Against all odds

Apr 23 2010 06:00
David McKay
 <p>IF ANY FURTHER evidence were required that resources represent an important home for investment dibs in years to come, then look no further than Platmin. Who? Platmin is the R4,3bn platinum junior mining company Brian Gilbertson's Pallinghurst Resources seized control of about 18 months ago. It may be a year behind its scheduled production profile - and only produced 28 000oz of platinum over the past calendar year - but Gilbertson was somehow able to persuade the world's third largest pension fund to invest US$50m into it. </p>
<p>Last week Platmin and Pallinghurst Resources unveiled Algemene Pensioen Groep (APG), a subsidiary of Netherlands sovereign fund Stichting Pensioenfonds ABP, as a key investor in Platmin's $250m rights offer. APG, which manages &euro;240bn (or R2,4 trillion), was joined by Singapore-based Temasek Holdings, which also pledged $50m to the offer. Temasek is equally impressive, holding $119bn in its investment portfolio. In March, Temasek said it would buy $100m in convertible debentures in Platmin. </p>
<p>Against a backdrop of turmoil in South Africa's metals industry - Government and industry are batting about details of fresh empowerment laws amid perceptions that the sector hasn't transformed well enough - this is a significant development. </p>
<p>"These are the bluest of blue international investors," said Gilbertson in an interview by phone from London, where plumes of volcanic Icelandic ash were preventing his flying to attend the public announcement in Johannesburg of the joint investments in Platmin. </p>
<p>Recruiting APG was a typical Gilbertsonian coup. But it wasn't easy. </p>
<p>Gilbertson's founding colleague - and fellow Pallinghurst director - Arné Frandsen says an estimated 300 emails passed to and fro between the offices of APG and Pallinghurst ahead of its investment. During one site visit, in which the Dutch were walked through Platmin's proposed 250 000oz/year Pilanesberg Platinum Mines prospect in North West province, Julius Malema - the bloody-minded ANC Youth League president - had again burst into the spotlight after intensifying his calls to nationalise SA's mining assets. </p>
<p>Gilbertson, whose Pallinghurst Resources indirectly has a 51% stake in Platmin, said: "I've never been through such a strict due diligence for a project." That's saying something about a career spanning more than 40 years and involving such mammoth, ground-shaking deals as the listing of Billiton in London and later the creation of $550bn BHP Billiton. </p>
<p>For APG, it's the first time it's invested in metals, let alone Africa. Let alone - let's face it - the somewhat speculative junior mining sector. Exploration and start-up mining in SA don't have a glittering reputation. At the time of writing, Wesizwe Platinum finds itself caught up in a poisonous ownership tussle and clearly adrift from the R5bn it needs to build its platinum mine virtually next door to the Pilanesberg mines Platmin owns on the western half of the Bushveld. </p>
<p>So attracting APG and Temasek was Gilbertson at his Protean, silver-tongued best. Yet it's also an unalloyed signal SA's minerals wealth has retained its long-term pulling power. </p>
<p>South African Economic Development Minister Ebrahim Patel, speaking at the launch of the Platmin investment, said more opportunities for this country to tap into global pension funds existed. The equity investments promised by sovereign funds in the Netherlands and Malaysia also provided evidence SA's economy was emerging from the recession. </p>
<p>"There have been a number of recent decisions that all indicated strong confidence in SA's economy," said Patel. "Among those include the decision by the European Investment Bank in March to reaffirm its commitment to SA by pledging &euro;900m (around R9bn) for infrastructure projects in both the private and public sectors in SA." </p>
<p>Perhaps the strongest vote of confidence provided by the APG and Temasek investments is in the world's commodities industry. Having emerged from the financial crisis and world recession that followed - in which metals, such as copper, halved in value in months - the commodities business is back with a bang. The much-hyped term "supercycle" is even making a comeback, just as China again tests double-digit GDP growth. </p>
<p>"This is part of a global realisation that commodity markets are the place investors should be," said Gilbertson. "Both players [APG and Temasek] have recognised the PGM [platinum group metals] space is one that will be very important in the future." </p>
<p>But what makes Platmin the dripping roast of SA's platinum industry? </p>
