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Amplats: More is more

Jan 15 2013 13:23

Company Data

Anglo American Plat Ltd [JSE:AMS]

Last traded 438.38
Change -4.72
% Change -0.01
Cumulative volume 93429
Market cap 118.22bn

Last Updated: 01/09/2014 at 04:28. Prices are delayed by 15 minutes. Source: McGregor BFA

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MINER Anglo Platinum [JSE:AMS] (Amplats) has released its review strategy and it is interesting to note the extent to which it is attempting to use the carrot rather than the stick in this endeavour.

In a conference call earlier on Tuesday, Anglo Platinum CEO Chris Griffith shared his insights on this strategy.

Despite the fact that the strategic review is a business decision designed to ensure long-term sustainability, the reality is that political factors cast a very long shadow over the decision and have a major impact on the entire country’s mining industry and economy.

The decision to follow a hybrid approach of strategic mothballing (Khomanani 1 & 2 and Khuseleka 1 & 2) and targeted divestiture (Union Mines) was in line with what the market was anticipating.

In fact, results of my readers' poll on Monday (see chart below) clearly reflect that the business news reading public favours downsizing (79%), followed by spinning off (18%) with a token 3% in favour of doing nothing.



So what strategy has Amplats adopted in light of the "mine" field in which it operates?

The company is striving to pre-empt union strife with a ludicrously generous proposal, so excessive that it could have been designed by the labour unions themselves - had they been able to agree on anything at all.

Apparently Amplats has taken its dominant market role very seriously and has raised the bar with regards to mollifying labour unions and mitigating the risks of unrest.

The mining company is following a three-tiered approach to defuse the situation.

Retrenchment packages

Griffith is under no false illusions that unions will negotiate long and hard to craft retrenchment packages. In all likelihood, Amplats has budgeted for over-generous departure gifts for its miners with retrenchment costs taking R1.2bn of the R3.2bn budget for executing this strategy.

Redeployment buffet

Amplats is rewriting the playbook on what to do when you close a shaft, with projects which include:
  • Redeployment at other Anglo mines;
  • Redeployment at non-Anglo mines; and
  • Reskilling and training for employment clusters in other industries, such as Amplats-funded construction jobs building 21 000 new houses in Rustenburg.

Community investment

Amplats is planning to not only upgrade miners' housing in Rustenburg - the predominantly affected region of retrenchments - to the score of 15 000 new employee houses, but is also building 6 000 new houses for non-Anglo staff in Rustenburg, apparently for philanthropic largesse.

What makes this proposal out of the ordinary is that Amplats is offering staff the option of double dipping: they can take a full retrenchment package and also secure a construction job on top of that.

Amplats is striving to not only balance job losses with new jobs to be created through various initiatives - in and of itself ambitious, given the employment landscape - but it is also tackling the exponentially more difficult challenge of job neutrality for the affected workers.

It seems that this response was the only feasible option, given the volatility of South Africa’s geopolitical environment.

Amplats' decision clearly indicates it believes exorbitant retrenchment costs are better than production stoppages. This intuitively makes sense since once costs are known with reasonable certainty, capital can be allocated accordingly, both in the short and long term.

Quite frankly, if this is the new paradigm which the mining industry is reaching it is a tough act to follow. Assuming unions can digest this offer - which they will undoubtedly find reason to dislike, based on their policy of proactive thoughtless leadership - other mines will follow suit.

The result will be homeostasis in SA mining whereby incumbents can rightsize operations at inflated costs, albeit within the realms of profitability. However, the growth impact will be decisive.

Companies will do whatever it takes to reduce head count in the mining industry due to the high exit barriers. This strategy will effectively cauterise mine jobs in South Africa, with numbers shrinking until they reach parity with similar operations in Australia and Canada.

This, as it happens, is a good outcome for the overall SA economy - with the ever so slight caveat that government and more likely the private sector will have to find alternative employment for this growing slice of low-skilled qualified workers.

Exciting times await us.

 - Fin24

*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.

 

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anglo platinum  |  mining
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