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Watching the margins

Platinum is the sector of South Africa’s mining industry generally held to have the best-looking future. But you wouldn’t know that judging by recent developments. There’s been a string of bad news from Impala Platinum Holdings [JSE:IMP] (Implats), Aquarius Platinum [JSE:AQP] (Aquarius) and Platinum Australia (PLA) triggered by labour and cost issues. Thousands of jobs are at risk; while one mine is being shut down and the expansion of another delayed.

The strong rand is hitting profit margins, while there’s been considerable labour unrest linked to wage negotiations, disputes about retrenchments and strife within the National Union of Mineworkers that caused thousands of workers at Lonmin’s Karee mine to be retrenched.

Production has also been affected across the board by production halts enforced by the Department of Mineral Resources (DMR) as part of a deliberate crack-down on safety.

By far the worst incident took place at PLA’s Smokey Hills mine, where a mob of former employees attacked a minibus transporting workers near the mine and set it on fire. The mob killed contractor Kobus Jansen van Rensburg and assaulted the other workers so badly that five had to be hospitalised.

The trouble dates back to December 2010, when current contractor JIC Mining took over from previous contractor Redpath and dismissed around 85% of the workforce, who had gone on strike.

Implats has decided to restructure its Marula mine near Steelpoort and delay by two years its proposed expansion to produce 90 000oz of platinum from the current 70 000oz/year.

Main reason is the persistent underperformance by the mine against production and cost targets.

JP Morgan Cazenove analysts Steve Shepherd and Allan Cooke say: “Management has struggled to settle on an effective mine design, causing initial production, capital expenditure and cost targets to be missed.”

Implats hasn’t specified how many jobs are at risk, but industry sources reckon up to 1 300 workers may be affected.

Having finally won control of Booysendal South – as reported two weeks ago – Aquarius subsequently decided to put its troubled Blue Ridge mine on care and maintenance. CEO Stuart Murray says the decision to suspend Blue Ridge resulted from the realities facing the platinum sector. Those were that the rand basket price for platinum group metals (PGMs) had continued to deteriorate while on-mine cost inflation in SA had continued “unabated” with rises in the price of electricity, diesel and wages.

Murray says: “The findings of Blue Ridge management during the redevelopment project – coupled with the current economic realities of the platinum industry in SA – strongly suggest the mine would be loss-making for some time to come. Under the circumstances, any other course of action would be financially irresponsible for the wider group.”

It’s significant that Aquarius is opting instead to increase its stake in low-cost surface tailings retreatment operation Platinum Mile from its current 50% to 91,7% at a cost of R115,5m. Murray says that investment is based on the plant’s expected profitability at current rand PGM prices and before taking into account any expansion initiatives. He added a number of growth opportunities were already being assessed through what would become a “dedicated tailings division” at Aquarius.

Murray also stressed the “industry leading capital efficiency” of the programme to expand and extend the life of the Everest mine through the exploitation of Booysendal South. He said that would cost R850m ($120m), with which the life of Everest would be extended from six to more than 30 years, while production would be increased by 25%/year from the current planned “steady state level” of 190 000oz of PGMs to around 250 000oz from 2017 for the extended life of mine.

Ryan holds shares in Implats and Aquarius
 
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