A SATED MINE MARKET
It’s becoming harder to find buyers who are prepared to pay acceptable prices for mines, writes Charlotte Mathews
Ten years ago mining company executives waxed enthusiastic about acquisitions, diversification and creating economies of scale. Now the buzz phrases are cost-cutting, simplifying the portfolio and focusing on core assets.
But selling unwanted mines at an acceptable price is not easy in a depressed market, so the onus of selling or holding on has been shifted to shareholders.
Unbundlings have been happening thick and fast in the mining sector in the past couple of years, including the spin-off of Gold Fields’ Kloof and Driefontein into Sibanye Gold, BHP Billiton’s de-merger of smaller, shorter-life assets into South32 and Glencore’s divestment of its Lonmin stake to its shareholders. AngloGold Ashanti proposed separating its southern African assets into a new listing and holding a substantial rights issue. But shareholders persuaded it to drop the idea.
Impala Platinum, which said in February it would seek buyers for its Marula mine, decided last month in the absence of any acceptable offers that it would retain the mine and put resources into turning it around.
If Impala Platinum could not sell Marula and Glencore could not sell its Lonmin stake, what chance has Anglo American Platinum, which announced almost two years ago it would seek buyers for its Rustenburg and Union mines? As time has passed and the platinum price has stagnated, the alternative (an unbundling to shareholders) has seemed increasingly likely.
But this would be a more than usually complex unbundling, because there are issues to resolve. What would Anglo American, as Anglo Platinum’s 77,96% shareholder, do with its stake in Rustenburg/Union? What would be the new entity’s empowerment status? And how would new money be raised to give these mines a future?
Anglo Platinum spokesman Mpumi Sithole says the group is gauging the level of interest among potential bidders. It had said previously it would inform the market in the June quarter whether it would sell or list the two operations.
CEO Chris Griffith said in the latest Anglo Platinum annual report that the group’s 2012 review of its operations led to the conclusion it should follow a value-driven, rather than volume-driven, approach. That means most production will in future come from mechanised
Whoever buys Rustenburg and Union will … soon have to face the decision of whether to recapitalise or restructure
mines, the group will operate in the lower half of the cost curve, margins and returns on capital employed will improve and the operating environment will be safer. After realigning its portfolio, Anglo Platinum will be able to focus capital expenditure and management effort on Mogalakwena, Amandelbult, Unki and Twickenham as well as its joint ventures: Mototolo, Modikwa, Kroondal and BRPM mines.
Simon Hudson-Peacock, portfolio manager at Momentum Asset Management, says last year Anglo Platinum gave itself until mid-2015 to find a buyer for these assets, failing which it would proceed with a listing.
With no suitable offers in sight and a worsening platinum market in the interim, an unbundling and listing now seems the most likely course of action, he says. If a start is made now to restructure these mines into a company suitable for listing, the project is unlikely to be ready before mid-2016. On the positive side, this may buy some time and avoid having to list at prevailing weak platinum prices.
Investec Asset Management fund manager Daniel Sacks says the Rustenburg and Union mines have not been profitable for several years and are not generating free cash flow after shared costs at current platinum prices. Capital needs to be spent to turn them around and extend their lives, but less capital has been allocated to them in recent years.
Hudson-Peacock says these mines need to be recapitalised or closed. But Anglo Platinum and Anglo American are averse to further restructuring or retrenchments in the platinum business after the outcry from government two years ago, when a major restructuring was announced. The original restructuring plan had to be significantly moderated.
Anglo Platinum’s latest annual report shows the Rustenburg operations consist of the Bathopele, Thembelani and Siphumelele deep-level underground mines, all of which are 100% owned.
The first two have a life of mine to 2029 and Siphumelele should last until 2025. They are all labour-intensive operations that were hit hard by last year’s five-month strike.
Bathopele employed 1 907 people in 2014 and expects to produce 124 500 oz of equivalent refined platinum this year. Although it made a loss, operating free cash flow was R356m compared with a previous outflow of R24m. It has 400 000 oz of Merensky and 5,2m oz of UG2 in reserves and resources.
Thembelani is a conventional mine employing 9 911 people, including contractors, compared with 11 431 in 2013. It expects to produce 229 000 oz of equivalent refined platinum this year. It made an operating loss of R1,12bn, from a previous profit of R175m, and had a cash outflow of R413m against 2013’s R184m outflow. It has 10,9m oz of Merensky and 28m oz of UG2 in reserves and resources.
Siphumelele employs 3 706 people, about half as many as in 2013 after shafts were put on care and maintenance. It made positive operating cash of R12m, a turnaround from 2013’s R62m outflow, and should produce 86 000 oz of equivalent refined platinum this year. It has 12,6m oz of Merensky and 31,2m oz of UG2 in reserves and resources.
Union Mine is in Limpopo, 15 km west of Northam, and is a joint venture with the Bakgatla community. Its life of mine is to 2037. It employs just under 7 500 people.
Operating free cash flow last year was a negative R267m and a negative R513m in 2013. There is 14,4m oz of Merensky, 26,2m oz of UG2 and 600 000 oz of surface material in Union’s reserves and resources.
Among those who might have bid for these assets, African Rainbow Minerals and Northam Platinum have denied any interest. Sibanye Gold’s Neal Froneman has shown an interest, but presumably not at a price that has excited Anglo Platinum.
Investec’s Sacks says the book value of Rustenburg alone is about R10bn. There are buyers, but not at the price Anglo Platinum is asking. It might be better to sell these businesses for below book value to take them out of Anglo Platinum so that it can focus on its core assets. The new entity could become more attractive if Anglo Platinum included a refinery, which would make it a self-sufficient company, but that’s not in line with Anglo Platinum’s strategy of retaining final control of the metal.
He says a separate listing of Rustenburg and Union is not expected to be an unbundling, like South32. It would probably take the form of a capital-raising to realise cash for Anglo Platinum, recapitalise the mines, and allow Anglo American to sell down its stake.
But it will be difficult to sell this entity to the market until platinum prices improve or the rand weakens significantly, Sacks says. These mines epitomise the problems of deep-level mining in SA, as they face issues like safety, labour volatility and high operating costs. It is also uncertain whether they will be allowed to carry forward the empowerment credits that were granted to Anglo Platinum as a holding company for past empowerment deals, which means new empowerment shareholders might need to be brought in at a discount.
For Anglo Platinum to allocate its capital towards its long-life, low-cost mine at Mogalakwena is the right business decision, Hudson-Peacock says. But it means that whoever buys Rustenburg and Union will not only inherit social and environmental liabilities, but will soon have to face the decision of whether to recapitalise or restructure. The buyer will also have to sacrifice some margin on an offtake agreement with Anglo Platinum, as the new company will not have its own refinery.
Sacks says it seems unlikely the mines will be listed in the near term, given expectations that platinum prices will not turn around for at least a year or two, the approaching “strike season” in SA and the current exchange of words between government and the mining industry over job losses and empowerment.
Anglo Platinum group is currently gauging the level of interest amongst potential bidders
The Anglo American Platinum Turffontein shaft at Thekwana village, near Rustenburg in North West.
Chris Griffith… Following a value-driven, rather than volume-driven, approach.