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Miners halt dividend payouts, stay-in-business capex as price languishes in the doldrums

25th May 2018

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

     

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The once burgeoning platinum industry that in the recent past benefited from a years-long upswing in commodity demand and prices is now failing to recover from the global economic depression that heralded the end of its glory days and shut many smaller operators down.

In the wake of the 2008 Lehman Brothers crisis, the industry is divided, with government and the private sector not on the same page as to whether the blunted platinum industry is actually in a crisis, and whether agreement can be reached on the best way forward to drive the industry out of its apparent sunset future.

The prolonged low platinum group metals price environment continues to pressurise the profitability and sustainability of conventional deep-level platinum mines that are already operating as close to the cost curve as they can on a platinum price hovering at about $920/oz and the rand holding below R12 to the dollar.

SFA Oxford chairperson and director Stephen Forrest believes that the sector is experiencing a mine closure inducement price that is leaving many of South Africa’s platinum mines in harvest mode, with zero life-extension growth capital being injected into a third of the country’s production capacity.

“I do think it is a little bit bleak. The prevailing platinum price could be seen as a mine closure price, rather than incentivising expenditure for staying in business or [the development of] large new mines, [thereby] creating a problem of falling supply from South Africa.”

The breakeven, he indicates, for brownfield projects is about $1 500/oz at a rand:dollar exchange rate of R12, with greenfield projects requiring $2 700/oz at R12 to the dollar.

“[The platinum industry is] certainly in a great deal of difficulty,” agrees Northam Platinum CEO Paul Dunne, who explains that the price is currently 15% down in rand terms from the peak in mid-November.

Since 2008, much of the “meat of the companies” has been “eaten up” as the industry scrambles to stay in business – dividend payouts have stopped, stay-in- business capital expenditure has been halted and the capital currently in play is just maintenance capital.

“We have not returned money to shareholders for many years. We are now getting to epic proportions and we need to respond appropriately and timeously,” adds Impala Platinum (Implats) CEO Nico Muller.

The available strategic options are limited and are characterised by rationalisation, closure or consolidation, says Dunne.

The largest producers have already embarked on restructuring and closure programmes for their unprofitable ounces and have cut back on investment in new capacity and shelved any expansion plans.

Implats is working to align itself with the ‘new normal’ by optimising and improving productivity and through its harvest strategy.

“We have to face up to this – this is an industry in crisis,” says Junior Indaba chairperson and mining industry expert Bernard Swanepoel.

However, this is not a view shared by new Mineral Resources Minister Gwede Mantashe.

“There is no crisis. The [platinum] price is not as good as it was, but it is not [so] bad as to constitute a crisis. Over $900/oz is not a crisis,” he told delegates at the Joburg Indaba Platinum Industry Seminar, held in March.

“I have found an industry that is in self doubt, believing it is about to die – an industry where suspicion and mistrust are at a high level.

“We need to develop trust. We are not going to survive if we do not trust each other,” he says, highlighting his belief that the only crisis in the industry is in the form of a corporate disconnect in relations with workers and communities.

A Lost Platinum Edge

The cost curve of South African platinum miners is now almost a flat line, says Nedbank Corporate Investment Bank mining analyst Leon Esterhuizen.

“All the companies have cut their costs to the bone, leaving the industry at a point where it is at the bare bone cutting limit and cutting any more means collapse,” he says.

The further curtailment of supply in the absence of a reasonable price increase also raises questions regarding where supply will be sourced once the current mines reach closure in a decade.

This is worrying, considering South Africa’s platinum industry has moved from being the world’s single largest source of platinum at 80% of supply a decade ago to supplying just above 50% of the world’s platinum demands, says Forrest.

Further, up to 25% of global supply is now sourced from recycling, which is expected to grow by some 60 000 oz in 2018, further cutting into mine supply.

South Africa has removed some 1.5-million ounces of platinum from capacity since 2008, in addition to another 500 000 oz from “abandoned” projects.

The low price environment has resulted in last year’s closure of Platinum Group Metals’ Maseve mine and the mothballing of Atlatsa Resources’ Bokoni platinum mine, effectively removing more than 50 000 oz in 2018, according to the World Platinum Investment Council (WPIC).

It is no longer the price that is the problem – it is the production levels, Esterhuizen adds.

“The cost curve is such that we are caught between a rock and a hard place. It is not a 10% drop in production that you can do now to [lower your costs]. It is a 50% drop in production, because cutting down 10% will leave you in a worse position.”

However, South Africa is rapidly getting to a place where production levels are adjusting – but not before curtailing future expansions.

