The violence that erupted near South Africa’s third-largest platinum producer Lonmin’s Marikana mine, in which over 44 people were killed this week, has dealt another blow to the country’s already struggling platinum industry.
On Thursday, 34 striking workers were killed and 78 injured in a police shoot out near the North West province mine, while ten people died in separate violent clashes earlier in the week.
Liberum Capital noted that the shooting, in addition to the week-long illegal strike, would place another barrier to investing in South Africa-oriented stocks, such as Anglo American, as well as the platinum sector as a whole.
Nomura International director of emerging markets economist Peter Attard Montalto stated that the “complex and delicate” situation, which intermingled a key sector of the economy with politics and union power, has received international attention. “Rating agencies have also been commenting that incidence[s] like this undermine investor confidence and are the kinds of social breakdown they have been highlighting as a driver of the negative bias to the rating,” he said.
Fairfax added in a statement that current margins did not provide sufficient returns to attract capital to the industry, given the riskiness associated in mining platinum-group metals (PGMs).
Cash costs in the platinum industry have quadrupled since 2002, while competing unions, industrial action, safety stoppages, continued electricity tariff increases, productivity decreases, nationalisation and supertax debates, as well as a lack of skilled labour continued to place added pressure on mining companies.
Nomura International analyst Tyler Broda earlier this month questioned the survival of certain participants in the platinum industry, as many South Africa producers were in a difficult position with existing operations becoming less profitable and investment less attractive.
Liberum commented that, despite Lonmin’s loss of 15 000 oz over the past seven days, owing to the ongoing disruption at the mine, it was unlikely to dent the chronic oversupply that faced the industry, as the producer only accounted for 12% of world supply.
The loss, however, was estimated to have cost Lonmin $21.7-million in revenues and $2.7-million in earnings before interest, taxes, depreciation and amortization (Ebitda).
Currently, the PGM sector held a cumulative oversupply in excess of 750 000 oz, on the back of a 4.2% fall in demand to 7.8-million ounces in 2012. It was forecast by Nomura that 2015 would see a cumulative surplus of over one-million ounces.
In the current “political/labour environment”, Nomura did not believe that Anglo American Platinum, which produced 45% of world supply, would “dare” make the deep production cuts that the market needed to balance.
Nomura, earlier, pointed out that, Lonmin, as the highest-cost producer, needed a material fundraising or growth push, or it could be the first of the South Africa platinum producers to “break”. Tyler also noted that Lonmin was likely to follow “broken” Aquarius Platinum in a game of “industrial chicken”.
Aquarius experienced a 86% year-on-year fall in shares, compared with Lonmin’s 46% year-on-year share decline, and Aquarius was trading at option value. Aquarius also placed a number of its mines on care and maintenance.
“There is some concern that if the situation at Marikana persists the company could start losing headroom on the covenants on its debt [which is] estimated around $380-million,” Fairfax noted.
The group noted that Lonmin’s Ebitda for 2012 was estimated at about $216-million, with revenues of $1.72-million. A loss of three to four weeks of production could see Ebitda drop 5% to $205-million.
Production across the platinum producer’s mines has been halted, with no indication as to when the volatile situation near the mine would ease, or when workers would start returning to work.
Workers were informally demanding a pay raise to R12 500, up from R4 000 a month – an amount that Fairfax said the company could not support with Ebitda margins of 12.5% and estimated net margins of 2.5%
In February, Impala Platinum’s (Implats’) Rustenburg operations were disrupted as workers downed tools in an often-violent six-week-long illegal strike that cost the lives of three.
The strike, which was said to be the result of union rivalry between the National Union of Mineworkers and the Association of Mineworkers and Construction Union, cost Implats 120 000 oz in lost platinum production and almost R2.4-billion.
Lonmin is currently without its CEO Ian Farmer, who was hospitalised this week owing to a serious illness. The executive committee, temporarily headed up by Roger Phillimore, would undertake the day-to-day responsibilities, and director and former COO Mohamed Seedat would step in to assist.