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Anglo's struggle showcases platinum woes

May 17 2012 14:58 Reuters

Company Data

Anglo American Plat Ltd [JSE:AMS]

Last traded 366.94
Change 2.92
% Change 0.01
Cumulative volume 28868
Market cap 98.96bn

Last Updated: 24/10/2014 at 11:05. Prices are delayed by 15 minutes. Source: McGregor BFA

Lonmin plc [JSE:LON]

Last traded 31.45
Change 0.28
% Change 0.01
Cumulative volume 146735
Market cap 17.95bn

Last Updated: 24/10/2014 at 11:01. Prices are delayed by 15 minutes. Source: McGregor BFA

ANGLO AMERICAN PLC [JSE:AGL]

Last traded 233.84
Change -1.91
% Change -0.01
Cumulative volume 301448
Market cap 328.65bn

Last Updated: 24/10/2014 at 11:04. Prices are delayed by 15 minutes. Source: McGregor BFA

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London/Johannesburg - Miner Anglo American [JSE:AGL] has made a priority of its struggling platinum business, admitting earlier this year that the world’s largest primary producer is underperforming in the face of soaring costs, imposed safety stoppages and weak demand. 

But South Africa’s politics, restive unions and a lacklustre market mean its keenly awaited "operational review" of its Anglo Platinum [JSE:AMS] unit, due later this year, is more likely to mark an evolution than a revolution - and constitute a case study in the woes holding back a battered industry.

Analysts and industry sources, some of whom see the review as a recognition the market will not turn any time soon, say they expect Anglo to outline the planned closure of some higher cost deep shafts, signal some potential sales or exits from some joint ventures with rivals, and focus its spending.

The review is unlikely, they say, to contain the radical production cuts that would transform the platinum industry after four years of narrowing returns - Amplats accounts for some 40% of global supply - or the transformational sales that would boost Anglo’s own lagging margins.

The price of platinum, a precious metal used mostly in catalytic converters and jewellery, is almost 40% below its 2008 peak, while costs have far outpaced inflation.

“For the sake of the industry we hope it will be a meaningful change from the status quo,” analyst Alison Turner at Panmure Gordon said. “But I am not expecting a massive shift.”

South Africa is the world’s biggest source of platinum, accounting for three-quarters of global output. It is also home to militant unions - the dominant National Union of Mineworkers (Num) and the more radical Association of Mineworkers and Construction Union.

Both would take a dim view of drastic mine and shaft closures, and they would likely be backed by the governing ANC in a country where one in four adults is unemployed.

This could be the single biggest factor holding back change.

“In a normal industry, you would cut your loss-making operations as soon as possible. In mining in South Africa that is extremely difficult - and I want to stress extremely,” said one long-serving analyst who declined to be quoted.

“It is not just about retrenchment costs. It is about politics.”

The ANC has rejected nationalisation but will consider a 50% tax on profits at a meeting next month.

Shutting down mines which employ thousands would be extremely tough, despite grumblings among investors that Anglo should not be “a social service”, in the words of one industry veteran.

Amplats is one of the biggest employers in South Africa’s mining industry, with more than 58 500 employees on its books at the end of last year - up from 2010.

“We can only hope that the intention to review should not be about retrenchment, because we cannot afford these at a time when the focus of the country is on job creation,” Num spokesperson Lesiba Seshoka said.

Anglo's future

The review is key to Anglo American as a group, with its future brought into the spotlight by the merger of erstwhile suitor Xstrata and commodities trader Glencore.

Anglo is the only major miner to have significant exposure to platinum, but the platinum contribution has shrunk from 22% of operating profit in 2008 to 8% in 2011. Amplats’ gross profit margin has more than halved in the same period.

Anglo has signalled strongly that it will not take the ultimate radical step of unbundling Amplats - a solution some analysts argue would create the most value for shareholders.

So the miner has little choice but to signal reform in the unit it owns an almost 80% stake in, as investors name platinum as one element - along with a bruising legal row with Chile’s state miner Codelco - that it needs to resolve in order to boost shares that have underperformed its peers.

“Anglo is on notice,” said another analyst who declined to be quoted. “(Platinum) is one of the most significant anchors on Anglo’s performance - people say it is South African risk.

"It is not South African risk, it is Anglo Platinum risk.”

Deep reform

Amplats underwent a major restructuring in 2009, cutting headcount by some 20 000 employees, mostly contractors, restructuring its mines and putting several high cost shafts on care and maintenance.

But momentum was lost last year, when productivity fell as it was battered by safety stoppages.

Platinum miners have fewer levers to pull this time.

Analysts expect this review, being run internally, to home in on focusing investment on growth projects like its lower-cost, open-pit Mogalakwena operation, Amplats’ largest single operation, and on trimming down overall production, particularly from the higher-cost elements of Amplats’ portfolio - the four deep mines in its Rustenburg heartland.

Analysts at UBS said the Rustenburg operations, excluding Bathopele, were among the least productive in the group and break even at platinum prices of above $1 600 - compared to current spot prices of closer to $1 400.

They have 39% of employees, represent 22% of production but contribute just 14% to operating margins.

But here is where Amplats’ difficulties - and those of the broader sector - become clear. Closing the Rustenburg operations, and even individual shafts, will anger unions, the government and does not do enough to reduce high overheads.

Selling them would be preferable - not least to preserve black economic empowerment (BEE) credits and free cash to invest in top tier mines, despite what analysts estimate would be a 17% drop in headline platinum volumes.

But it is virtually impossible to sell on a shaft-by-shaft basis and even as a package a sale would be tough - given depleted balance sheets in the industry and a dearth of outsiders wanting a slice of the higher cost end of the sector.

Amplats may also want to avoid a “free ride” for others.

Instead, analysts say Anglo is likely to close down a handful of its most problematic shafts in Rustenburg.

It is also likely to sell out of some of its joint ventures, including its stake in Modikwa - a 50:50 venture with African Rainbow Minerals [JSE:ARM], which has already signalled an interest in the asset - and Pandora, a venture with Lonmin [JSE:LON], which has also expressed interest.

“Amplats has some of the world’s best resources, but equally they have a lot of shafts that are not at the right end of the cost curve,” one industry source familiar with Amplats said.

“With the platinum price where it is, they need to take a hard look. Historically, they have only tinkered round the edges.”

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