PLATINUM companies face difficult choices as they balance wage increases increasing workers’ salaries to end a nearly five-month wage strike against their need to invest in their mines to ensure future production and to preserve jobs.
The mines owned by the world’s three biggest platinum companies, Anglo American Platinum (Amplats), Impala Platinum (Implats) and Lonmin, in the Rustenburg area have been idled since January 23, when the Association of Mineworkers and Construction Union (Amcu) called more than 70,000 workers out on strike to back its demands.
The demand for a R12,500 basic monthly salary would have represented a 127% salary increase if paid immediately. Amcu’s relaxed demand, to reach that over four years, amounts to a 23% increase a year between 2013 and 2017.
"The platinum producers simply cannot give in to Amcu’s current wage demands as the business would not be economic at today’s platinum group metal basket price," says Liberum analyst Ben Davis. "Even the current wage offer to unions would require the basket price to increase by 40% by 2017 to preserve the companies’ already weak profitability margins."
One estimate put the platinum price at $2,405/oz to meet Amcu’s demand for R12,500, assuming other metals in the suite of minerals mined by the three companies rise by a similar amount. Companies measure their revenue based on a calculation of the prices of platinum, palladium, rhodium, gold and other associated metals found in the ore body.
The platinum price has barely moved since the start of the strike, despite the loss of an estimated 1-million ounces of output. It has hovered near $1,430/oz as the market digests part of an enormous above-ground stockpile, the exact size of which is unknown but is estimated to be about 4-million ounces.
"This strike has been enormously damaging. It has destroyed the relationships we have with employees, communities, the union and government. It will take years to restore," says Johan Theron, head of corporate relations at Implats. "It has resulted in us taking an untold financial impact. The money and resources we had to finish our projects are gone … and it could substantially influence the shape of the future business.
"This is a defining moment in the platinum industry," he says. "The next chapter is restructuring and reshaping these businesses to be viable and sustainable into the future.
"The optimism in the sector, of tolerating loss-making operations for many years by subsidising them with profitable shafts — that’s gone. You’ll see much more decisive action."
A rule of thumb is that the total cost to company for salaries is double the basic component of the wage bill. Implats paid a basic wage bill of R1.12bn for its entry-level workers, and all the extras such as pension, medical aid, overtime, bonuses and living-out allowances brought the total labour cost for that category of workers to R2.25bn in the last six months of last year. Doubling the basic salary would also increase some of the other components of the total cost to company that are calculated as percentages of the basic salary.
Amplats has said Amcu’s demand will add about R4.5bn to its cost base, which it can little afford as net debt grows rapidly with a key production area out of action. Over a four-year period to 2017, this would increase the debt base by R9.8bn. Debt in the company has increased to R13bn because of the strike, CEO Chris Griffith has said.
"Productivity is simply not sufficiently high to offset this sudden increase in costs," says a platinum mine executive, speaking on condition of anonymity.
"If companies accede to Amcu’s demands it will tip a large number of mines into permanent loss-making territory."
The strike has also been felt by companies offering services and materials to mines, and a number of smaller companies, whose only contracts were with the platinum mines, have laid off workers and in some cases closed down. The three platinum miners have lost an estimated R21bn in revenue. Amplats and Implats have mines outside the Rustenburg area that are unaffected by the strike and which have continued production. Lonmin is completely stalled and analysts have suggested it may need to revisit the market to raise capital for the third time in five years.
About two-thirds of SA’s platinum mines were losing money or barely making a profit before the strike, with rising costs in labour and other inputs eating into margins because of flat prices for platinum group metals over the past five years. "The offers on the table from the companies are more than generous in the circumstances and leave shareholders with little or no prospect of a return on capital in excess of the cost of capital for the foreseeable future," says Michael Kavanagh, a mining and metals analyst at NOAH Capital Markets.
Implats reported revenue of R7.3bn for the six months to end-December at its Rustenburg mines and spent R3.9bn on wages. Other consumables came to R2.4bn and it spent R1.95bn on its new projects, leaving it with a R1bn loss. Acceding to Amcu’s demand will double the wage bill in three years and deepen that loss, leaving nothing for investing in new mines if there is no improvement in productivity or a dramatic increase in the platinum price.
Implats is spending R400m a month at its Rustenburg mines known as the Lease Area, down from the R1.4bn it usually spends, but with the strike nearing its sixth month, the company has spent R2bn with no return from the idled assets.
Implats estimates it could take three months to reach production levels similar to those before the strike and analysts say it will cost billions more before revenue is generated.
One platinum executive warns a return to production within three months is unlikely, citing the lengthy time it has taken Harmony to return to full production at its Kusasalethu gold mine, where Amcu is dominant, after a damaging strike at the end of 2012.
"Implats would have to pay operating costs for three months before making significant revenue from the Lease. We estimate this would entail an initial ‘investment’ of R2bn-R3bn in working capital to pay employees and other normal production costs until revenue starts filtering in," Citi Research has said.
Implats has raised R5bn and shareholders would be unhappy for cash earmarked for its new mines to be spent on salaries, the company has said.
This kind of capital outflow since the start of the year has forced Implats to revisit its plans for the mines it is building to replace the ounces it is depleting from old mines. It has said it will shut nine old mines in the next five years, replacing them with three new, deep-level mines.
Implats had aimed for output of 800,000oz-850,000oz in five years, from 700,000oz this year, but this year’s target is unlikely to be met. "All those small shafts are being mined out. To move people to the new mines we have to finish those big shafts. If we cut our capital expenditure we won’t be able to move those people and we won’t reach those production levels," Mr Theron says.
Two shafts, Number 20 and Number 16, are largely complete and on track for production. The third shaft, Number 17, has been completed, but there will now be an intense discussion within Implats over whether it should spend R5bn over the next five years on equipping the shaft and underground development to bring the mine into production.
"This highest risk for capital constraint is a decision on 17 Shaft. It will depend, once we are up and running again, on how the return to work happens and what the market looks like," Mr Theron says. The sinking of a fourth shaft, Number 18, is simply not up for discussion.
Amplats is openly talking about the sale of its Union mine and has said the Rustenburg operations are no longer core to its future as it switches its focus to the opencast and mechanised Mogalakwena mine and its other mines on the Eastern Limb of the Bushveld Igneous Complex. Mogalakwena is described by JPMorgan Cazenove as the most profitable mine in the world and one that could be ramped up to 1-million ounces a year. That is not a figure Amplats has publicly spoken of; rather, it has spoken of 600,000oz a year, doubling from 330,000oz now.