“We are cutting years of life and not doing extra development to keep [future expansions] going in the shorter term. As soon as you take that one-million- ounce-a-year capacity off the table, you are dialling back expansion funds,” says Deutsche Bank equity analyst Patrick Mann.

This impact will be seen in a few years, when shafts reach the end of their life and there is no replacement beyond Northam’s new Booysendal mine and Royal Bafokeng Platinum’s new Styldrift mine.

However, in the short term, supply will be sufficient, and, within the next four to five years, a shift in supply will be seen from Rustenburg’s deep mines towards opencast and low-cost mechanised operations at the lower end of the cost curve.

But South Africa will have difficulty regaining a greater proportion of the market and returning to the levels of its former platinum glory.

“We will still stay an important part of the market, where the balance of production is Russia and Zimbabwe, and we will move towards higher quality, lower cost, higher margin production – but it is a painful adjustment,” Mann comments.

Outlook

From the revival of jewellery to a transitioning diesel sector, there remains some positive options and a bit of sun on the horizon for South Africa’s platinum sector.

The industry could be on the cusp of a new dawn, as long as the opportunities placed at its feet by a crisis are leveraged, and government buy-in will be critical.

The WPIC’s early indications show signs of a market that is “moving in the right direction” in 2018, with supply tightening and demand remaining resilient.

“These promising fundamentals, paired with elevated global uncertainty and a better economic growth outlook, mean macro conditions are becoming increasingly helpful to the platinum market,” says the council.

There are tentative signs that jewellery demand is rebounding, with 2018 demand expected to grow 45 000 oz after four years of decline, along with increasing belief that the jewellery sector is set to be one of the biggest drivers in the next four to five years.

A recovery in industrial demand and the expected increase in jewellery demand will likely outweigh any decline in automotive and investment demand.

However, concerns about automotive demand currently weighing negatively on platinum sentiment are “overdone”, with clean diesel vehicles set to remain on the road for years to come in a market that has proved more robust than expected.

In Western Europe, platinum demand is expected to reduce by 600 000 oz by 2040, but the emergence of 1.2-million ounces of new platinum demand in the automotive sector will result in a crossover beneficial to the industry, Forrest says.

The declining demand for platinum in passenger cars at a time when its use in diesel-fuelled light commercial and heavy-duty vehicles is rising is the offsetting factor, providing further opportunities for platinum in an era believed to be impacted on by the impending influx of electric vehicles (EVs).

Swanepoel, however, believes the EV – and the electric battery – market to be too small currently to impact on the industry to a significant degree.

“It is only beyond 2025 that EVs will likely gain traction,” he says, with Forrest adding that by 2040, only 20% of vehicles will be EVs and a transition from heavy-duty vehicles to electric is unlikely.

However, growth in platinum consumption in fuel-cell-powered EVs is expected this year, as China and other countries deploy fuel-cell-powered bus programmes, which have generated orders for significant numbers of fuel cell stacks to be delivered over the 2018 to 2021 period.

Johnson Matthey notes that the outlook for fuel cells is also brightening as transport applications are forecast to consume more platinum than stationary fuel cells for the first time.

“All these different vehicle technologies have their place. All will have disadvantages and advantages for platinum, but the crossover effect is likely to offset any significant impact,” Forrest adds.

“Our industry handled 40 years of a flat gold price. They mechanised, they modernised, they changed the legislation – we put the rest of the world out of business,” says advisory firm Cadiz Corporate Solutions director Peter Major.

“We found a way of coping.”

Citing examples in the oil and iron-ore sectors, besides others, which “fell a lot more” than the platinum industry when prices took a hit, Major attributes their recovery success to the speed of their reactions and responses.

These industries recovered within 18 months despite a prolonged low price, by rapidly cutting costs and adjusting to the new environment – with government backing and support.

“Working with government is something we need to do,” he explains, stressing that the platinum industry needs to restore government relations and regain control over some of its environment.

Major references the many uncertainties that blight platinum mining operations, with mining companies having zero control over much of their environment, including reliance on State-owned power utility Eskom’s electricity supply and pricing, which makes up some 25% of an operation’s cost, and recent legislative and regulative amendments.

Esterhuizen adds that, in hindsight, the platinum sector was slower to react, failed to cut costs earlier – which made it harder to cut later – and lost labour competitiveness.

“All the mines that are making money today are the mechanised assets. Very few normal commercial deeper undergrounds mines are making money.”

Despite the market having its back against a wall, he believes that the industry will bounce back as the naturally cyclical nature of the mining sector dictates.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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