Platinum industry ‘faces a bloodbath’
• More than half the sector unprofitable • JPMorgan Cazenove predicts production cuts
Mine closures, job losses and the cutting of hundreds of thousands of platinum ounces will be forced on SA’s beleaguered platinum sector, despite companies’ efforts to keep operations going when more than half the industry is unprofitable.
While Mineral Resources Minister Gwede Mantashe said at a platinum conference there was no crisis in the sector — a comment that nearly had Northam Platinum CEO Paul Dunne choke on a breakfast sausage at the event — a report from JPMorgan Cazenove showed just how dire the situation is for SA miners and predicted that the year of change would be in 2020 as efforts to keep unprofitable mines going at enormous expense failed.
Platinum mines employ about 170,000 people, a far cry from 199,948 a decade ago. Lonmin is embarking on cutting 12,600 jobs as it closes old mines, while Impala Platinum (Implats) is reviewing mines in its flagship Impala Lease Area near Rustenburg as it accelerates the closure of old mines by “harvesting” them.
The report dealt with Anglo American Platinum and Implats, the world’s two largest platinum miners, and Northam, an aggressive company looking for growth in low-cost assets, diversifying itself away from a single deep-level mine. It did not take into consideration Lonmin or Sibanye-Stillwater, two major platinum miners in SA.
The report said there could be “substantial supply cuts” after 2019, “which could have a transformational impact on
South African supply.” SA’s supply could fall below the 4million ounces mark, with 700,000oz to 800,000oz of metal cut from output, which would bring broader benefits, having a “profoundly positive impact on platinum prices, in our view”, the report said.
An executive at a platinum company said the authors of the report appeared to be working on the assumption that platinum companies would do nothing to address losses at their mines and cut costs to save jobs in a volatile part of the country. Sociopolitical conditions in the Rustenburg area were closely linked to the platinum mining industry there, which accounted for 1.7-million ounces of annual production. Mining companies were acutely aware social unrest could be triggered by indiscriminate job cuts and mine closures, he said.
At prevailing prices, 2.6-million ounces, or 60% of SA’s production, was unprofitable, he said. SA produced 4.3-million ounces out of a total global mined supply of 6-million ounces. With prices stagnant for nearly a decade, there had to be a major cut in supply. It appeared SA, producing so much metal at a loss, was where those cuts would be made.
“In our view, most manage- ment teams remain reluctant to close high-cost, cash loss-making capacity, as the benefits of resulting higher metal prices would likely be transferred to high-cost competitors. Attritional operating strategies are likely to persist in 2018-19, resulting in protracted cash losses and rising balance sheet risks for high-cost producers and depressed PGM [platinum group metals] prices for the wider industry,” said JPMorgan’s analysts.
“Yet balance sheets are comfortable and we see no prospect of supply reform until about 2020 when unsustainable cash burn at Impala is likely to result in cathartic shaft closures, in our view. Our analysis concludes South African producers lack urgency to make painful production cuts, since most major producers lack balance sheet pressures,” the report said.
The expected cuts in production would come in the second half of 2020 and Implats would be the “catalyst” cutting some 400,000oz of capacity at its Impala Lease Area mines, the report said. Implats needed the rand price for the basket of PGMs it produced to be at least 50% higher to be cash flow positive. Implats was the highestcost producer of the major platinum miners.