1 February 2013

Zimbabwe: SA Mining Woes Spur Zim Platinum

Zimbabwe is set to benefit from emerging challenges in South Africa's platinum mining sector following recent announcements by the metal's largest producer, Anglo-American Platinum (Amplats) that it will reduce its annual production by 400 000 ounces or 15% in a bid to stem losses.

Anglo-American has announced plans to halt production from four loss-making shafts at it South African mines. This will result in global supplies falling by more than 7%.

Platinum prices have in response to the new developments, surged above US$1 700 a troy ounce on the global metal exchanges, rising above gold for the first time in 10 months.

Amplats accounts for more than 45% of the metal's world production, whilst South Africa produces more than 80% of world supply estimated at over 5,8 million troy ounces.

Zimbabwe is an important producer, accounting for over 6% of world output.

South Africa and Zimbabwe combined account for more than 75% of the world's known platinum reserves.

Harare-based economist and mining analyst, Brains Muchemwa said the long-term impact of the recent global price increases on the domestic platinum sector were largely dependent on the sustainability of the changing fundamentals that have caused the spike in global platinum prices.

"A prolonged placement of Amplats' Rustenburg four platinum mine shafts under care and maintenance in the face of recovering European and Japanese diesel automotive industries is a boon to the local producers and Zimbabwe's economy as a whole as the high prices will eventually translate to more profitability at the producers' level and, in the absence of transfer pricing, increased tax revenue to the government.

"More importantly and barring negative perception in light of the distorted country risk profile, a positive outlook projecting good prices usually allows the producers an opportunity to favourably interrogate the debt markets in funding medium to long-term expansion projects that will increase production," Muchemwa said.

He however warned that it was too early to make pronouncements about the potential impact of investment in Zimbabwe's platinum sector.

Labour problems are not the only problems facing South Africa's platinum industry. Other problems include a volatile South African rand, a slowdown in Europe's vehicle market, relatively low platinum prices and rapidly rising production costs.

In addition to labor costs, South African platinum producers are facing skyrocketing costs for electricity (the mining sector is power intensive), which has been rising by 25% each year for the past three years.

Industry analysts say they do not see the problems in South Africa going away soon.

Russia' Norilsk, one of the few major platinum producers outside South Africa, believes South Africa's production will decline by between 350 000 and 400 000 ounces this year.

It estimates a surplus of about 6,5% presently exists but this will be soaked up in about 12 to 18 months should there be continued problems in South Africa. After that, Norilsk believes the industry could be in a period of supply deficits for years to come.

The recent labor-related supply disruptions in South Africa and signs of improving global demand buoyed by the recovery in the automotive sector reflects slowly strengthening economies, likely to stimulate further price gains.

Platinum is mainly used in the manufacture of catalytic convertors for motor vehicle engine exhaust systems that reduce carbon emissions from exhaust fumes.

This use accounts for about 40% of total platinum demand. As the world auto industry is showing signs of recovery as car sales surge, the demand for platinum is expected to increase.

Zimbabwe has grown its output of the white metal by more than 120% since 2006, while South African production has declined by20% over the same period.

The situation has been made worse by the recent violent labour unrest experienced at large South African mines in August last year.

This combined with rising costs and increasingly burdensome underground mining conditions that have triggered safety concerns have made continued productions at some of the operations in South Africa unviable, prompting the proposed mine closures.

South Africa's platinum total production is expected to fall by more than 600 000 ounces in 2013, losing mining companies an estimated R8,6 billion in revenues at current prices in contrast to Zimbabwe's output, which is expected to increase by 7%.

Analysts say the improving political situation in Zimbabwe could result in the country becoming a more attractive platinum investment destination over South Africa.

South African mines, which are largely deep underground operations have become expensive to exploit while Zimbabwe's platinum deposits, which allow for opencast, mechanised mining, make them some of the lowest cost-reserves in the world.

"Fortunately Zimbabwe doesn't seem to have very stringent government safety standards that have been one of the major cost drivers in platinum production in South Africa. Zimbabwe and South Africa are the biggest producers of platinum in the world and they should hold back production to ensure that they starve the market of oversupply so as to maintain firm global prices. Therefore the decision to close most of the platinum mines in SA is very welcome and is good for the long-term stability of the platinum mines," Muchemwa said.

Zimbabwean mining companies also enjoy much-lower labour costs, which are about a third of costs in South Africa, whilst there is virtually no labour unrest in Zimbabwe.

The major challenge in Zimbabwe's mining remains the cost and availability of electricity as well as perceived political risk.

Media reports last year said Impala Platinum, through its Zimplats subsidiary, could invest as much as US$10 billion (R87 billion) to expand production in Zimbabwe provided there is a satisfactory and business-friendly regulatory environment.

However, uncertainty over implementation of Zimbabwe's indigenisation legislation has stalled the sector as investors remained skittish. The conclusion of empowerment deals where 51% of the shares in both Mimosa and Zimplats where transferred to indigenous shareholder groups has been seen to bring closure to the debate.

Analysts say Zimbabwe holds an important lesson for South Africa in terms of political risk and the impact it has on asset valuations.

Zimbabwe's platinum output is expected to grow to about 11,5 tonnes (365 000 ounces in 2012), with Finance minister Tendai Biti saying he is forecasting production to reach 393 000 ounces (12,5 tonnes) in 2013 on the back of a planned 10% expansion by Zimplats.

Zimplats, which produces about 180 000 ounces of platinum a year, has the potential to expand output to a million ounces, which translates to potential earnings of US$1,7 billion per year at current prices.

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