Platinum not out of woods yet

Johannesburg-S.A. (June 22)   IF YOU are a betting type of person, you might put money on the longest-running strike in South Africa’s history ending next week.

With a new wage agreement provisionally in place, the three largest platinum producers — Anglo American Platinum (Amplats), Impala and Lonmin — should begin gearing up for resumption of production.

The platinum price remains strong at about R1,457 an ounce while demand for automotive catalytic converters and jewellery, particularly in China, has not diminished.

The rand also played its part by taking a pounding from the weak economic data.

But the costs of mining groups are rising — and it is not just about the new wage deal.

Hanré Rossouw, sector head for resources at Investec Asset Management, said the total costs of the social aspects of production resumption have not been calculated — including dealing with the health and fitness levels of workers.

“The platinum price has been pretty flat in rand terms over the last few years, and the cost base is increasing at 10% a year. Margins have shrunk. Even in an increasing platinum price environment you could still see returns of these companies remaining negative.”

According to Mr Rossouw, the share prices of the companies are banking on some good tidings. “The platinum price hasn’t actually moved in the last six months. Most analysts would say the shares are factoring in at least a platinum price of R1,600 and a continually weakening rand.”

Mr Rossouw said that while that could happen, profitability was not guaranteed.

Part of the cost pain is down to union rivalry. “Getting an agreement marginally higher than what the National Union of Mineworkers got at Northam was the aim of the Association of Mineworkers and Construction Union (Amcu),” he said.

After previous strikes, Lonmin had been quicker to start up, said Mr Rossouw, and that should be the case again. But the group had admitted to burning cash faster than its rivals, in expectation of the strike being resolved sooner.

Money raised for new mines has been burnt elsewhere, and the miner was arguably in the most precarious position.

“I don’t think Lonmin acted as decisively as Impala. However, out of fears of a resultant rights issue, Lonmin has now cut back on its expenditure.

“At current cash-burn rates, these companies have only six to 12 months before bankruptcy if the strike isn’t resolved — there will be drastic action,” Mr Rossouw said.

Urgent action would be needed. South African company decisions were under far sharper scrutiny than ever before Marikana. While the wage offer would seem to meet the social demands placed on these companies, the reality was that they could not be met without restructuring and loss of jobs. That would probably lead to a follow-up strike.

“Lonmin made the point that they cannot afford the additional demands. The companies could not afford the original deal. The reality is half of the industry is not producing returns at last year’s prices and last year’s wage deal.

“There is even a recognition from Amcu that there will be further restructuring needed to make the industry sustainable,” Mr Rossouw said.

Should anyone invest in these companies?

Mr Rossouw said Investec was a cornerstone backer of Aquarius Platinum’s recent rights offer, but with the largest three companies it was a case of deciding whether the physical commodity might be a better option.

“Now that Aquarius (has) fixed its balance sheet, it has significant upside, and we saw the previously dramatically depressed share price respond to the refinancing.”

He said Lonmin was in a similar situation with concern about it needing to have a rights issue, but the market was not likely to support it. “The share price could reflect a significant rerating once there’s some certainty about its balance sheet.”

Peter Major, head of mining and resources at Cadiz Corporate Solutions, said the platinum sector had been a “horrible” investment since 2002.

“From January 1 2002 until now the SA Platinum index averaged 6% total returns a year in rands, about the same as inflation. In the same time, our gold-mining sector averaged 3.6% a year. The Alsi 40 averaged 15%, and the property index 21% a year.

“Everything is dependent on the platinum-group metals prices and the rand. If either moves against them, the platinum miners — all of them — are in big trouble.

“These three miners are really going to battle to make money under this agreement. It doesn’t matter what the wage increase percentage is because productivity isn’t increasing. All wage increases are detrimental. Productivity per person on the gold mines is down to levels of 100 years ago.”