Platinum mines’ CEOs play meagre hands

SA’s platinum sector is fast approaching the point where companies have little choice but to close or consolidate mines to cope with prices mired at levels of a decade ago despite costs rising annually, leaving more than half the industry unprofitable, senior industry figures say.

The estimates of the number of mines in trouble vary from 50% to 60%, but either way the industry, which supplies 80% of the world’s primary platinum, or mined production, is in serious trouble.

“It’s an industry in distress, deep distress,” says Northam Platinum CEO Paul Dunne, adding options for platinum mining companies after years of low and stagnant prices had effectively narrowed to either close or consolidate.

“The ability to transact will become a very important characteristic of a successful company … we are at a time where companies will need to deal to survive,” Dunne says.

“We are in the throes of a correction that is not immediately visible to the market, which is looking for step changes, because it has been gradual. We are down from 5.3-million ounces and we’ll be lucky if the local industry gets to 4-million ounces [in 2017],” he says.

The industry has some interesting and dynamic CEs to play the hand prices and demand have imposed on them. Dunne is one of them, successfully growing Northam from a single asset, the world’s deepest platinum mine, to a portfolio with increased shallow, mechanised mining, an addition of fresh ore in a deal with Anglo American Platinum (Amplats) and a clever R175m deal to buy the Eland mine that had been bought for $1bn and languished unloved and mothballed in Glencore.

Another dynamic and dealhungry CE is Sibanye Gold’s Neal Froneman, who has spearheaded a blitzkrieg in the platinum sector.

Sibanye has snapped up the whole of Aquarius Platinum and the large Rustenburg mines from Amplats and is finalising an audacious $2.2bn cash purchase of North American palladium and platinum miner Stillwater Mining, launching Sibanye into the top three of global platinum group metal producers in less than three years at a cost of about $2.8bn.

Amplats under the leadership of Chris Griffith has wrapped up an extensive remoulding of the business, casting off labour-intensive, deep-level platinum mines and joint ventures to focus on shallower, low-cost, mechanised mines, positioning the world’s largest platinum miner to ride out the storm.

Lonmin CEO Ben Magara has started talking about investigating suspended assets within the company, but has no financial firepower to bring any of those assets to account soon.

Impala Platinum (Implats) is now headed by Nico Muller, a smart operator, but an unknown entity as an executive willing to do deals.

Balance sheets are on the whole stressed, limiting companies’ ability to invest in growth let alone sustain their mines. Implats recently replaced some R4.6bn in convertible bonds due in February 2018 with a longerdated, more expensive convertible bond due in 2022, protecting the company by not exercising its rights in 2018 to pay cash for the bonds and put hefty debt on its balance sheet as it brings two large new and lower-cost shafts into production to replace smaller, nearly depleted operations.

Lonmin is narrowly avoiding breaching a key debt covenant with a consortium of twitchy local and international banks that demands the company’s tangible net value does not fall below $1.1bn. At the end of March, its value stood at $1.4bn.

Sibanye has just laden itself with the $2.2bn cash purchase of Stillwater Mining, a palladium and platinum miner in Montana. Sibanye will pay a $2.65bn bridging loan to finance the deal through a $1bn rights offer, $1bn in bonds and the balance with a streaming agreement on Stillwater platinum production, a convertible bond, debt or equity. Sibanye has left itself fully stretched and will have to wait to lighten its debt load before it is able to pursue a fourth platinum transaction in SA. The company most likely to be Sibanye’s target is Lonmin. The smelting and refining operations, which collectively would cost more to build than Lonmin’s market capitalisation of R3.5bn, are the key.

Lonmin has few options left to bulk up its balance sheet. Shareholders would not easily support another rights issue, having participated in four in the past decade, with its large shareholders or financial institutions unlikely to easily step up as underwriters of the share. The Public Investment Corporation is perilously close to the 35% level at which it would be compelled to make an offer to the minorities according to London Stock Exchange Rules. Securing fresh debt would be difficult too.

“We are at a point … where anything is probable. There are very few strategies left for platinum miners beyond closure or consolidation and that makes it a very interesting time,” says Dunne.