<p>"There are no dripping roasts in mining," Gilbertson responded. It's all about chance - and opportunity. For Pallinghurst, the opportunity was that Platmin ran into financing problems at a time when the platinum price slipped to $800/oz. In came Gilbertson, quick as a flash, with offers by Pallinghurst to provide much-needed capital to Platmin. There was no way the platinum price was staying at that level, said Gilbertson, who has since seen the metal advance to $1 700/oz. </p>
<p>Having taken a position in Platmin for next to nothing, Pallinghurst set about building Platmin's case. Less than five years ago Platmin's Pilanesberg Platinum Mines had no business case or it would have been developed by one of the other major platinum firms, such as Anglo Platinum, Impala Platinum or even Lonmin. </p>
<p>But what makes it compelling for Gilbertson now is its resources outcrop (stick out of the ground) in certain places and only descend, in a relatively soft decline, to 600m. At a time when the majority of SA's platinum miners are having to dig deeper for metal-bearing ore - with all the attendant complications of safety, travel time, refrigeration (it gets hot underground) - having the stuff exposed above ground is obviously a marked advantage. </p>
<p>Says Platmin CEO Tom Dale: "We know that geologically its [Platmin's] resources are complex and we'll take that into account when mining. But there are embedded cost benefits in surface and shallow deposits." </p>
<p>And then there's the greater plan for Platmin. Inevitably for Gilbertson, those plans have expansion and scale at their heart. Platmin has a concentrator on site, which was built for modular expansion and which will accommodate plans by Platmin to incorporate neighbouring property Sedibelo, which separates Pilanesberg Platinum Mines from another Platmin-owned farm, Magazynskraal, which a subsidiary of Platmin is drilling. </p>
<p>Platmin also announced last week it was to buy 10% of Sedibelo from Barrick Gold Corporation, the Canadian gold producer, for $15m. The remaining 90% of Sedibelo is owned by the Bakgatla-Ba-Kgafela tribe, which also has pre-emptive rights over the Barrick stake. It's thought the deal will be seamless, as the tribe had earlier been in contact with Platmin about developing its prospect. Said Gilbertson: "I can envisage this as a grand complex." </p>
<p>Asked if Platmin could vastly improve on the 250 000 oz/year output mark, Gilbertson replied: "Twice or potentially more than the current output from the surface deposit." </p>
<p>He also said the value Pallinghurst derives from its platinum investment in Platmin doesn't have to be in a single vehicle: raising the possibility that Gilbertson, unable to resist the deal urge that's lit up his career, will strike again. </p>
<p>Could Platmin become the consolidating force that binds together other cash-starved platinum producers, such as Wesizwe Platinum and Platinum Group Mines, a Toronto-listed firm? All are in need of critical mass, money, a premium that Gilbertson can provide. </p>
<p>Apparently not. Gilbertson said: "You can sit at a bar and kick those ideas around. But we've got a lot to keep us busy for a while." He says that now. </p>
<p>TOM DALE </p>
<p>You can't down Dale </p>
<p>TOM DALE and Brian Gilbertson go back some. Once infamously described as Gilbertson's "blunt weapon", Dale was instrumental in the restructuring of Gengold, the listed gold subsidiary of Gencor, into the current Gold Fields. Dale, now positioned to play a role in the consolidation of South Africa's platinum industry, cuts a formidable figure now as then. </p>
<p>In his role at Gold Fields he ruthlessly identified assets that wouldn't make the cut and kept mine managers on tenterhooks in the company's formative years by identifying certain mines as either a core or non-core asset on a quarterly basis. </p>
<p>Dale then bowed out of Gold Fields, although not without some controversy, after sharing joint leadership roles with incoming Gold Fields boss Chris Thompson. It was an uneasy relationship: Dale was brutal and blunt while Thompson cut a more conciliatory figure, suave some would say. Dale's departure was motivated, some say, by Gilbertson himself. </p>
<p>Why, then, does Dale want this return in Platmin? Dale talks of the challenge, but Gilbertson interjects. "Tom can nod or shake his head, but I think it's the opportunity to participate in an industry-transforming transaction." </p>
<p>For Dale, Platmin's immediate challenge is to properly mobilise the contractors that operate on the Pilanesberg Platinum Mines. "I had to create an effective organisation," he says, which he adds started with installing proper reporting lines. "We had a dysfunctional organisation so we had to put in good people. That's taken six months but I believe we've done that." </p>
