South Africa’s Platinum Miners Struggling

Platinum is rare and often irreplaceable, but that does not mean mining the metal is always profitable. Earlier this month, Aquarius Platinum (ASX:AQP,LSE:AQP) announced that the Marikana operations, jointly owned with Anglo American Platinum (OTC Pink:AGPPY), will be placed on care and maintenance due to the enduring low PGM basket price. This is a clear sign that industry headwinds are taking a toll on South Africa’s platinum miners.

At present, costs are rising, labor conditions are volatile, metal prices are low, and there are forecasts that the market could be in surplus this year.

The industry’s problems are not new and companies have been trying to adapt. Anglo American (LSE:AAL) and Lonmin (LSE:LMI), for example, previously decided to use low-grade mining as a means to cope.

But there are an increasing number of signs that the conditions are becoming unbearable, and the closure of Marikana is one of them.

“Unnecessary operational and regulatory headwinds are occurring against a backdrop of a pricing environment that remains relentlessly tough, with unabated on-mine cost inflation little fundamental demand recovery and continuing volatility in financial markets,” said Aquarius CEO Stuart Murray in the Q3 2012 results statement released in March.

“The result is that margins are under severe pressure throughout the industry and it is my view that labour unions and the government need to start co-operating constructively with mining companies immediately if the very sustainability of the platinum industry and the thousands of jobs it provides is not to be threatened,” he also warned.

Eastplats suspends development

In May, Eastern Platinum (TSX:ELR,LSE:ELR) announced the suspension of funding for development of the Mareesburg mine and construction of the Kennedy Vale concentrator plant. Only nine months after deciding to embark on that project, the dynamics had changed so drastically that the company concluded that the financial risk of continuing was too great.

Eastplats said prices have declined dramatically, with little or no fundamental demand recovery or supply reduction forecast in the near to medium term. The company also cited predominating economic factors in South Africa, such as unrelenting operating cost inflation, adverse currency exchange rates, weak chrome prices, heightened concerns with respect to reliable power delivery and unplanned, and unlawful labor actions.

“These factors, and particularly the continued cost pressures we are experiencing in South Africa, make the platinum sector an extremely difficult space in which to operate,” said President and CEO Ian Rozier.

The current operating conditions also prompted Eastplats to conduct a full review of its operations. Having completed it, the company said earlier this month that it plans to reduce costs and improve efficiencies.

The plan has “potential implications to staffing levels.” It involves suspending stoping at the Zandfontein section of the Crocodile River Mine and embarking on a 12- to 18-month development program, reducing overhead and administrative costs, and deferring non-critical capital expenditures beyond 2013.

Partnerships develop

Now that the platinum mining industry appears on the brink of crisis, partnership attitudes are emerging.

On Monday, representatives of the South African government and organized labor met with platinum producers for “a frank and open discussion” on the challenges facing the industry.

According to a statement released after the meeting, all parties agreed on a short- and medium- to long-term plan to address the challenges. And, the Department of Mineral Resources agreed to convene a task team to lead the effort.

Platinum Group Metals unfazed

Meanwhile, Platinum Group Metals (TSX:PTM,AMEX:PLG) sees opportunity and is ploughing full steam ahead into the business of mining platinum in South Africa.

This week the company communicated plans to finance and complete the WBJV Project 1 mine, a joint venture with Wesizwe Platinum (OTC Pink:WSZWF), and to expand and explore its new Waterberg project, a joint venture with JOGMEC.

“The WBJV Project 1 mine is near surface and has excellent grade. The competitive nature of this project is highlighted at this time of increasing costs and mine closures,” said President R. Michael Jones.

“We have solid confidence in the platinum market in the medium and long term and solid confidence of our position in that market as we drive towards first production in mid 2014.”

 

Securities Disclosure: I, Michelle Smith, hold no equity interests in the companies mentioned in this article.