TORONTO (miningweekly.com) – Barring a big uptick in platinum-group metals prices or better production performance from miners, a 10% rise in costs could leave over two-thirds of the sector operating in the red, RBC Capital Markets analyst Leon Esterhuizen said on Wednesday.

Poor production performance, rapidly rising power costs and steel prices are all conspiring against platinum producers, the majority of which extract the precious metals from South African rocks, and there’s no let up forecast at least until the end of 2012, he said in a research note.

The strong rand isn't helping matters much, either.

“Indeed, current labour negotiations in the industry appear to be heading towards wage increases that would be at least double South African inflation, whilst SA power costs will increase by at least 25% over the next year as Eskom ratchets up tariffs,” said Esterhuizen.

He goes on to illustrate how without a major improvement in performance or significantly higher metal prices, RBC increased its cost curve for the industry by 10%, including cash costs and capital.

“With such a large portion of the industry cost curve so flat, a 10% cost increase in the absence of a higher metal price environment delivers a pretty ‘messy’ picture that could see over two-thirds of the mines delivering negative cash flow.

“Under the current situation, it is not surprising that we are seeing the first signs that producers aren’t pursuing the growth programmes they had previously aspired towards, citing the current low basket/high cost environment.”

As for platinum prices, Esterhuizen predicted that the threat of strikes in South Africa’s platinum sector, which accounts for over 70% of global supplies, was helping prices to hold at current levels of around $1 838/oz.

Industrial action has temporarily shut down large sectors of the country’s industry so far this year, as labour unions demand double-digit wage hikes that employers are more than hesitant to grant. Negotiations in the platinum sector are still underway.

“Should this be resolved without action, we could see some short-term metal price weakness,” Esterhuizen wrote.

He said that although there was a “somewhat fragile” automotive demand picture – platinum’s biggest use is in vehicle exhaust systems – exchange traded fund's uptake of the metal remained stable.

“As long as the supply side continues to struggle, even low global demand growth will be enough to keep the metal prices well supported.”

Anglo American Platinum (Amplats) is the biggest producer, followed by Impala Platinum and Lonmin.

Shares in Amplats closed at R561.96  apiece on Wednesday. The shares have fallen by about 22% over the last 12 months.
 

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