<p>Currently, not many analysts are covering Platmin. It doesn't produce cash flow and it has it all to prove. In that regard, much rests on Dale to turn it into a profitable operation. </p>
<p>Dale failed in his bid to turn around Sallies, the fluorspar producer, after first sacking its then CEO Izak Marais and then promising to leave himself if he didn't produce the goods. He quit the board then soon joined Platmin in October last year. </p>
<p>One market watcher questions whether Gilbertson's plans to partly consolidate the western, and less developed half, of the Bushveld Complex are actually so important. "It might make a good business proposition, but is it ground-breaking? To be ground-breaking you'd have to consolidate some of the larger players in the industry, such as Lonmin, Aquarius Platinum and Mvelaphanda Resources' Booysendal prospect," he says. </p>
<p>Platmin declared an $11m loss in the 10 months ended December 2009. It produced 28 000oz over that period. However, that was an underachievement against scheduled production, which was already approaching a year by the time Dale joined. The plan is to take production this year up to 160 000oz in concentrate while work on a bankable feasibility study for a second project continues. </p>
<p>Dale says funds raised for Platmin now total $380m. About $50m is likely to be paid for full control of Sedibelo, while another $45m will be for lead items former owner Barrick had already secured: the all-important access to water and guaranteed electricity. </p>
<p>PGMS </p>
<p>Metal of the future </p>
<p>GILBERTSON BRISTLES at the suggestion he's only a recent convert to platinum. That observation is partly based on his decision, back in the Nineties, to resist putting Impala Platinum into Billiton following the unbundling of mining house Gencor. And later, while building the Billiton empire, he again resisted adding any platinum investments, on the basis that - so market chit-chat goes - he was chary of hard rock, deep level mining. It was dangerous. It was costly. </p>
<p>"No, I don't think I agree with that at all," Gilbertson said of that assessment. "I stared my career in platinum. I was the chairman of Impala Platinum and have had significant involvement in the platinum industry." </p>
<p>He then launched into a well-justified apology for platinum. </p>
<p>"The modern world can't function without PGMs. I think it's a very strategic industry," he said of the fact that the horseshoe configuration (see map) that represents North West province's Bushveld Complex hosts 80% of the world's platinum reserves. </p>
<p><img src='http://www.fin24.com/downloads/Media/article_images/fweng_img/2007/sep/ee_pla290410.gif'> </p>
<p>Most analysts agree with Gilbertson's market vision that the cost of producing platinum from the complex - including the cost of acquiring power and water - is increasing while there's a simultaneous increase in industrial and investment demand, hence the improvement in the platinum price. "It's a challenged industry on the supply side," said Gilbertson. </p>
<p>Justin Froneman, of Macquarie First South, in a note to clients dated 23 March says: "On the back of our view of a continued recovery in the underlying PGM fundamentals, coupled with the tightening of the platinum spot market and the favourable underpin of an inflationary cash cost base, we remain bullish with regards the medium- to long-term PGM fundamentals." </p>
<p>According to Johnson Matthey, in its most recent review of the PGM market, platinum supply is forecast to increase this year after a modest 2% increase to 6,06m oz in 2009. South Africa, which supplies most of the world's platinum, should see record sales of 4,73m oz this year, a 210 000oz increase. </p>
<p>But the short-term growth profile isn't enough to meet long-term demand. Like gold, platinum has a significant investment market. The launch of two new physically backed exchange-traded funds since the beginning of the year - one in the United States and one in Switzerland - has contributed an additional 255 000oz of platinum demand and 420 000 of another PGM, palladium, demand. The total metal held in ETFs is currently 1,567m oz of palladium worth $730m, and 944 000oz of platinum worth $1,5bn, says Johann Steyn, of Deutsche Securities. </p>
<p>Unlike gold, platinum has chunky industrial uses, primarily in the manufacture of autocatalysts that help extract noxious fumes from vehicle engine emissions. JPMorgan said in a recent report that 38% of platinum demand in 2009 was from the autocatalyst sector (see pie chart). It also has a hefty demand in jewellery, which has been relatively immune to the metal's price hikes. </p>



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