Rustenburg - Miner Evans Ramokga has a warning for Anglo American [JSE:AGL] as the mining group prepares to unveil a revival plan for its South African platinum business: don't close any shafts.
"If one shaft closes, we stop all the shafts," said Ramokga, a winch operator at Anglo American Platinum [JSE:AMS] (Amplats) and Amcu union activist, sitting in a fast food restaurant in the platinum belt city of Rustenburg.
This is no idle threat from a militant union that brought much of South Africa's mining industry to a standstill last year. But it is one investors say Anglo cannot afford to bow to as costs rise, prices stagnate and platinum profits tumble.
Slashing output - and potentially thousands of jobs at one of the sector's biggest employers - could prove socially and politically explosive. Next year brings elections in a country where one in four is unemployed and many accuse the ANC of betraying the poor who helped bring it to power.
Anglo is expected to make its plan for Amplats public as early as next week, almost a year after it was commissioned. It has three broad options. It can spin off Amplats; it can do little and hope profits rebound; or it can close loss-making shafts to create a nimbler, profitable business.
In reality, analysts say, the choice is only how much to cut, where and how.
"Things are never as obvious as they seem from a distance. The issue is the mines are getting ever deeper and labour is no longer cheap," said analyst Paul Gait at Sanford Bernstein.
"Anglo's strategy in platinum has always targeted volume. They have to move to a framework where they think 'we have more responsibility in this market than just the production of ounces - if the price isn't right, we have to do something about it'. And that may be cutting high cost production."
According to its annual report, Amplats employed more than 54 000 mineworkers in 2011, including contractors - up from the year before despite heavy retrenchment after 2008, making it one of South Africa's biggest mining employers.
Unlike mining for many commodities, largely mechanised, geology has kept platinum mines too narrow for automation, requiring tens of thousands of miners to use hand-held drills in sweltering conditions instead.
Platinum's labour-intensive nature has intensified the perfect storm for Amplats, 80% held by Anglo and facing rising wages, power and input costs as demand sagged for a metal used in autocatalysts - particularly for diesel cars, and therefore largely dependent on Europe's sluggish market.
Prices have tumbled from peaks scaled in 2008 and periodic spikes in recent months have been a mixed blessing for Amplats and its rivals as they have mostly been triggered by strikes in South Africa, home to 80% of known platinum reserves.
In 2006, platinum contributed 24% of Anglo's group operating profit. In 2011, squeezed by labour and power costs, that share was down to 8%. By the first half of last year, safety stoppages and weaker prices left platinum accounting for just 2% of group profit.
It still accounts for a quarter of net operating assets.
There is little hope of a quick fix for Amplats. But while cutbacks may not be on a scale that would push prices back to record levels, they may be deep enough to support prices, which will also be a boon to rivals such as Lonmin [JSE:LON].
Amplats accounts for some 40% of global supply.
"Our base case is that (Anglo) are likely to put two of their existing Rustenburg operations on care and maintenance, and if they do that, that would take out 200 000 to 220 000 ounces of platinum per year," said Tom Kendall, an analyst with Credit Suisse, which has a 2013 forecast for platinum of $1 695 an ounce, above the current price around $1 590.
Last year, Amplats produced some 2.5 million ounces. Most analysts expect the miner to at least cut its two lowest-margin shafts - Rustenburg shafts Khuseleka and Khomanani, whose impact analysts estimate at 230 000 to 250 000 oz. More optimistic forecasts put cuts as high as 500 000 oz.
The group will also try to cut back overhead costs, excess smelting capacity and improve marketing, analysts say.
For parent Anglo, the strategy for untangling the platinum Gordian knot will be watched as a potential flash point between existing management - particularly chairperson John Parker - and its newly minted chief executive, Mark Cutifani.
Cutifani, currently the boss of miner AngloGold Ashanti [JSE:ANG], takes over in April and will inherit a strategy designed under his predecessor, despite being hired in large part for his experience of deep-level precious metals mining.
"The positive way of looking at it is that Anglo gets two hits at the ball. This review can help stem the bleeding, and then Mark (Cutifani) can apply his expertise to really fixing the business," Sanford Bernstein analyst Gait said.
The possibility of spinning off Amplats is a tempting one. According to HSBC analysts, the South African discount Anglo has attracted is worth more than the value of its platinum holdings.
But it is an option long discarded by outgoing chief executive Cynthia Carroll, and analysts agree it is unlikely.
"If you can make platinum work, you wouldn't spin it out - and if you can't make it work, spinning it out makes it more difficult," analyst Des Kilalea at RBC Capital Markets said.
Doing nothing for now - perhaps tempting in the context of heightened union tensions - is also not an option.
The main question is how to cut without reviving the 2012 wave of strikes. The Rustenburg operations expected to be hit by cuts have been at the core of union unrest.
Amplats' four lowest-margin mines, likely targets for cuts, employed some 22 000 people last year - excluding contractors.
Amcu's Ramogka said the workers were indifferent to the review, and wanted to have the next round of wage talks first.
Other Amcu organisers in Rustenburg said mine closures would be seen as a ploy to cut its support.
Amcu has wrested tens of thousands of members from the larger National Union of Mineworkers in a turf war at the root of the labour violence that claimed over 50 lives last year.
For its part, Anglo will hope rising costs will keep miners' heads cool.
"People are tired of striking," said another Amcu organiser who declined to be named. "They are struggling with money. Now school is starting and they must pay school fees.”
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