Amplats needs the Midas touch
It is shades of 2008 after the collapse of Lehman Brothers when mining giant Anglo American abruptly declared it would not be paying a dividend. This time its platinum arm, Anglo Platinum (Amplats), told shareholders that its chief executive, Neville Nicolau, had stepped down and the dividend would be stopped until further notice.
Nicolau's sudden departure has surprised industry observers because he is seen as a quality act, one that will be hard to replace.
"If Neville Nicolau can't fix Anglo Platinum no one can," said Peter Major of Cadiz Corporate Solutions.
Platinum analyst at SBG Securities Justin Froneman added: "He is a good guy and notable operator … but there are question marks as to whether he was given enough flexibility. I'm not surprised he resigned."
Describing Nicolau as having "balls of steel", Major said he was not convinced that Amplats' worries had anything to do with Nicolau's management, but rather with the complex dynamics of managing the platinum business, which had been beset by a cocktail of cost challenges in areas of labour, productivity and the size of mines.
A 30-year veteran at Anglo American, Nicolau's resignation has created a dark cloud of speculation surrounding his exit.
Was it forced? Major believes that Nicolau resigned and was not forced out and Anglo American has denied that he quit over a disagreement in strategy.
Kumba Iron Ore's chief executive, Chris Griffith, will take on the ailing company's top job.
He is not new to the platinum industry, but Froneman said the jump from iron ore to platinum was no easy feat.
"Kumba is stable and doesn't have the same issues and pressures. It's going to be tough," he said, adding that Nicolau had a lot of experience in deep gold mining, "which made him a good candidate for Amplats".
Amplats is the world's largest producer of the white metal, which is used as an autocatalytic converter in vehicles. South Africa holds 80% of known global reserves and the company is the market leader.
Cost control issues
Nicolau joined Amplats in June 2008 when its share price hit a record of about R1400 a share. Amplats at that time was already experiencing cost control issues, but they were miniscule in relation to issues today. He leaves with the share price at just R408 a share.
Platinum group metals' basket prices have remained flat since the 2008 crisis, but costs in South Africa have risen above inflation. This is an endemic issue across the platinum industry in South Africa and is not confined to Amplats.
However, Amplats is the market leader and the magnitude of the operation in some ways works against efficiencies. It has been said in the past that Amplats is too big to manage.
Amplats shares have tumbled 24% in the year to date, in line with the platinum index. Platinum is now trading at $1390 a fine ounce, whereas it hit $2100 an ounce in February 2008.
Amplats' dramatic drop in interim profits, reported earlier this week, is indicative of the entire industry's troubles. Global platinum has been in surplus for the past two years, according to Thomson Reuters GFMS and has added to production and cost dilemmas at the world's largest platinum miner. Coupled with demand issues, palladium is a cheaper alternative to platinum and is gaining market share.
Amplats' gross profit was down by 56% at R2-billion for the half-year. The gross profit margin – operating profits as a percentage of revenue – has almost halved from 19.2% to 10.7% and the six months returned a net loss after tax of R450-million.
Amplats financial director Bongani Nqwababa, who has taken over from Nicolau on an interim basis, described the results as a "blood bath" and it is no surprise the company halted the dividend. After it cut dividend payments across all divisions in 2008, they were resumed only in the second half of 2010.
Last year Amplats shareholders took home R1.8-billion in dividends – the 2011 total dividend declared amounted to R7 a share and Amplats has 260-million shares.
Standard Bank commodity trader Marc Ground said he expected consolidation and mine closures. He said 10% of South African platinum production was at risk.
"I expect about 450 000 ounces of platinum at risk this year. This relates to five mines; four are Amplat mines." The figure includes the unprofitable Markina mine, which has already been shut down.
Ground said he expected more mine closures this year, but added: "Amplats average costs are R8 300 per platinum group metals ounce. They could still support unprofitable mines. Marikana was different because it was a joint venture with Aquarius Platinum, so the decision to shut down wasn't only theirs."
Per equivalent refined platinum ounce, however, Amplats's cash operating costs are R14478, soaring by 11% in the first six months of the financial year. This has been on the back of higher-than-inflation increases of electricity, labour, diesel and caustic soda. Mining inflation, which relates directly to labour costs, increased by 8.4%.
Ground said there was very little mining companies could do about aggressive wage settlements.
Analysts are now speculating how Amplats will bring down costs. Labour accounts for about 50% to 55% of total costs in the platinum industry and Amplats employs about 59000 people. If more mines are shut down, the industry can expect job losses.
"This is going to be a political issue if jobs are lost in the platinum industry," Froneman said.
With Marikana and Everest closed, Amplats will have to find other ways to increase efficiencies. "There's a debate whether the big players should've done more … Perhaps they should've shut down mines to help the industry … but as a market leader, do you want to take all the pain while others take market share?" Froneman said.
With costs growing by about 10% a year and platinum prices flat for the last few years, the industry needs decisive action.
"I think a lack of demand because of poor global auto sales is the real problem. However, a supply response – cutting unprofitable production – could help support platinum group metals prices," said Ground. Froneman added: "Productivity can't mitigate rising costs in the long term."
Meanwhile, Major said Amplats needed an innovative leader: "Amplats needs a Mark Cutifani," he said, referring to the chief executive of Anglogold Ashanti.
"Will Griffith be a Mark Cutifani? It's hard to say … Mark is so out of the box. He thinks laterally and that what is needed in South African mining," said Major.