Platinum mergers could provide relief, but are no final cure

Twenty years ago, South Africa's platinum sector was dominated by three major players: Anglo American Platinum, Impala Platinum and Lonmin. Today, 16 or so companies operate in this environment.

Consolidation could be a solution for the stagnant sector, analysts say, although growth in small miners may be good for competitiveness and sharing the country's wealth.

An executive at one of the platinum houses, who wished to remain anonymous, said consolidation was needed because there were opportunities for synergies that would help in saving costs and running a more efficient platinum sector.

For shareholders "it makes no sense to have 16 miners, although it benefits customers".

Analysts in the main agree with calls for consolidation in an industry that has suffered from a lack of investment over the past decade and from two major labour strikes.

Hurbey Geldenhuys, analyst at Vunani Securities, said consolidation could offer some short- to mid-term solutions to avoid shutting operations.

"This means your unit costs increase at a much faster rate than expected and the production is falling at many of these shafts because there haven't been adequate investment to renew the prospects of those shafts."

The platinum price dropped to a record low of $831 an ounce in 2015 and has yet to fully recover, trading only 6.5% firmer so far this year to trade at $949.40 on Friday afternoon.

Platinum will probably peak at $1480/oz in 2020 while some industry players predict this peak around 2023, according to Bloomberg data.

The little consolidation that has been evident in the industry in recent years was driven primarily by Sibanye's voracious appetite.

The Neal Froneman-led miner bought Aquarius's Kroondal mine as well as Anglo's Rustenburg operations. Northam Platinum recently bought Glencore's Eland mine.

One industry player said that despite Anglo's fire sale of some of its poorer-performing platinum mines, the sales are not leading to consolidation but are resulting in further fragmentation of the industry, which does not solve the problem.

With 80% of the world's platinum produced in South Africa, one commentator said the country should have been a price setter in the market and unfortunately was not.

Anglo Platinum, which produces about 40% of world supply at its peak, has cut about 350,000 to 400,000 unprofitable platinum ounces since 2013.

Lonmin cut 150,000 ounces last year, while Impala has cut 200,000 ounces since 2012.

"There's some pressure on platinum and while half of the industry is loss-making it will continue to put pressure on the PGM industry in SA," said Amplats CEO Chris Griffiths.

"It's going to be a tough ride for a number of years before the sustained deficits make an impact and we can increase demand again so we can bring new production to the market." World Platinum Investment Council and SFA (Oxford) figures show that there will be a deficit of about 100,000 ounces this year. The decline in production has been offset by new projects coming on line at the few smaller miners that still have cash for these.

Leon Esterhuizen, analyst at Nedbank, said that consolidating platinum production would be effective.

"The real problem is, given the fact that there are four major companies in the world, one would expect that they wouldn't be destroying the market in terms of producing too much metal," he said.

With Lonmin being the worst , the company should be cutting production even more because they are not making money, Esterhuizen said.

"They have to take that step instead of keeping all the loss- making assets open."

Other major companies such as Amplats would not cut more of their production now because they would be cutting off their profitable ounces, he said.

With companies making a profit right now, the option to cut production again was not on the table.

"Unfortunately, it doesn't work like that. If you are losing money you have to take the pain," Esterhuizen said.

Independent analyst Ian Cruickshanks said the simple answer was that when the free market price was less than the cost of production - which was the case for many of the mines - it would result in closures which would in turn lead to consolidation.

The use of recycled platinum from scrapped vehicles' catalytic converters and the improvement in technologies used in the removal was placing a cap on demand for platinum for the foreseeable future unless there were an increase in the demand for cars.

However, consolidation does not bode well for black economic empowerment businesses, with some companies operating high-cost mines.

Bringing smaller miners together to create one giant means people will lose the full control of their businesses and no one wants to do that, Esterhuizen said.

"You have to try to convince people to go from owning 100% of a small company to 5% of a bigger pie. It's crazy but people don't want to do that - so it's difficult to consolidate fragments. You're never going to see less than four companies in a space," he said.

Cruickshanks said that while consolidation might lead to the erosion of competition, fewer miners might result in the price increasing and viability for BEE competitors.

In all likelihood there would be fewer platinum miners in South Africa in future, he said.

"What is going to happen is more operations will become less profitable in due course and if we have any more BEE forcible rules then it is going to be even more difficult," Cruickshanks said.

Imraan Osman, Siyanda Resources's director of business development and corporate finance, said it would become increasingly difficult to sustain production of unprofitable ounces.

"We can't afford to produce unprofitable ounces... (so this) means restructuring the business to lower the overhead cost. That is what will need to be done," said Osman.

The Africa Platinum Mining Index has declined 74.4% in the last 10 years, while the platinum price has dropped about 44.5% in the same period. - Additional reporting Chris Barron

mtonganal@sundaytimes.co.za and anetosp@sundaytimes.co.za