Light At The End Of The Tunnel For Platinum Industry?

BMI View: The sale of struggling platinum mines to restructuring specialists in South Africa could breathe life into the distressed platinum mining industry over the coming quarters. While our core view remains for the platinum sector to remain under pressure over the coming months, we anticipate a return of investor interest over the longer term.

We expect divestments and acquisitions to take place in South Africa's platinum sector over the coming quarters, which could gradually turn around the industry's faded fortunes. The five-month strike that took 40% of South African platinum production offline during H114 forced the afflicted mining companies to consider divesting of their assets. Following the strike, Anglo American announced it was putting some of its platinum mines up for sale and we expect further divestments across the industry (See 'Platinum Sector Divestments Ahead', June 26).

We expect willing buyers to be found for distressed platinum mines. Interest is likely to be shown by companies with restructuring expertise, companies with expertise in mining deep shafts and firms with a bullish outlook on platinum prices.

Bottom Line Pain For Platinum Producers
Select Companies - Net Income (USDmn)

BMI View: The sale of struggling platinum mines to restructuring specialists in South Africa could breathe life into the distressed platinum mining industry over the coming quarters. While our core view remains for the platinum sector to remain under pressure over the coming months, we anticipate a return of investor interest over the longer term.

We expect divestments and acquisitions to take place in South Africa's platinum sector over the coming quarters, which could gradually turn around the industry's faded fortunes. The five-month strike that took 40% of South African platinum production offline during H114 forced the afflicted mining companies to consider divesting of their assets. Following the strike, Anglo American announced it was putting some of its platinum mines up for sale and we expect further divestments across the industry (See 'Platinum Sector Divestments Ahead', June 26).

Bottom Line Pain For Platinum Producers
Select Companies - Net Income (USDmn)

We expect willing buyers to be found for distressed platinum mines. Interest is likely to be shown by companies with restructuring expertise, companies with expertise in mining deep shafts and firms with a bullish outlook on platinum prices.

Sibanye Gold is the most likely company to acquire platinum assets before the end of 2014. Sibanye is South Africa's largest gold producer, currently operating three underground and surface gold operations, Driefontein, Kloof and Beatrix. The company split from GoldFields in 2013. Sibanye has expertise in making successful acquisitions and has stated its aim to drive consolidation in the South African mining sector. Last year the firm acquired Witwatersand Consolidated Gold Resources for ZAR383.3mn (USD36mn) and West Rand Operations for ZAR1,324.58mn (USD124mn).

Sibanye Gold has stated that it could raise USD1bn for a move into the platinum sector, but that the assets under consideration would not cost 'anywhere near' this sum. Sibanye has received funding proposals from South Africa's investment banks and also has access to Chinese funding. Moreover, the company's CEO stated that since the firm has a healthy free cash flow, it is in a strong position to fund the move by a combination of equity, debt and other instruments.

Sibanye Ready To Purchase Platinum Assets
South Africa - Select Index and Equity Rebased

Acquisitions of South Africa's older platinum mines could lead to extensive cost-cutting and restructuring, which would improve operational efficiency, slash cash costs and potentially boost profit margins. Sibanye has expertise in making a profit from deep, high-cost gold mines nearing the end of their lives, which could be crucial in improving the fortunes of Amplats' Rustenburg mines for example.

At the same time, new platinum deposits coming online including Northam Platinum's Booysendal project ramping up to steady state at 160kozpa (thousand ounces per annum) and Royal Bafokeng's Styldrift project set to start production in Q318, will provide healthy growth in the stagnant sector.

Over the coming months, we anticipate further turbulence ahead for South Africa's platinum sector and a significant time lag before a positive trajectory is established. However, should these improvements in the sector begin to materialise, investor sentiment towards South African platinum miners could improve rapidly from bearish extremes. If both fundamental and technical factors start to align, we would look to turn bullish toward the FTSE/JSE Africa Platinum Mining Index (JPLAT). The JPLAT is a basket of the six largest platinum producers in Africa. Currently the index remains in a downtrend, but some strategic acquisitions in South Africa's platinum sector, resulting in the JPLAT breaking above technical resistance, could see us turn bullish on the index.

Signs Of A Base Forming
FTSE/JSE Africa Platinum Mining Index (JPLAT) (Weekly Chart)

In illustration of currently weak investor sentiment towards South Africa's platinum miners, valuations are depressed. For instance, the JPLAT price to book ratio is currently 1.3x, compared to an average of 3.0x in 2009.

If the sector can be put back on a sustainable path, the companies listed on the JPLAT could enjoy a return of investor interest as the size of South Africa's platinum reserves means that the country will remain the largest producer in the world. 95.5% of global platinum group metal (PGM) reserves are located in South Africa.

An Unloved Sector
JPLAT - Price To Book Ratio (Weekly Chart)

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Related sectors of this article: Mining, Palladium - Mining, Platinum - Mining
Geography: South Africa
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