Would you buy a used platinum mine?

Wednesday, 23 January 2013

Last week, Anglo American Platinum announced that it planned to stop production at four of its shafts in Rustenburg (which could result in the loss of 14 000 jobs), and to sell a mine considered unsustainable.

The backlash that followed from our ruling party was impressive. The ANC said Amplats wanted to divert its business from South Africa and send the country's mining industry "to the dogs".

"The ANC condemns the action taken by Anglo American Platinum Limited who have exploited and then mercilessly created conditions to eliminate 14 000 jobs of which 13 000 are in the Rustenburg area," said spokesman Jackson Mthembu, calling the decision "cynical and dangerous in the extreme".

The following day, Gwede Mantashe put his boot in. “Amplats is built on South African money and it is reckless in its operations in South Africa. These companies come here and behave as if they are strangers... when they were built on our sweat and blood,” he thundered.

He said mining companies misrepresenting their intentions could have their licences revoked and that the ANC had made a proposal to the mineral resources department that shafts which had become unsustainable, or been “mothballed”, be put up for auction.

Which led me to think: would I want to buy a platinum mine?

Interesting stuff, platinum. Do you know that it is one of the rarest elements and about 80 percent of the world’s platinum comes from South Africa?

Like gold, platinum doesn’t rust easily, even at high temperatures, and so is called a noble metal.

Platinum is rarer and more durable than gold. The price of platinum has generally been slightly higher than the price of gold at around $350 per ounce versus $295 for gold a few decades ago.

Then came the commodities boom of the 21st century, driven largely by economic growth in Brazil, Russia, India, and China. The price of platinum shot through the roof, peaking at $2 200 per ounce in early 2007.

Many mining houses, including Amplats, ramped up steeply on their production (creating many jobs in the process – 90 000 was the figure I recall).

Now the mathematics of supply and demand is that if you increase the supply, the price drops. If you lessen the demand, the price drops. Both things happened simultaneously in January 2008 when the price plummeted to $800 per ounce – a combination of overproduction and the global recession.

As the world recovered from the recession, the price rose again, reaching $1 600 in 2010. But then, a couple of things happened.

Firstly, workers in the platinum belt – particularly in the Rustenburg area – began an on-going cycle of (generally illegal) work stoppages causing devastating losses to the mines in the area. (Impala Platinum, for example, lost R2 billion of revenue through a six-week illegal strike late 2011.)

Secondly, Europe’s economy went into meltdown helped primarily by the Greeks and the Spaniards. This, coupled with the US recession, meant that fewer people were buying cars.

Why does that matter? Well, the world sold 245 tonnes of platinum in 2010 of which almost half (113 tonnes) went to the automotive industry for making catalytic converters for exhaust systems. Fewer new vehicles means decreased demand for platinum.

Also, early vehicles made with catalytic converters are now being recycled. Remember that platinum does not rust, so a high percentage of the old converters can be used for new converters. And the high cost of mining means that recycling is cheaper.

So we have illegal strikes and a government that does nothing about it, increased costs and lower revenue, and a business already running at a loss.

Amplats would be stupid to not scale back on their operations. If they don’t, their shareholders will force them to do so.

Gwede Mantashe and company suggest that if Amplats doesn’t use those mines, government should sell those mining rights to companies who will.

Nothing wrong with that – the Freedom Charter and our constitution make it clear that the mineral wealth belongs to the nation.

Except would you buy a business where costs are rising, demand is falling, and cheaper alternatives are presenting themselves?

Some bright spark suggested we sell those rights to China. If we are happy with China’s record on worker rights (as workers at the “Aurora” Orkney mine have discovered), that’s fine.

On the other hand, that will also mean we lose around R100-billion that Amplats has committed to capital expansion over the next ten years.

So for once, I would like those in our ruling party who keep shooting their mouths off to zip it.

This is the time for cool heads and tough negotiations, not more fodder for the rating agencies.

Oh, and take an economist to the negotiations. May I suggest FNB CEO Michael Jordaan? He knows his numbers, and he believes in this country.