Test case How Implats’ turnaround strategy could make or break it
Platinum miner has tough calls to make to lift Rustenburg mine
● If Nico Muller, Impala Platinum’s CEO, succeeds in the job he was called in to do, it could become a test case for conventional platinum miners in South Africa that are competing against lower-cost mechanised mines, such as Anglo American Platinum and Northam Platinum.
Faced with high operational costs and low platinum prices over the past five to 10 years, how can any conventional miner invest more capital in its operations if the life of conventional mining in South Africa’s platinum mines is already declining? Not even the best CEOs in the industry can change that fact.
Some 60% of the companies in the industry are making a loss, with only the mechanised operations and a few modernised conventional mines making money. Industry analysts say if the current platinum group metals environment persists, conventional platinum miners, such as Implats, will struggle to sustain their operations for more than five years.
The platinum price has slumped 37% in the past five years. Implats’s share price has tumbled 77.5% in the same period.
For conventional miners, labour accounts for 65% of their costs compared to 40% to 50% at mechanised or open-pit mines.
Muller, who was tasked with turning the business around, specifically at the Rustenburg operations, has a difficult job.
He took the helm at Implats in April last year, replacing Terence Goodlace.
But Muller has yet to take tough decisions, such as closing down more of the miner’s 11 operational shafts in Rustenburg.
One shaft was closed this year but more closures could be on the cards.
Muller said the company would provide details of its strategic review in the second half of the year.
He has been criticised by investors for moving too slowly when it comes to closing down loss-making operations, but Izak van Niekerk, an analyst at Mergence Investment Managers, said although Muller had been slow to shut shafts, the company had correctly prioritised safety first. Safety was an issue the company needed to sort out.
However, with the change in CEO and a strategic review under way, Van Niekerk said, Muller might pleasantly surprise the market.
“They do need big changes if they are going to reverse the continued operational disappointment, and cost inflation running above expectations,” he said.
Implats’s Rustenburg operations are the bread and butter of the company, and currently also the group’s problem child.
Therefore, the revival of the operations, which account for about 60% of the group’s production, will set the tone for how the company will look in the years ahead.
The company also operates smaller mines Two Rivers and Mimosa, which are jointly owned with African Rainbow Minerals and Sibanye-Stillwater, respectively.
Van Niekerk said Implats was unlikely to invest in increasing production at Zimplats in Zimbabwe because it would be very expensive to do so.
It is a case of either Rustenburg works or Implats looks at a long-term greenfields project in the Waterberg, which is also likely not what investors want to see.
“So they don’t really have a choice. They have to fix Rustenburg,” he said.
While Lonmin has been the focus of problems in the platinum mining sector for the past six years, with its share price failing to recover from its 99% crash following the Marikana tragedy in 2012, Implats is close behind.
The market already predicts another round of job cuts at Impala after last year’s 4 000 job losses. Analysts hope the strategic review and a reduction in the number of ounces Implats produces will boost the outlook for the company as well as improve sentiment towards platinum group metal prices.
Asked about further job losses, Implats spokesman Johan Theron said: “The scale and timing of such losses at our Impala Rustenburg operation will be determined by the outcome of the strategic review and ongoing efforts to improve profitability.”
According to a report by JP Morgan released in April, at current rand prices Implats Rustenburg operations will burn $1-billion in cash by the end of 2020, but “the elimination of high-cost production remains a key imperative” — which would help the company strategically align itself for lower prices for longer.
The report also said Implats’s balance sheet remains comfortable in 2018 as it has access to ample liquidity.
In its first-half results to end-December 2017, Implats had net debt of R3.8-billion excluding leases, with R4.2-billion cash and credit facilities of up to R4-billion.
Sibonginkosi Nyanga, an analyst at Momentum, said Muller had said he was targeting 2019 as the year in which Implats would return to profitability.
For Rustenburg to achieve that, there needs to be a significant reduction in head count, and a shutdown of some shafts. However, from a social and political point of view, Nyanga said, it was unclear whether there was the appetite to take those decisions, given the jobs that have already been lost in the mining sector this year.
The sector has shed more than 70 000 jobs in the past five years.
Nyanga added that the main solution to saving the platinum industry was a reduction in the number of ounces big miners are producing.
He said that by removing a million ounces, there might be some pick-up in price. Sibanye-Stillwater last week said removing 600 000 ounces from the market would set off an uptick in platinum prices. According to Johnson Matthey, in 2017 just under six million ounces of platinum were supplied to the market.