Mining Weekly

JOHANNESBURG (miningweekly.com) – The production base for South Africa’s high-flying platinum group metals (PGMs) is still constrained and there are no quick ounces to fill the gap, Nedbank CIB market research mining analyst Arnold van Graan said on Thursday.

“We’ve seen a lot of shaft closures and we’re still seeing planned shaft closures as we speak, despite the high increase in PGM basket prices,” Van Graan told Mining Weekly.

Based on the available reserves in the orebodies, Van Graan sees the number of shafts falling to about 50 by 2025, from the 80 shafts, headgears and declines that existed in 2008, which points to a considerable drop in production.

The closures have removed the available PGM ounces needed to bring the platinum market closer to balance.

Instead, a deficit has risen which has seen the prices of palladium and rhodium spike to very high levels and platinum suffering a slight surplus.

Every ounce of platinum mined brings with it about half an ounce of palladium and also rhodium, and with palladium and rhodium in such demand, the market is ending up with more platinum than it needs.

This is why steps are now being taken to match PGMs consumption with the PGM mining ratios.

The substitution steps now being taken are to ensure that under-supplied palladium is substituted with over-supplied platinum.

“Getting the usage ratio back to the mining ratio will balance out the pricing ratio,” Van Graan explained.

COST PROBLEM

Structural changes in the cost base are continuing to put considerable pressure on costs, driven by above-inflationary increases in labour and electricity costs, the more stringent safety regime, the ageing of operations and increased travel time from shafts to rockfaces over a ten-year period to 2019.

“All these things have contributed to a significant rise in unit cost, which has outpaced the increase in the rand basket price. That’s why the industry’s margin evaporated and failed to generate cash flows," he said.

Following the restructuring post the 2014 strike, costs fell. "But over the last few years, costs have started to trend up again and in the recent results season, we’ve seen that costs continue to rise, almost across the board. So, I think the industry still has a cost problem.

“As a result, many of the marginal shafts previously earmarked for closure, but which are now being kept open on the back of high metal prices, are basically running on borrowed time. If we do see a sharp pullback in the PGM basket price, these marginal shafts are at risk.

“I understand why they are being kept open – they generate free cash flows and provide much needed employment, but it’s basically a temporary boost, and if metal prices turn down, more restructuring would have to take place,” he said.

Even before the outbreak of the coronavirus, which this week hit South Africa directly with the first confirmed case in KwaZulu-Natal, vehicle sales are forecast to decline further this year, as they did last year and in 2018.

Despite the decline in vehicle sales, the PGMs industry has been bolstered by tightening emission standards across the globe and including China, which have resulted in more metals being loaded into each vehicle and demand continuing to rise.

“The PGM fundamentals are quite bullish over a three-year period, barring a big fallout from the coronavirus, which is still 'the known unknown', at this stage. We know it’s going to have a negative impact, but we don’t know how big that impact’s going to be.

“A lot of people have been running numbers. What I’d say from my experience is that it’s very hard to quantify the impact of something like this. What I do expect is that the actual impact plays out over a longer timeframe than most people anticipate. In reality, something like the coronavirus could play out over two or three quarters, or maybe even over a year,” Van Graan added.

Since 2008, there has been a significant decline in PGM mine capital expenditure (capex), which means that orebodies have been depleted but not replaced. To fix that, an increase in capex is necessary but even if that is done now, it would take years to grow output materially.