TORONTO (miningweekly.com) – The tight power supply outlook in South Africa could result in constrained production from platinum-group metals (PGMs) mines, according to RBC Capital Markets analyst Leon Esterhuizen.

South Africa is the top producer of PGMs and produces almost 80% of the world's platinum mine supply.

However production has been declining from the country's PGMs mines in the last five years, as producers battle rising costs, electricity shortages and volatile metal prices.

In a research note dated October 13, Esterhuizen commented that reports published recently by the South African government indicate that power supply concerns remain a very real issue for miners in the country.

The system enjoyed a respite thanks to the economic downturn in 2008 and 2009, but returning industrial demand, from the mining sector in particular, is likely to put increasing pressure on power supply, Esterhuizen said.

Even the new Medupi coal-fired power station will not be enough to feed growing demand once it comes on line in 2013, and the government expects to rely on “mitigation” - the addition of non-Eskom power and demand-side management in reducing demand – to balance power supply and demand in the coming years, he said.

“The implication is clear – the potential for further supply constraints is very real,” Esterhuizen commented.

“At the very least, we should be questioning all the promises of supply expansion from virtually every PGMs producer in South Africa.”

Based on a 'business as usual' scenario, without accounting for any mitigation measures in the country, PGMs production could be 19 150 oz lower in 2011 and as much as 197 419 oz lower in 2013, as a result of power supply shortfalls, RBC calculated.

However, while a shortage of power in South Africa will likely push PGMs prices upwards, that may not be reflected directly on companies' bottom lines.

“Margins will be lower as a consequence of lower-quality ore, more capital required to maintain, let alone the need to grow output and persistent pressure on the cost line,” Esterhuizen said.

Electricity, labour and other input costs all continue to rise, and South African miners now also have government royalty payments to consider.

“In this environment, any shallow resource will attract a lot of attention – least impacted [on] by power issues, lowest operating cost and capital cost to build,” he predicted.

Smaller companies that have projects on the Western Limb of the Bushveld Complex, like Wesizwe Platinum, Eastern Platinum and the new Royal Bafokeng Platinum (which is expected to launch an initial public offering in November), will probably attract the most attention and could be potential takeover targets.

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