Wow, are they in trouble! Isabel and I can scarcely believe that miners could be so unwise. The South African Department of Minerals and Energy has let it be known that it is "highly dismayed." Why on earth are companies putting out statements saying that they’ve been given a clean bill of health? The government says they haven’t!
Platinum, the metal probably most affected, has been soaring partially as a result. OK, the general flight from the dollar is helping the price. But the market believes that mines will be penalised.
What is this all about, you ask? Around 180 miners died last year in South Africa. As a result the government is taking radical steps to improve safety. Steps like closing a mine after a fatality and not allowing it to reopen until its received safety clearance.
A big part of its attack is a mining safety audit. All mines are being inspected. Findings have not been released. The Department says that no company has passed the safety inspection yet. And, as the South African expert among us, Isabel says - companies jumping the gun will undoubtedly suffer!
Companies jumping the gun on SA safety clearance
Singled out for criticism already is Aquarius Platinum. CEO Stuart Murray was reported as saying its Marikana and Everest mines had passed. You can see it up there on the company’s own website, dated January 7.
Furious, the Department actually put out an announcement that it could not possible have completed its audit at Marikana. Its people could not find anyone there! When they arrived all staff had been fired after an illegal strike.
So far there has been no adverse impact on the Aquarius share price. That’s been moving up with the trend in platinum. But the company should take care. It is already having a bad time. It could do without any extended closures.
Aquarius has just announced that shut downs, illegal strikes and mill repairs lost it production of 12,000 the platinum group of metals (PMG) in the last three months. But in its present mood the market seems to have chosen to focus on the Murray’s bullish remarks. He said, "looking forward, the SA mines are in good shape to improve production levels."
Only time will tell!
At the moment markets are of a mind to believe production generally will not improve. Platinum went up by 34% last year because of a supply/demand deficit. Worldwide the deficit was 265,000 ounces, the biggest gap since 2003 according to major refiner Johnson Matthey.
Another deficit year for the metal?
Demand increased as stricter controls over vehicle emissions boosted the use of platinum in exhaust filters. Platinum demand for car catalysts rose 2.3% from a year earlier to 4.24 million ounces last year. That was 61% of the total global demand.
But South African production — 78% of supply — fell because of closures after accidents and strikes. Platinum output from South Africa dropped 1.3% from a year earlier to 5.2 million ounces. Maybe that will happen again.
Lonmin is another company that has been finding life tough. Also operating in South Africa, it too suffered from production problems and strikes. It also suffered a fire at a major smelter.
So, despite the soaring platinum price, its share price did not do a lot in 2007. Starting off not far from 2,800p it was only 600p or so higher as 2008 opened. Admittedly it did touch 4,400p mid year, but that did not last long.
Lonmin finds favour with Citigroup
But it has found a champion, and a big one. Major US investment bank Citigroup thinks Lonmin could offer "attractive" exposure to platinum.
Citigroup likes platinum. It sees evidence that its movement is moving away from currency. "Strong demand factors" are emerging as THE major influence, it believes. Behind this view is that while platinum rose by 34% over 2007, the rand/dollar rate gained only 2%.
Plus, Citigroup does not think 2008 could possibly be as bad for Lonmin as 2007. It believes that Lonmin learned its lesson, and that the damage to production is already ‘priced in’.
It believes that Lonmin’s guidance on its likely 2008 production numbers shows it has resolved many of its problems. Smelter and strike issues should not recur in 2008/09, says Citigroup. Lonmin believes it can produce 190,000 ounces.
Citigroup says "This is clearly a more conservative view and one that may account of the potential for further industrial action or any future unseen events. However, if the company is successful in targeting and improving the issues with grade control and concentrator recovery, we see scope for increased production and earnings guidance in 2008."
An improvement of 10% in production could bring a 15% rise in earnings. "On the flip side, a 10% further loss in production would hit earnings by 20%" the bank adds, however.
Demand for the shares, too, is predicted. It sees Lonmin as a potential bid victim. "The platinum miners should continue to be a ‘commodity of focus’ for consolidation", says Citigroup. They show some of the best returns in the industry. "In addition, only Lonmin and Impala provide accessible large scale production of platinum group metals (PGMs)."
As a result it suggesting that Lonmin’s price should be at least £3 more than current levels.
If Lonmin could improve production by 10% - through a combination of improved recoveries at the smelter and concentrator - earnings could rise by 15%, according to Citigroup's estimates. "On the flip side, a 10% further loss in production would hit earnings by 20%."
Unfortunately, Lonmin does have a history of disappointing. True, this has mainly been down to smelter problems. But the operating environment is getting tougher. Who knows if there will be more strikes? And there is always the danger of closure from accidents.
Keep mining.
Erin and Isabel.
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