A SATED MINE MAR­KET

It’s be­com­ing harder to find buy­ers who are pre­pared to pay ac­cept­able prices for mines, writes Char­lotte Mathews

Financial Mail - Investors Monthly - - Front Page -

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

Pic­ture: SUN­DAY TIMES

The An­glo Amer­i­can Plat­inum Turf­fontein shaft at Thek­wana vil­lage, near Rusten­burg in North West.

Pic­ture: TREVOR SAM­SON

Chris Grif­fith… Fol­low­ing a value-driven, rather than vol­ume-driven, ap­proach.

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