Amplats: Knock-on risks

Jan 15 2013 16:12
*Peter Attard Montalto
Amplats protests.

Last year's protests at Amplats are extracting serious economic consequences. (File, AFP)

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Guest columnist Peter Attard Montalto of Nomura writes about Anglo Platinum's review strategy:

Anglo American [JSE:AGL] has been reviewing the operations of its platinum businesses for a year now, and on Tuesday morning announced the results and key impacts on its Anglo Platinum [JSE:AMS] (Amplats) South African subsidiary.

The rand has been reacting to the negative results. The reaction of government suggests they will not take this lying down.

The details from our equity analysts published just now:

According to Amplats, four shafts will be closed and one will be sold. It will be putting approximately 400 000 ounces of platinum production at its Khuseleka and Khomanani shafts on long-term care and maintenance.

The Waterval UG2 operation and the No 2 smelting furnace may also be shut. The Union mine, as reported by Reuters on Monday, will be divested "at the right time"; in the meantime, it will stop mining at Union North and will place the Mortimer Merensky operation on care and maintenance.

This will likely add further ounces to the cuts (overall Nomura Union North estimates 60koz). Fourteen thousand jobs will be cut, but Amplats will create an equivalent amount of restructuring jobs.

The company expects to receive annual savings of R3.8bn in cost benefits and capex is expected to fall by 25% over the next 10 years (to aggregate R100bn). For Amplats, this rationalisation will likely be difficult and will likely increase the potential for industrial action.

Amplats will be creating an equivalent amount of jobs as an offset and will continue to employ 45 000 workers. Its baseline expectations for production will fall by 16%. For the platinum industry as a whole, this change to supplies will place the market into deficit over the medium term, in our view.

We provisionally calculate a deficit in 2013 of 410koz of platinum or 6.7% (we were lower than consensus for 2013 production before) and a cumulative deficit of 730koz of platinum by 2015.

Our reaction:

The move is a blow to the government at the start of a year which will probably see the early stages of policy around a mining super-tax formed, as well as increased regulatory burden on the sector.

Mining unrest has also continued since the end of last year despite the (foreign media) attention fading and affected the Rustenburg platinum area in particular.

While such unrest has been low-level intimidation and has not forced companies to make statements of lost output, it has nevertheless led to a slowdown in production (or rather slower recovery after the post-Marikana unrest) as well as made things increasingly difficult for mine management. Union's power struggles also seem far from over.
These factors have played a key part in the Amplats review about the profitability of the platinum sector and its competitiveness. Despite having a practical monopoly on production (over 80% of global output), South Africa is unfortunately not able to leverage this position.

The platinum market deficit this move will create should reinforce the positive vibe around the JSE and hence it could continue its charge higher. Equally, the re-employment offer from Amplats should mean consumption impacts will be limited (though they may well be lower-paid jobs).

This move was likely a "pay-off" to the government in order not to incur its ire. However, little appears to have been done to satisfy the unions in the mining sector and, given the concentration of workers in this area, violent protests against the Amplats moves are very likely in our view.

This adds to the labour unrest risks we have already highlighted for 2013 about the wage round in the mining sector (and economy more widely).

The key concern, however, is the drop in investment this will result in. R100bn is a significant amount of investment (ultimately from a foreign company) to be losing out on in a country that has such poor net foreign direct investment flow through 2012.

All in all, we believe the rand is reacting because it is becoming clear that, despite the outcome of Mangaung, the underlying structural issues in the economy and the mining sector in particular are forcing downscaling and lost output before any upsides from (eventual) implementation of the national development plan (NDP) can be achieved.

On top of this the labour unrest has also attracted market attention, with the violent farm strikes in the Western Cape.

A nasty mix of politics has also entered the frame, with the ANC attempting to pass blame onto the DA (which runs the Western Cape) even in spite of the key legal issues of minimum wage reviews requiring Pretoria ministry sign-off (ie from the ANC). Union militancy there is also adding further catalyst to the unrest.

Such issues highlight the downside risks to fiscal over the medium run, even if short-run budget dynamics are more favourable. They also reinforce the view of a low potential growth figure (3.7%) if the capital stock is being eroded through underinvestment and the battle the NDP will have to raise this over the medium run.

There are a few other risks that follow from the review:

• The government appears to have been unable to prevent this happening, suggesting there is still a lack of leadership on these issues even after Mangaung.

Equally, Mangaung has not caused a pause and additional reflection by Anglo simply because of Mr Ramaphosa and the pushing of NDP.

• We must remember that this is part of a much larger reassessment of the competitiveness of the sector by both domestic and foreign mining interests in the country.

While clearly companies won’t simply leave, the sort of scaling back talked about by Amplats and being considered by others like Harmony Gold is just as damaging, in our view.

• Mineral Resources Minister Shabangu announced on Tuesday that the Amplats review will itself be scrutinised by her department and that simply putting shafts on "care and maintenance" is a form of "hoarding" of resources.

This sort of commentary is worrying, given the department of mineral resources can technically remove Amplats extraction permits and give them to someone else if the mines are not being used – a regulatory threat that caused a storm and widespread investor worry two years ago when it happened to a mine in error.

• The sale of the Union mine will be interesting and a first real test of what the government wants to achieve with its new, more interventionist approach that was already developing before Mangaung but has now been reaffirmed by the ANC at the conference.

Will we see the government’s state-owned mining company (AEMFC) taking a stake alongside black economic empowerment partners? The resources of the AEMFC remain limited though and the National Treasury is unlikely to want to fund specific projects like this.

Will Mr Ramaphosa himself be involved via his business interests? We find it hard to see where there is scope for sale to a foreign mining company in the current environment (unless it were to be a fire sale, which seems unlikely).

Of course, it may well be that while Amplats waits for the right market conditions the perfect time never comes and instead of selling it just has to put it on care and maintenance.

Tuesday’s news is negative for the structural issues around the mining sector and its competitiveness, even if from a corporate perspective it is good for Amplats's competitors. It also increases sovereign risk through increasing further the probability of unrest this year.

The bias to the balance of payments is also doubly negative - from lower platinum exports widening the deficit and from lower investment flows deteriorating the funding side. The rand’s negative bias could therefore continue.

The move will likely reinforce the view of the SA Reserve Bank's monetary policy committee of long-run negative structural risks to growth and potential from the post-Marikana unrest and ongoing labour market issues.

However, shorter-run inflation and growth may well mean there is still not enough cause to cut rates this year as the risk to our baseline final cut in March or May. A more protracted rand sell-off would also scupper the chances of a cut.

*Peter Attard Montalto is an emerging markets economist at Nomura. Opinions expressed are his own.

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