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Implats' cave-in

Mar 16 2012 07:36 Kevin Allison*

Company Data

ANGLO AMERICAN PLC [JSE:AGL]

Last traded 285.00
Change -4.62
% Change -0.02
Cumulative volume 1115560
Market cap 400.56bn

Last Updated: 01/08/2014 at 04:27. Prices are delayed by 15 minutes. Source: McGregor BFA

IMPALA PLATINUM HOLDINGS LIMITED [JSE:IMP]

Last traded 103.21
Change -3.12
% Change -0.03
Cumulative volume 1928700
Market cap 65.25bn

Last Updated: 01/08/2014 at 04:26. Prices are delayed by 15 minutes. Source: McGregor BFA

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London - Impala Platinum’s Zimbabwe cave-in is bad news.

The world’s second-biggest platinum miner has agreed to hand over 51% of its Zimbabwe subsidiary to a gaggle of local investors, including Robert Mugabe’s government.

The subsequent 1.5% rise in Implats’ share price may have reflected relief that the assets weren’t seized outright, but for other platinum miners that will be cold comfort indeed.

An asset-grab in the world’s second-richest platinum province is the last thing the struggling industry needs.

Striking workers, deadly mines and iffy industrial demand mean miners have been struggling to make decent returns on the white metal - despite a fourfold rise in prices over the past decade.

Platinum accounted for about half of employees at Anglo American [JSE:AGL], the world’s biggest producer, last December. But it delivered just 8% of the diversified miner’s 2011 operating profit.

That might seem strange for an industry that is basically an oligopoly led by Anglo and Implats. But scratch beneath the surface, and platinum miners face knotty challenges.

Demand is one. Diesel-heavy Europe, the world’s most platinum-intensive auto market, is in the doldrums. High prices have also led carmakers to reduce the amount of platinum they use in diesel engines’ catalytic converters.

The bigger problem is, literally, structural. About three-quarters of the world’s mined platinum deposits are located deep underground in a single rock formation in South Africa’s Transvaal.

Extracting the metal involves back-breaking work in cramped and stifling conditions. Too often, workers pay the ultimate price.

Of the 17 mining fatalities at Anglo American last year, 12 occurred in its platinum business.

Safety-related work stoppages, labour strikes and a shortage of skilled engineers have restricted production and sent wages soaring.

The cost pressure is exacerbated by militant South African unions and the mines’ deep locations. Production cuts are so expensive and disruptive that even in an effective oligopoly, supply discipline has historically been lax.

None of these problems will be easy to fix. Anglo, Implats and other platinum miners had hopes that expansion in Zimbabwe, where platinum deposits are closer to the surface, would push down production costs. But the price of doing business there just went up. 

Background:

  • Impala Platinum has agreed to surrender a 51% stake in its Zimbabwe business to local investors, the company announced on March 13.

The move marked a reversal by the world’s second-biggest platinum miner, which had been resisting Zimbabwe’s demand that foreign firms hand over majority stakes in their operations in the country.

  • It was unclear how Zimbabwe’s government would pay for a 31% share of Impala’s 87%-owned Zimplats unit, the country’s biggest producer of the white metal. Implats said on March 14 that the government would have to find money to buy the stake or else it would not be transferred.
  • The Zimbabwe deal came less than a month after Impala said it would restart production at its Rustenberg platinum mine. Production at the mine, the world’s biggest, had been halted for several weeks because of a strike, costing the company 120 000 ounces of lost production of platinum group metals.
  • Impala’s woes come amid a broader industry trend of labour disputes and safety stoppages, which have crimped output and increased production costs for miners.

Announcing its full-year results on February 17, diversified miner Anglo American, which owns 80% of Anglo Platinum, the world’s biggest producer by volume, said returns at its platinum business were unacceptable.

Chief executive Cynthia Carroll said the group would review its platinum exposure.

  • Platinum prices were just over $1 675 an ounce on March 15, up nearly a quarter from December’s two-year lows, but well below 2008’s record-high price of $2 290 per ounce.

 - Reuters

*The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

 
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