Did platinum unions miss a boom-time opportunity?

Johannesburg (June 9)  WHAT is a fair split between wages and profits? Of the financial proceeds that flow from mining, how much should go to workers and how much to shareholders in dividends?

This question is at the heart of the four-and-half-month strike on Rustenburg’s platinum mines.

For the first time in more than 20 years a union has come along that rejects the long-established balance between wages and profit. The Association of Mineworkers and Construction Union (Amcu) has made very clear that its mission is to change this distribution forever. Its president, Joseph Mathunjwa, has repeatedly said it like this: "Workers want change in their lives. They feel strongly that nothing has changed over 20 years. So this is a sacrifice they must make for future generations."

Two academic researchers at the University of the Witwatersrand, Andrew Bowman and Gilad Isaacs, have looked at precisely this question. Their conclusion is that over the past 14 years the benefits that have flowed to workers in wages, compared with shareholder dividends, has been disproportionately in favour of shareholders in the big three platinum producers. It is also, they say, out of whack with the wider economy.

This calculation is made by looking at the share of "value-add" that goes to the relative parties. Value-add they define as the monetary value left after all the costs of production have been taken into account, including capital investment for the future.

Between 2000 and 2008 — boom time for platinum — workers received 29% of the value produced; 61% went to profits, of which just over half was distributed to shareholders. The boom would have been the ideal moment for unions to demand substantial increases, the report says. These were also the years when employers should have done more for employees, if not through wages, then in profit share and improved living conditions.

Platinum companies Lonmin and Impala, which have responded to the report, recognise this.

Says Impala Platinum’s Johan Theron: "With the benefit of hindsight, we did not do enough to improve employee living standards and labour productivity.

"More investment and innovation in these areas would have alleviated many of the legacy issues we deal with today, not only in terms of the socioeconomic hardship, but also in the lack of trust between management and employees."

But that opportunity was missed and unfortunately the employee share ownership schemes that Impala, for example, put in place vested too late to reap the benefits of the boom, leaving workers feeling cheated of gains they thought they had been promised.

Between 2009 and 2013, following the global financial crisis, both the size of the pie and the relative shares changed dramatically, as platinum demand and prices fell. During this period, labour received 58% of the value-add and 11% went to shareholders in dividends.

Over the entire 14-year period, the report says, the distribution comes out at 38% for labour and 23% for shareholders.

When compared with the wider economy, say Mr Isaacs and Mr Bowman, platinum shareholders did very well. The average that shareholders in nonfinancial companies received was 20%, dropping to 18% after the financial crisis.

Lonmin and Impala point out that the fortunes of resource businesses are typically cyclical and influenced by external factors such as metal prices and currency exchange rates.

"Added to this, the platinum sector faces great volatility as it is influenced by fundamental supply and demand for the metal, and market sentiment. Investors in the business know and understand this, and most certainly accept this high/low reward cycle as part of the risk of investing in resource companies," the companies say.

Mining analyst for Noah Capital Michael Kavanagh says because of these characteristics, when looking at who got what slice of the pie it is important to look at the whole cycle. As industry analysts use a very different methodology from Mr Isaacs and Mr Bowman’s "value-add" method, he says it is difficult to comment on their figures.

It is also important to bear in mind, says Mr Kavanagh, that in the lean years shareholders are asked to raise more money and all three companies have in the past few years increased their debt, raised bonds or done a rights issue.

Mr Isaacs and Mr Bowman’s report then moves on to look at whether, in the light of what has typically flowed to shareholders, mining companies could afford Amcu’s demand in the future, if the platinum companies paid dividends at the average of the rest of the economy. They conclude that both Impala and Amplats could meet the wage demand — a cash wage of R12,500 within four years — out of the "excess" that in the past went to shareholders. The same is not true for Lonmin, where the dividends in excess of the average would not cover the wage increase.

The companies and mining analysts strongly disagree it is possible to predict the future based on the past, as the model used by Mr Isaacs and Mr Bowman does. The companies have argued the increase is unaffordable on grounds that, even under present circumstances, operations are not generating enough cash to cover the investment required to continue mining.

Says Mr Kavanagh: "When assessing the ability of these companies to afford wage increases, a good starting point is to look at the cash-flow statements. If cash from operations doesn’t exceed investing cash flow, then there is no spare cash to pay increased wages.

"If these companies were generating huge amounts of cash after investing to maintain production in the future, then workers might have some justification in asking for more money. However, they are not generating excess cash; in fact, they have trimmed their investment spend to the bare bones, already creating a huge challenge to maintain future production."

The companies also argue that they need to plan for "relatively stable and consistent wages through the cycle. Wages simply cannot be curtailed at will, which is why it has been critical to consider their sustainability over a long period of time, no matter where we are in the cycle."

While Mr Isaacs concedes that the real world is more complicated than the affordability test he uses, he makes the point that the companies "clearly don’t think that they will remain in negative territory for 10 to 15 years. Otherwise they would close up shop."

The broader point, he says, is that restructuring in the industry is now bound to occur, and what is most important now is for this to take place in a managed and consensual way, with an eye not on the immediate situation but on the sector’s long-term prospects.

"We need a discussion on how to achieve a living wage for workers, affordability for companies and on how the state and country can benefit from the proceeds of mining. That is a conversation that will involve far more state intervention," he says.