains made by certain minerals are sustained.
Spot prices surged in January: up 43% for PGMs; 11% for gold whilst iron ore has been flat. As a result, Amplats’ tax take alone this year could increase to a figure of around R10bn. And that’s just one company and excluding royalties.
Including royalties, Amplats is set to pay about R12bn to the fiscus. Other companies exposed to the PGM complex are similarly positioned to contribute such as Sibanye-Stillwater which could pay R5bn in royalties and just under that in corporate tax this year assuming prices remain at spot.
All in all, the anticipated tax paid by the mining sector this year, assuming all things equal, will be about R40bn, more than double that achieved two years ago.
GOOD TIMES KEEP A-ROLLING?
For a country with a fiscal deficit equal to about 6% of GDP for the foreseeable future, this income from metals is welcome relief. All in all, mining taxes make up about 10% of total corporate taxes paid in South Africa.
The question, though, is how long the minerals cycle can continue, especially as economists at Davos are expected to ponder over the likelihood that the world economy is slowing?
There is a risk to bulk minerals such as iron ore. Last year, a supply deficit developed after a slimes dam disaster at Vale’s Brumaindho facility, in which hundreds of people were killed, resulted in a shut-down of a portion of the company’s production. However, some of that production – if not all – will come back into the market over time.
In palladium and rhodium price increases, which have been driving the increased tax take for Government, seem to have little holding them back, according to analysts.
Firstly, increased production from South Africa is deemed to be unlikely, especially in an era of continual power interruptions. Data released by Statistics SA showed that SA’s output of PGMs fell 13.5% in November compared to the same month in 2018.
Secondly, a rebound in automotive production, and increasing legislation on emissions – PGMs are used in the manufacture of autocatalysts fitted to car engines – are likely to continue to stoke demand.
According to TD Securities, a Canadian stockbrokerage, the increase in palladium in particular, which has gained 25% in two weeks during January, is not a bubble.
“We see little evidence of excess in speculative activity which suggests the rally is fundamentally driven, despite the parabolic move,” said TD Securities in a recent note.
“In fact, our dry powder analysis suggests that traders hold a below average total position, and positions per trader are also below average, thereby reducing the risk of a sharp reversal,” it said.
“We think the rally has room to run as periods of extreme scarcity send prices sharply higher. No substitutes imply that near-term demand will not be destroyed.”
Said RMB Morgan Stanley: “We see a reasonable likelihood that prices and sector profitability will remain elevated and move higher in 2020”. It judged the fundamental PGM market deficit at about 500,000 to one million ounces whilst tightening emission standards would drive “… an uplift in PGM loadings that is somewhat delinkned from the macro backdrop (and slowing world economic growth).
