A pedestrian passes the offices of Anglo American in Johannesburg. The share price of top platinum producer hit 10-year lows last week while world no 2 producer Impala Platinum is also trading around decade troughs.
Reuters
Johannesburg/London
South Africa’s platinum sector is at a crucial juncture as the metal’s price, near six-year lows, maintains a steady decline, with analysts now contemplating a move below $1,000 an ounce.
Platinum has fallen nearly 10% so far this year, and at current prices of less than $1,100 an ounce, many shafts in the world’s top producing country are losing money.
“(Platinum is) still firmly in a bear market, with little evidence of a bottom as yet,” independent technical analyst Cliff Green said last week.
Its break through recent technical levels is “likely to trigger acceleration closer to $1,000, then $950,” he said.
The outlook could hardly be bleaker for an industry that was hit by a five-month strike last year that resulted in big wage increases it can ill afford in the face of soaring costs.
“Half of the industry, including major producers such as Lonmin, is cash-flow negative and if platinum slides below $1,000/oz nearly two thirds of the industry could be underwater,” said Cape Town-based Investec fund manager Hanré Rossouw.
Investors have taken note: the share price of top producer Anglo American Platinum on Tuesday hit 10-year lows while world no 2 producer Impala Platinum is also trading around decade troughs.
Margins for the trio hit by last year’s crippling strike - Amplats, Implats and Lonmin - are razor thin.
According to Thomson Reuters data, on December 14 Amplats’ return on equity was 0.4%, Implats’ was 0.5% and Lonmin’s was a negative 2.5%.
Amplats’ gross sales revenue last year was 55.6bn rand ($4.5bn) but after cost of sales - effectively production costs - were removed, its gross profit on metal sales was only 2.65bn rand.
For Implats, revenue last year was 29bn rand and cost of sales almost 26bn rand. Lonmin had revenue of $965mn and underlying costs of $913mn.
Implats also has potential cash problems. During the ramp-up from the strike, the cash reserves on its balance sheet fell to 2.7bn rand at the end of 2014 from 4.3bn six months before.
Amplats has said it expects first-half earnings to be at least 20% higher, but that is compared to the period last year when most of its mines were shut by the strike.
And Lonmin may be pressured to spend more on accommodation after an enquiry into the slaying of 34 striking workers by police at its Marikana mine in 2012 found the company had failed to comply with its housing and social obligations.
There is little space for meaningful restructuring. Production cuts could boost prices, but would require layoffs - politically all but impossible in South Africa’s charged labour environment, where union militancy has been on the rise.
Amplats plans to offload labour-intensive assets around the platinum-belt town of Rustenburg.
Investec’s Rossouw said the current environment points to consolidation. “You have got to ask why platinum companies are still sinking new shafts if you can buy existing companies at a fraction of the cost of growing organically,” he said. But sellers in a buyers’ market are holding tight. Sources have said the Anglo American unit will almost certainly float the mines it wants to divest because the offers it has received are too low.
Much of the platinum extracted in South Africa, home to more than 70% of global reserves, is mined at deep and dangerous depths, one of many factors pushing up costs.
The more viable operations are those that are shallow.
Platinum Group Metals is set to start production in the fourth quarter at its Western Bushveld Joint Venture project, in which it owns an 83% stake.
The partly mechanised operation has shallow depths and high grades, reducing costs to such an extent that it can make money, Chief Executive Michael Jones told Reuters.
“Our operating cost estimate is $655 an ounce so, based on our current guidance, we can be profitable,” he said.
