Anglo rules PGMs

Anglo American Platinum still hopes to complete the sale of its major Rustenburg mining complex to Sibanye Gold before the end of the year, and an unidentified buyer has made an nonbinding offer for its Union mine. It also wants to sell some smaller joint-venture stakes.

All that remains to consummate the Rustenburg deal is clearance from the department of mineral resources.

Despite selling a major chunk of its mining side, Angloplat will remain the world’s largest platinum company, said CEO Chris Griffith.

That’s largely because it will still control the metal from those mines.

“It is going to be a number of years before the metal does not flow through me,” Griffith told City Press.

“I don’t see our role diminishing and, of course, we have our own growth options. No one has the options we have.”

The R4.5 billion deal with Sibanye comes with a concentrate-purchasing agreement that will oblige Sibanye to sell all the Rustenburg concentrates to Angloplat to refine and market.

“After a number of years, that moves to a tolling charge. We charge a not dissimilar amount, but give them back the metal,” said Griffith.

Last year, the company made 28% of its gross profit by buying and refining concentrate from other mines. The profit margin on this part of the business often exceeds mining and usually varies from 5% to 15%.

It will now become a far larger part of Angloplat’s business.

In 2014, when Sibanye CEO Neal Froneman first announced his intention to buy a platinum asset, he insisted that he also needed his own refinery.

Angloplat, however, has “every reason” to hold on to its processing assets, Griffith told City Press.

“To build a refinery costs multiple tens of billions of rands. There are better ways to make margin with that capital. We have the benefit of installed capital,” he said.

Angloplat ruthlessly shut down the unprofitable parts of both Rustenburg and Union mines before selling them.

Both are now making money and Angloplat was able to reduce its net debt from R12.9 billion to R9.9 billion in the first half of this year.

Like parent company Anglo American, Angloplat is concentrating on restructuring and paying down debt, while temporarily suspending dividends.

The company’s profits fell 62% to R991 million, but its generation of free cash flow, an important measure in the mining industry, improved.

It is also putting a moratorium on any new investment until 2018 as it drives the industry’s effort to push the platinum price higher by reducing supply.

“When the balance sheet allows and the market actually wants it, we can expand production,” said Griffith.

“I’m less worried about the absolute amount of ounces and who owns them. It’s about how much money we make. We will be the company that makes the most money.”

All the major platinum companies have cut production in the past two years.

“Some have left it too late, hoping that the work that we have done would be sufficient,” said Griffith.

For now, that is not raising the price all that much because other macroeconomic events are overshadowing the fundamental demand and supply situation, said Griffith.

“Eventually, there will be very little above-ground stock left, no matter the macro events. The fundamentals will dictate price,” he said.

The Angloplat that will remain after the asset sales will be unique in the platinum sector. Most of its production will be mechanised and wages will no longer be the company’s major cost, which Griffith believes will allow it to massively reduce the rate of cost inflation the company experiences.

Anglo American is “on track” with its plans to pay off debts by selling most of its mines, CEO Mark Cutifani said this week.

The company announced its half-year results on Thursday, reporting a far smaller loss than in the first half of 2015: $813 million (R11.5 billion) compared with $3 billion.

The historic downsizing first announced late last year continues with $1.5 billion in asset sales announced so far this year. If these disposals, largely of niobium and phosphate mines in Brazil, are concluded this year, Anglo will hit its target of reducing net debt to less than $10 billion before next year.

In the first half of this year, net debt was reduced from $12.9 billion to $11.7 billion.

Cutifani said that the plan to sell Kumba Iron Ore is still on, despite Kumba this week announcing positive financial results after shutting down its own unprofitable operations.

Cutifani said the iron-ore market seems set for a drop in prices. The fundamental problem of oversupply is still there and new production is due to come into the market too. “The price pressure is downwards,” he said.

Kumba made the largest contribution to Anglo American’s earnings after De Beers.

Cutifani would not comment on progress regarding the sale of Anglo Coal, which operates 10 mines in South Africa and is a major Eskom supplier.

De Beers, one of the core subsidiaries Anglo will retain, increased its profits marginally by selling 29% more diamonds at, on average, 14% less than a year before. Much of this came out of its stockpiles.

Like the rest of the Anglo group, De Beers has shown “supply-side discipline” by cutting back production. It closed mines in Canada and Botswana and sold its Kimberley mine in South Africa.

The company had earnings of $585 million (R8.2 billion) in the six months to June, although the seasonal nature of the diamond market means that the first half is usually better than the second.

“We are very different from other commodities. The driver of prices is consumer demand. Everything else follows that,” said newly appointed CEO Bruce Cleaver.

“It’s not like iron ore that is tied to infrastructure demand.

“The reason we’re positive is that whatever you believe, there will be tremendous numbers of people moving into the middle class,” he said.

De Beers spent about $110 million on marketing, said Cleaver.

What has been driving demand is the success in marketing diamonds to “repeat buyers”, who start with a ring, then later buy other kinds of diamond jewellery, said Cleaver. Wedding or engagement rings make up about a third of the market, he said.