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SA platinum mines enter ‘survival dimension’
Brendan Ryan
Posted: Mon, 20 Oct 2008
[miningmx.com] -- THE collapse in platinum group metal (pgm) prices has placed the South African platinum mines in “survival mode”, where they will have to cut production and suspend capital expenditure on new projects.


That’s the view of Credit Suisse Standard Securities (CSSS) precious metals analyst David Davis, who had warned in a report published on September 18 that pgm prices had reached “industry breakeven” levels.

He calculated breakeven prices for platinum companies at about $1,100 per ounce for platinum; $300/oz for palladium and $4,200/oz for rhodium.

Currently, platinum sits at $867/oz while palladium has dropped to $187/oz and rhodium has collapsed to about $1,700/oz.

Davis had previously warned in his report “A mine too far”, published in June, that the SA platinum industry was expanding too rapidly.

In his latest report released last week, Davis commented the platinum industry “is unlikely to maintain current production at current metal prices, let alone carry out their growth strategy in the current environment.

“We believe that the industry needs to respond rapidly to the suppressed metal prices which, if sustained, could force the companies to cut back or delay capital projects and right-size their operations.

“We estimate the industry should reduce their production by more than 10% to stimulate prices and platinum equities.

“We are of the view that metal prices are now the main driver of SA production in the short- to-medium term. This means that the industry has entered a totally different dimension, that of survival,” he said.

Davis pointed out that, while there was so far no evidence of any cutbacks being made, he believed the platinum industry had reacted to falling pgm prices by reviewing all costs, including capital projects.

He pointed to the speed with which market fundamentals had reversed themselves in under three months. He believed announcements were imminent that projects would be delayed, as companies cut back on everything except essential capex.

Davis added that his discounted cash flow (DCF) models for Anglo Platinum (AngloPlat) and Impala Platinum (Implats) at current metal prices were negative over the life of their reserves, even at an exchange rate of $1/R10.67.

He indicated that a number of individual mines within these groups would generate cash flow over a much reduced life-of-mine of between five and 10 years.


Click Here to subscribe to our daily newsletterDavis estimated that AngloPlat might reduce its production by 9% on average over the next four years. If that were the case, AngloPlat would produce 2.28 million oz in 2008 compared with its original forecast of 2.4 million oz; its production would reach only 2.58moz in 2012, compared with the group’s original forecast of 3 million oz.

Recent research from JP Morgan analysts Steve Shepherd and Allan Cooke has also highlighted the perilous financial situation facing various platinum producers, while pointing out the problems inherent in any decision to cut back on operations.

They said: “History shows that closure decisions are never rushed by the producers for a number of, probably, quite obvious reasons.

“Such reasons may include the expense, political and labour relations cost of discharging large numbers of workers in an environment of high unemployment in a country that employs quite draconian labour laws that are arguably more sympathetic to the workforce than its employers.

“So, typically, mining groups will often absorb pain for some time before making a closure decision which is as difficult to reverse as it is to execute.

“Moreover, we note that a number of the upper quartile (cost) producers are black economic empowerment entities, often joint ventures with larger players. We contemplate how difficult it may be to curtail these operations since it could lead to an unravelling of the state’s empowerment imperative.

“Thus, in a weak pgms market environment, a rapid supply-side response is unlikely in our view.”

The point made by Davis is that the longer the platinum companies hold off on making production cuts, the longer pgm prices will remain suppressed.

He said: “We are of the view that a number of expansion projects are value destroying and, as such, yield no or very little return on investment.

“Furthermore, we believe platinum and rhodium supply is likely to be in surplus from this year through to 2010. Under these circumstances we believe metal prices will remain suppressed until the supply and demand dynamics change.”