In with the machines

Staying with platinum, Amplats have reported For the six months to end June 30 2014. What I find quite interesting is that the first picture has a heavy dragline that has both a Chinese and South African flag. I have no idea why, perhaps someone can enlighten me.


Tonnes milled, down 34 percent. Ore grades, 13 percent lower. Equivalent refined Pt ounces? 39 percent lower when measured against the first half of 2013, mostly as a result of the industrial action, but as the company also points out, as a result of consolidation of Union and Rustenburg mines. Refined production, platinum lower by 16 percent, palladium lower by 5 percent.


There is some interesting commentary in the segment titled Strategy overview - repositioning of the portfolio. Here is the skinny. The Rustenburg mines, the oldest ones in the portfolio have been consolidated from five mines to three which will result in 250 to 350 thousand ounces of unprofitable ounces removed from total production. Step one done. Step two is where Union mine will be consolidated into one mine, from two and the company have indicated before that this is for sale. They plan to exit it, in its entirety. This we know.


Then there are some pretty obvious ones, prioritising spend and focus on Mogalakwena, Unki, Twickenham, Amandelbult and the JV assets – Mototolo, Modikwa, Kroondal and BRPM. When you read about the specific mines in question, that are going to attract more of the companies capital, it is immediately clear what the companies response to the protracted strike has been.


Mogalakwena consists of four open pits, life of mine extends beyond 2060. Unki is a mechanised, trackless board-and-pillar underground operation, as per their page on the Amplats website. Twickenham is also out there on the Eastern Limb, currently heavy spend has seen the mine heavily mechanised. On the JV's, many of the mines are not operated by Amplats and are smaller and more nimble, they are happy to contribute their share. Again, you do not have to be a genius to figure out that Union is loss making, the Rustenburg mines are old and tired and equally unprofitable.


By consolidating these mines, selling Union and focusing on lower cost mechanised mines, that tells you immediately that the company is going to be less labour intensive. There are at last look over 5000 people who have lost their jobs at Amplats since this time last year. Union employs around 7263 people, meaning these employees will no doubt be somewhere else in due course. And fewer people working in labour intensive mines. This is a direct response to labour declaring victory, forget the social issues in South Africa, this is the response from business.

So is this business investable? I am not too sure. Production is going to be in the region of 2.1 to 2.2 million ounces, that basically has not budged for as long as I have been watching this business. The demand side looks fine, jewellery demand from China is picking up, investment demand locally (in price trackers) is good and of course European automobile sales are starting to pick up. So the demand side looks good, obviously the recycled product will be more and more in time, you would expect vehicle sales in emerging markets to continue to make traction.


How will this restructuring go down? Single commodity basket, volatile place and combative government and workforce to the company, all rather tricky at best the operating environment. There are better assets to own, better sectors to be in, like healthcare, technology and retail. We continue to avoid all these companies is this sector.