JOHANNESBURG (miningweekly.com) – Two consecutive days of surprise negative news this week tore strips off the share prices of South Africa’s two leading platinum mining companies.

Anglo American Platinum (Amplats) lost 4% of its value when it warned of a 60%-to-70% plunge in basic 2011 earnings per share, and Implats saw its shares fall 3% the previous day, when its CEO David Brown announced his resignation without the name of his successor being put into the public domain.

The two announcements put the spotlight on declining platinum revenues, an inhibiting regulatory regime, safety issues and challenging production scenarios during 2011, when the platinum price fell 21%.

Amplats, for one, had been banking on a 2011 platinum price of “at least” $1 800/oz, while in reality platinum has been trading lately in the considerably lower $1 500/oz-$1 550/oz ranges.

A number of analysts have highlighted the closing gap between the cost of production and the prevailing platinum price.

"We knew that the platinum division/sector – and South Africa in general – is struggling but this downgrade is likely worse than the market expects," Numis Securities analyst Cailey Barker was quoted as saying in a note.

In the process of finalising its 2011 results to December 31, Amplats found that its headline earnings a share were likely to be 24%-to-34% down, as a result of a once-off R1.07-billion accounting charge for the broad-based community development transaction it announced in November.

Amplats, headed by CEO Neville Nicolau, entered into a R3.5-billion community development arrangement in November that resulted in 2.33% of its shares being acquired by near-mine communities.

Amplats' spokesperson Kgapu Mphahlele told Mining Weekly Online that the extent of the earnings absorption of the community transaction had been anticipated at the time the deal was announced.

"The deal is not about compliance but about ensuring sustainable economic development in our host communities," Mphahlele said, adding that Amplats was on track to be black-economically empowered by 2014 - "hence our conversion to new-order mining rights being approved".

He put the impact of the community transaction at 262-million shares and said that further details would be presented on February 13, when Amplats was scheduled to publish its 2011 results.

On the current level of demand for platinum, Mphahlele commented that, although the decline in platinum-group metals (PGMs) prices was worse than expected, the lower trends in PGMs demand had been anticipated.

Liberum Capital analyst Dominic O’Kane calculated that the negative underlying earnings effect for Anglo American, which holds 79% of Amplats, could be 2.1%.

In its announcement to the JSE, Amplats put contributory earnings-decline factors down to the high number of production-lowering safety stoppages, as well as high industry cost inflation, particularly for labour and electricity.

Even the once-off gain of R4.4-billion from the listing of Royal Bafokeng Platinum, as well as a R0.8-billion profit on the sale of the Western Bushveld joint venture, were insufficient to stave off the expected 60%-to-70% lower basic 2011 earnings, compared with 2010.

Brown announced his planned departure unexpectedly, against the background of Implats’ latest quarterly report for the three months to September 30 showing 12% lower production, 27% lower refining, 10.8% higher units costs, unresolved indigenisation implementation in Zimbabwe and three mine deaths.

Analysts speak of platinum miners having to cope with struggling demand after the Japanese earthquake reduced car manufacturing from that country, European sovereign debt risk and monetary policy to contain inflation in China, on top of troubles in the South African mining environment.

Amplats decided in June to pursue shallow low-grade reef and delay the exploitation of its higher-grade but more capital-intensive deep-shaft options in Rustenburg, in sharp contrast to Implats, which has three deep, capital-intensive and mainly replacement projects on the go in the same area.

Impala’s 17 Shaft is the site of the world’s largest shaft-sinking contract, with the main shaft going to a depth of 1 922 m, the ventilation shaft to 1 700 m and the refrigeration shaft to an already sunk 1 437 m.

Although Amplats has for many years had a strategy of prioritising the higher-grade Merensky reef, in the last three years it has been lowering its upper-group two (UG2) reef mining costs and improving UG2 processing efficiencies.

This has given the company the confidence to seize the opportunity of mining large volumes of near-surface but lower-grade UG2 and will help it to entrench a lower-cost culture for longer, until there is greater incentive to spend capital on deep-shaft projects that require extensive periods of gestation and large dollops of cash.

Although its 60 000-employee mining, smelting and refining operations overwhelmingly South Africa-based, Amplats is also developing the Unki platinum mine in Zimbabwe, where Implats is more intensely active.
Implats has reportedly submitted indigenisation plans to the Zimbabwe government for both its Zimplats and Mimosa operations.

Contrary to public perception, it is understood that South Africa-based platinum miners are making progress in Zimbabwe, where Brown will continue to assist Implats until his departure in June.

Brown was instrumental in the development of Implats’ Zimbabwean assets and was also responsible for securing the Royal Bafokeng community as Implats’ anchor black economic-empowerment partner.

A 56 000-employee business that mines, processes, refines and markets platinum-group metals, Implats is in the process of finalising the appointment of the identified successor.

Implats chairperson Dr Khotso Mokhele said that Brown had been able to maintain a strong balance sheet while ensuring a balance between investment and returns to shareholders.

Brown has guided the company through a difficult business environment in recent years.

He joined Implats as CFO in 1999 and took over the CEO reins from Keith Rumble six years ago.

This time last year Dawn Earp resigned as CFO and, in 2009, October 22 was a day of high Implats drama when the then chairperson Fred Roux was acrimoniously sacked “with immediate effect”.

Roux said at the time that his sacking was the result of “doing the unthinkable and actually criticising Implats’ executives for a substandard performance, basically over-promising and under-delivering”.

In December, Brown, whose preference is to remain in mining, was appointed as an independent nonexecutive director of JSE-listed telecommunications group Vodacom to serve as an audit, risk, compliance and remuneration committee member of the mobile group.
 

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