Risky

Finweek English Edition - - INVESTMENT - Chris Grif­fith, CEO of Am­plats

The four-week strike in South Africa’s plat­inum sec­tor has echoes of Mar­garet Thatcher’s strug­gle to break the min­ing unions of the UK’s coal sec­tor in the Eight­ies. Po­si­tions were so en­trenched that the only out­come was a frac­ture.

On the ev­i­dence of num­bers pro­vided by Im­pala Plat­inum (Im­plats) CEO Ter­ence Good­lace on 19 Fe­bru­ary, the plat­inum sec­tor has nowhere to go. If it ac­cedes to the wage de­mands of the As­so­ci­a­tion of Minework­ers and Con­struc­tion Union (Amcu) it faces re­struc­tur­ing and re­trench­ments. If it stands firm, how­ever, the out­come may well be the same. Here’s how the sit­u­a­tion cur­rently looks for plat­inum pro­duc­ers:

Rev­enue booked last year for the sec­tor’s three largest plat­inum com­pa­nies – Im­plats, An­glo Amer­i­can Plat­inum (Am­plats) and Lon­min – was R50.7bn against which roughly half, or R22bn, was spent on salaries.

A fur­ther R23bn was spent on con­sum­ables and power while a fur­ther R8bn was spent on cap­i­tal de­vel­op­ment, a level dan­ger­ously low to sup­port in­dus­try growth when the plat­inum price re­cov­ers, in Good­lace’s view. A f ur­ther R2bn was ex­pended on taxes and roy­al­ties while only R800m was pro­vided to in­vestors in div­i­dends – a mere 1.5% of rev­enue. Con­sid­er­ing the fact that share­hold­ers pro­vide the cap­i­tal, that’s a very slim re­ward. More than dou­ble was paid to Govern­ment even though the govern­ment doesn’t in­vest in businesses.

In any event, the in­dus­try loss was just over R5bn last year be­fore Amcu’s R12 500/ month ba­sic min­i­mum wage is fac­tored into the equa­tion. Am­plats, among oth­ers, has worked on im­prov­ing cost con­trols, but the wage in­creases, if ap­plied, will suck the ben­e­fits out of the pain cur­rently be­ing suf­fered.

Nat­u­rally, this is bad news for SA Inc, which re­lies on the plat­inum sec­tor for em­ploy­ment, for­eign ex­change and the like. Per­haps more wor­ry­ing is that the in­ter­na­tional mar­ket has al­ready taken cog­ni­sance of the dis­lo­ca­tion be­tween de­mands of labour and the in­abil­ity of in­dus­try to meet them.

The plat­inum price has been sur­pris­ing since the strike was called on 23 Jan­uary, fall­ing $20/oz in the one-month pe­riod but show­ing some vo­latil­ity. It rose to a high of $1 470/oz and has been up to $90/oz lower in the pe­riod.

That is per­plex­ing price ac­tiv­ity given that about 60% of all newly mined plat­inum is sourced from the three com­pa­nies in­volved in Amcu’s strike ac­tiv­ity. Of the three pro­duc­ers, only Lon­min is com­pletely shut down, nonethe­less, you would ex­pect a price re­ac­tion in the pos­i­tive.

Not so, say an­a­lysts, be­cause the strike was rel­a­tively well f lagged, al­low­ing pro­duc­ers to build stock­piles of up to eight weeks. Chris Grif­fith, CEO of Am­plats, is adamant that the stock­pile build was nor­mal in­ven­tory and not a pre­med­i­tated war chest. Still, the plat­inum price might only start to re­spond to the prospect of a real deficit in sup­ply if the strike ex­tends to eight weeks.

The other, more wor­ry­ing, fac­tor is that in the words of one an­a­lyst, the plat­inum mar­ket has been wean­ing it­self off the SA de­pen­dency by build­ing stocks of its own and de­vel­op­ing a re­cy­cling sup­ply chain in the au­to­cat­a­lyst in­dus­try, es­pe­cially given the per­sis­tence of in­dus­trial ac­tion over the past three years.

For in­vestors this must present a con­fus­ing pic­ture. Piet Viljoen, founder of as­set man­age­ment com­pany RECM says, how­ever, that the busi­ness risk cur­rently as­sail­ing the plat­inum pro­duc­ers should not be con­fused with in­vest­ment risk which, given the low val­u­a­tions of the plat­inum, is cur­rently low.

“Min­ing plat­inum out of the ground is by de­fault a risky busi­ness. How­ever, if a low price is paid for the com­pany’s shares, this as­set is a low-risk in­vest­ment, de­spite the risk­i­ness of the busi­ness,” he says.

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