Amplats riding high but wary
World’s largest platinum miner is rolling in cash after a bumper six months – yet it’s talking the good times down
A tenfold increase in its cash pile in the space of a year is probably the most obvious sign that the lean times are firmly behind Anglo American Platinum.
But Amplats has travelled a painful journey to transform itself and CEO Chris Griffith is determined to avoid the mistakes of the past.
While platinum prices continue to languish at multiyear lows, the rocketing prices of palladium and rhodium, with the benefit of a weaker rand, helped the world’s largest platinum miner produce a bumper set of half-year results this week.
Besides a 120% jump in half-year headline earnings, Amplats kept cost increases to 6% — lower than mining inflation of 7.5%.
But it will be tested as wage negotiations kick off in earnest. The majority union, the Association of Mineworkers & Construction Union, has upped its hallmark minimum wage demand of R12,500 to R17,000 this year.
While the good fortune of the company undeniably puts it in a weakened negotiating position, Griffith says the miner will be mindful of the long-term implications of any agreement. "As prices go up, they also come down and what we will be very careful about is that we don’t embed unsustainable cost inflation that when prices do come down … that we then have to start retrenching again."
Instead, Griffith notes that one-off payments or benefits are likely to be part of the settlement that the company envisages.
Cash-flush as it is, Amplats declared a R3bn dividend on Monday, translating to R11 a share. That’s based on a payout policy of 40% of headline earnings, which was recently revised upward from 30%.
But Noah Capital analyst René Hochreiter questions whether the company ought to consider revising it to 50% or even 60%.
"My guesstimate for a forward dividend yield is about 3%. That’s pretty low for a resources company, when times are good," he says.
Finance director Craig Miller, however, says Amplats is being disciplined in its capital allocation and cognisant of coming headwinds — from wage talks as well as possible power cuts from Eskom.
The company is also assessing two possible expansion projects, but is unlikely to pull the trigger on both, says Griffith. "We have to be very careful about the amount of metal we bring to the market."
In the past, platinum producers, including Amplats, oversupplied their own market, pushing prices downward.
Though Amplats is already thinking about how to weather the next down cycle, it is probably some while away.
For palladium and rhodium, where demand is dominated by the petrol-powered vehicle sector, the medium-term outlook remains positive thanks to tighter emission rules, which mean more of these metals must be used.
And while the platinum price remains in the doldrums (it has been below $900 an ounce for over a year now), the outlook is improving.
As reported by Johnson Matthey, there was a "dramatic turnaround in investor sentiment" which stimulated "heavy buying" of platinum ETFs earlier this year.
That indicates investors believe that the platinum price could go higher, says Arnold van Graan, mining analyst at Nedbank Corporate & Investment Banking. "Many investors, especially SA investors, who are bullish on the platinum price, are buying the ETF as a proxy for the stocks, given the operational challenges and risks still faced by the PGM producers."
A higher platinum price would be a further boost for Amplats which, despite the uplift from its palladium and rhodium production, is still predominantly exposed to platinum.
It accounted for about 48% of Anglo Platinum’s first-half refined production, with palladium at about 34% and rhodium at about 6%.
Nic Norman-Smith of Lentus Asset Management says platinum supply has not dropped as much as normal market forces would have dictated due to the government’s de facto rescue of Lonmin, when the Public Investment Corp underwrote its 2015 rights issue.
"This kept excess supply on the market, which hurt the rest of the industry," he says.
"Provided there is no further government intervention, the supply/demand dynamics should provide some strength to the platinum price as miners shut down unprofitable ounces of production."
Lentus, however, views Impala Platinum as the most attractive of the major miners.
JPMorgan, meanwhile, is underweight on Amplats which, though the "undisputed leader" among SA platinum miners, has relatively expensive shares — they’ve rallied 133% over the past year.
In a note, its analysts caution that PGM prices will disappoint and will prompt a correction in the stock.