Coronation dumps stocks in troubled platinum sector

Coronation, one of SA’s largest asset managers with more than R600bn in assets under custody, has disinvested from the platinum group metals (PGM) sector, casting doubt over the long-term prospects of an industry that employs nearly 200,000 people.

Nicholas Hops, head of SA equity research at Coronation, said that while there is potential for short-term rallies, in its current form, the PGM sector represents a value trap for investors.

Hops recommended that companies in the sector, which is the largest employer of all mineral commodities producers in SA, should look at decommissioning unprofitable mines.

“The sector finds itself facing both cash losses and the need to fund committed projects. Given our view on the long-term outlook for PGM markets, we believe that the companies should be decommissioning producing mines and shuttering projects,” Hops said.

“This is, however, incredibly hard to do in SA, given how labour-intensive these assets are and how many lives would be impacted as a result.

“The decision to shut a mine will never be purely financially driven, and we believe that unprofitable mines are likely to stay operating for longer than they should, thus providing the market with more metal it does not need. Management teams have very tough decisions to make going forward, which increases the risk of further capital allocation missteps as some attempt to diversify away from their core markets.”

Employment

Stats SA data shows the mining industry employed 514,859 people in 2019. Out of every 100 workers in the mining industry, 39 are employed in the PGM sector, 21 in the coal sector, and 20 in the gold sector.

Lower palladium and rhodium prices, coupled with lower sales volumes, have seen PGM group profits plunge by double digits and resulted in JSE-listed companies losing value in 2023. Impala Platinum has shed 64% of its value this year, Anglo American Platinum 54%, Sibanye 45%, and Northam 41%.

Mining houses such as Sibanye have already begun closing unprofitable shafts, slashing thousands of jobs.

RMB Morgan Stanley analysts have said platinum miners need to adjust to lower prices for “longer”.

Hops said some of the challenges facing the domestic platinum industry have been self-inflicted, with management not deploying capital in the most efficient manner.

“A key element driving our decision to disinvest was the capital allocation decisions made by management teams during the boom years. Initially, we had hoped that the PGM windfall would be returned to shareholders in the form of dividends or buybacks, especially in the context of shareholders having supported the industry with capital during the bear market,” Hops said.

Ill-fated

“We continued to see companies announcing new projects, even as the longer-term outlook started to deteriorate. Some destroyed tens of billions of rand of shareholder money in pursuit of ill-fated acquisitions, much of which has since been impaired and with more to come.”

The dire outlook and disinvestment from the sector by one of SA’s largest asset managers flies in the face of optimistic forecasts laid out by the Minerals Council SA, formerly the Chamber of Mines, earlier in 2023.

The council, in its national platinum strategy for SA, said the sector has the potential to create more than 1-million jobs and contribute R8.2-trillion by 2050.

“Urgent and bold action by the SA government is required to provide the PGM mining sector with support in tackling short-term challenges, while at the same time investing in its future,” the council’s strategy document reads.

“Concerted and co-ordinated effort by the public and private sectors, supported by the framework of a national strategy, is essential to enhance the PGM sector’s outlook in the short term, and to avoid squandering the long-term opportunity.

“The SA PGM mining industry is in crisis — a function of structural changes in global supply and demand fundamentals, including increased growth in recycling, flat new-mine supply, and weaker demand.”

Data from GlobalData, shows SA was the world’s largest producer of platinum in 2022.

The country accounts for 73% of global production, with the other largest producers being Russia, Zimbabwe, Canada, and the US.

Green metals

Coronation estimates that platinum supply will continue to outstrip demand on the back of a rise in demand for green metals in response to the emergence of battery electrical vehicles (BEVs). It said BEVs have been receiving huge government subsidies around the world, and the pace of growth has been faster than was initially expected. It expects this surge to intensify.

The Cape Town-based asset manager added that within two years, China went from producing about 1-million BEVs a year to over 5-million.

“We have increased confidence that BEV producers will be able to source the commodities they need and that conventional consumers of commodities will have to compete for the residual. This will be positive for the prices of the metals concerned,” Hops said.

“Longer term, there is the potential for the hydrogen economy and fuel cells to provide an incremental leg of demand for PGM miners ... as a result of a higher level of BEV production over the forecast period and a slower adoption of fuel cell vehicles, we anticipate that the PGM markets will be in large surpluses going forward, signalling the need for supply to come out of the market.”

khumalokabelo@businesslive.co.za