Crunch time for platinum sector as prices slide
THE LOCAL platinum sector is at a crucial juncture as the metal’s price, near six-year lows, maintains a steady decline, with analysts now contemplating a move below $1 000 (R12 210) an ounce.
Platinum has fallen nearly 10 percent so far this year, and at current prices of less than $1 100 an ounce, many shafts in the world’s top producing country are losing money.
“(Platinum is) still firmly in a bear market, with little evidence of a bottom as yet,” independent technical analyst Cliff Green said last week.
Its break through recent technical levels was “likely to trigger acceleration closer to $1 000, then $950,” he said.
The outlook could hardly be bleaker for an industry that was hit by a five-month strike last year that resulted in big wage increases it can ill afford in the face of soaring costs.
“Half of the industry, including major producers such as Lonmin, is cash-flow negative and if platinum slides below $1 000 an ounce, nearly two-thirds of the industry could be underwater,” Investec fund manager Hanré Rossouw said.
Falling share prices
Investors have taken note: the share price of top producer Anglo American Platinum (Amplats) on Tuesday hit 10-year lows while world number two producer Impala Platinum (Implats) is also trading around decade troughs.
Margins for the three companies hit by last year’s crippling strike – Amplats, Implats and Lonmin – are razor thin.
According to Thomson Reuters data, on December 14 Amplats’ return on equity was 0.4 percent, Implats’ was 0.5 percent and Lonmin’s was a negative 2.5 percent.
Amplats’ gross sales revenue last year was R55.6 billion but after cost of sales – effectively production costs – were removed, its gross profit on metal sales was only R2.65bn.
For Implats, revenue last year was R29bn and the cost of sales was almost R26bn. Lonmin had revenue of $965 million (R12bn) and underlying costs of $913m.
Implats also has potential cash problems. During the ramp-up from the strike, the cash reserves on its balance sheet fell to R2.7bn at the end of last year, from R4.3bn six months before.
Amplats has said it expected first-half earnings to be at least 20 percent higher, but that was compared with the period last year when most of its mines were shut by the strike.
And Lonmin may be pressured to spend more on accommodation after an enquiry into the slaying of 34 striking workers by police at its Marikana mine in 2012 found the company had failed to comply with its housing and social obligations.
There is little space for meaningful restructuring.
Production cuts could boost prices, but would require layoffs – politically all but impossible in South Africa’s charged labour environment, where Investec’s Rossouw said the current environment pointed to consolidation. “You have got to ask why platinum companies are still sinking new shafts if you can buy existing companies at a fraction of the cost of growing organically.”
But sellers in a buyers’ market are holding tight. Sources have said the Anglo American unit would almost certainly float the mines it wanted to divest because the offers it had received were too low.
Much of the platinum extracted in South Africa, home to more than 70 percent of global reserves, is mined at deep and dangerous depths, one of many factors pushing up costs.
The more viable operations are those that are shallow.
Platinum Group Metals is set to start production in the fourth quarter at its Western Bushveld joint venture project.
The partly mechanised operation had shallow depths and high grades, reducing costs to such an extent that it could make money, chief executive Michael Jones said. – Reuters