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South Africa's platinum pain deepens

Platinum crisis looming as more than half of South Africa's platinum mines are underwater or marginal at current platinum prices.


http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=155714&sn=Detail&pid=102055

Author: Christy Filen
Posted: Wednesday , 25 Jul 2012

JOHANNESBURG (Mineweb) -

The latest financial reports from listed platinum miners have shown that over half of these are making losses or are trading at thin margins which would see any further drop in the platinum price or cost increases cause a crisis in what is a labour intensive sector of South Africa's economy.

Of the 26 mines, eleven were found to be operating at a loss with a further four marginal at best. (see list at bottom of the story

The exercise was a difficult one as platinum miners do not report in accordance with a set of standardised metrics so comparisons are difficult.

Some use kilograms, others ounces or equivalent ounces based on internal standards. Some measure PGM ounces and platinum, others only platinum, others only PGMs. Frustrating to say the least!

Nevertheless, from Anglo American's interim results presentation yesterday it was painfully obvious why a review was currently underway. Seven of the eleven mines operating at a loss belong to the world's largest platinum miner.

For Amplats the calculation used compared revenue per equivalent platinum ounce with the cash cost thereof.

Marikana (already on care and maintenance) was the worst performer with Union North, Modikwa, Thembelani, Kroondal, Khuseleka and Khomanani filling the ranks. Modikwa was hit by a month long strike during the period and Khuseleka is in ramp up. Union South proved to be marginal.

The abovementioned operations employ over 30 000 staff including contractors.

Aquarius Platinum's Everest mine which is also on care and maintenance was included in the eleven. Kroondal and Marikana, mentioned above, are shared operations between Aquarius and Amplats.

Impala Platinum's Marula mine was included in the loss making operations based on the comparison of the rand cost of platinum in concentrate exceeding R15 000 in its interim results for the end of December 2011 when compared to today's platinum price of approximately R11 800 using US$1381 and an exchange rate of R8.54.

Atlatsa's Bokoni mine was last reported as cash flow negative at an operational level in the company's March 2012 quarter end results due to underperformance and the ramp up phase that it is in. Management only expects the Bokoni Mine to become cash flow positive after capital expenditure towards the end of 2015 taking certain assumptions into account.

The last operation included in the eleven was Crocodile River mine belonging to Eastplats which reported an attributable loss in its March quarter end report. The miner has resorted to cash preserving actions and has suspending funding for the development of its Mareesburg open pit mine and the construction of the Kennedy`s Vale concentrator plant.

On the marginal end are Amplat's Union South, Impala Platinum's Rustenburg operations, Northam's Zondereinde and Royal Bafokeng's Rasimone mine.

The information used for Implat's Rustenburg operations was for the six months end December 2011 so does not include the impact of the six week strike earlier this year. The cost of refined platinum production quoted for this operation was R10 994 and with a modest 10% increase in costs would push this above the current platinum price.

Northam's operating cost per ounce of precious metals for the six months end December was $1231 - a 10% increase would push this number close to the current platinum price.

RB Plats reported an operating cash cost per platinum ounce of R11 648 for its quarter ended March 2012 which is a hair's breadth away from the current platinum price.

On the positive side, Zimbabwean operations are low on the cost curve but are having to deal with that country's indigenisation policies.

In confirmation, Marc Ground, commodities strategist from Standard Bank said Tuesday that their models showed that roughly 480 000 ounces of platinum were at risk (unprofitable on a cash-cost basis) at current prices. This he said was approximately 6 mines mostly run by Amplats and equated to 10% of South Africa's production.

This is a marked increase in the bank's 334 000 risk ounces and four Amplats mines indicated in its June report.

Bearing in mind that the abovementioned numbers are all historical and with Eskom looking at price increases of 14% and above and some mines currently negotiating wage increases the potential for labour disruptions is high. Throw competing unions into the mix and you have a potentially lethal concoction.

Aquarius Platinum's CEO, Stuart Murray said in its latest production update: "Unfortunately, as has been well flagged by many industry participants, the likelihood of industrial action over the South African winter is high, largely as a result of inter-union rivalries. Aquarius is by no means immune to this threat, and intermittent unlawful industrial action has occurred at one of Kroondal's four shafts in July".

There is also unlikely to be any respite in the form of platinum price increases says Peter Major, mining consultant for Cadiz Corporate Solutions. Long term price graphs for platinum that Major presented recently show that last year's spikes were upward deviations from the long term price trend and that the current price is purely a reversion to the mean.

The doldrums in developed economies is also not likely to drive demand any time soon.

A bearish UBS investment research note said Tuesday that the directional risks for platinum remain to the downside as both the trend conditions and momentum tools are pointing south.

UBS indicated its first support level at $1384.25, which was a June low. Any break through this level would expose $1344.25 said UBS.

Ground said that another 50 000 ounces at least would be at risk if the platinum price were to fall to $1300 an ounce. This he said would depend on what happened to the rand/dollar exchange rate with a weaker rand increasing the prices received by mines.

As a base case, Ground expects prices to remain under pressure for at least the next year and expects some support towards the end of 2013/beginning of 2014 from the US economy as it finds a firmer footing as well as improvements in the Chinese economy.

As a worst case scenario, Ground said that if the Eurozone deteriorates further, weakens the Euro and strengthens the dollar then "prices could tumble quite precipitously". Without putting a number to it a fall of 30% was mentioned. This could put prices at just over $1000 per ounce.

On the equities side, Ground said that there was a buying opportunity in platinum shares currently but that ‘you've got to have the stomach' for more potential short term downside.

"If you have a long term view on these things we would say that these stocks are looking pretty well priced at the moment" said Ground.

Amplats closed at R408 per share on tuesday, not far off the post 2008 financial crisis low of R346.71 per share but a long way from its heady heights of R1335 pre 2008 crisis. In the last year the share has lost 32% of its value.

Atlatsa, Eastern Platinum, Wesizwe and Aquarius Platinum are all trading below their post-2008 crisis levels currently.

The likes of Wesizwe, busy with the construction of its Bakubung Platinum Mine, has seen its share price lose 63% of its value this year. The share price traded at R11 before the 2008 crisis and is currently trading at 68 cents per share which is lower than the levels of just over R1 that it hit after the 2008 crash.

Aquarius Platinum, the hardest hit, has tumbled to just above R5 a share which is well below its post-2008 crash level of R15.70. The share has lost 85% of its value in the past year.

At Anglo Platinum's interim results presentation, stand-in CEO, Bongani Nqwababa, said to expect the pain for longer, no truer a word said.



*Already included under Amplats