February 22, 2013 7:08 pm

Crisis hit platinum sector ripe for consolidation amid restructuring

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Platinum sector consolidation is expected this year as reduced demand and unit cost increases have left many producers in unsustainable positions, sector sources told dealReporter. But strong long-term fundamentals mean expected IPOs and strategic investments will continue, they added.

Short-term M&A activity is likely to involve Xstrata’s [XTA LN] platinum operations and opportunistic bids from miners such as African Rainbow Minerals [ARI SJ, said industry sources. Aquarius [AQP LN] and Northam [NHM SJ] are both potential targets, while an IPO of Sedebilo and secondary listing of Robert Friedland’s Ivanplats [IVP CN] are on the cards, they said.

The effect of squeezed margins on corporates has led to restructurings, multiple executive resignations and violent wage unrest in South Africa, which produces more than 75% of the global platinum supply. Cynthia Carroll, the outgoing CEO of Anglo American, the world’s largest platinum producer, recently said the economic problems have left the industry in “crisis”.

In January Anglo’s platinum division, Amplats, which sank to a USD 120m operating loss in 2012 (USD 890m profit in 2011) revealed details of its long-awaited restructuring that will see it look to sell its Union mines. Aquarius Platinum said that the six months to 31 December had been “the most difficult period in its history,” whilst Implats [IMP SJ] said that gross profit had fallen by 42% for FY2012 compared to the previous year.

In terms of short-term catalysts, sector M&A advisors are waiting expectantly to see what long touted Anglo American suitor Glencore [GLEN LN] does with Xstrata’s platinum business following completion of their merger, expected next month. The deal is awaiting approval from Chinese regulator MOFCOM.

“Glencore is likely to carry out a review following the merger and Xstrata’s platinum operations are likely to be on the block,” according to a source familiar with the companies. Xstrata produces PGMs at its Eland mine and at Mototolo, its joint venture with Amplats. Production at Eland is set to produce 450,000 to 500,000 ton Run Of Mine (ROM) capacity by the end of 2016.

“Ivan (Glasenberg) doesn’t like platinum because he can’t trade it,” said an investor in a number of platinum and other mining stocks. But a quick fire corporate sale is unlikely because a combined Glencore-Xstrata is “not going to sell at these levels,” said the investor, referring to the low valuations of many platinum stocks.

Other scenarios are possible though. While Glencore’s merger with Xstrata was overcoming investor opposition last year, the latter, which also has a 24.5% stake in Lonmin [LMI LN], proposed to spin off its PGMs, chrome and vanadium businesses into the platinum producer as part of a deal that would have seen it take control of the entity. Reports have recently suggested Glencore, should it ever acquire Anglo American, would spin Lonmin and Amplats into a new company ahead of a full sale.

Xstrata’s platinum assets are part of its alloys division which had revenue of USD 753m for the six months to 30 June 2012. This represents less than 5% of the group’s total USD 15.5bn revenue. For FY11 the platinum business made an operating loss of USD 23m, while Xstrata Alloys made an overall operating profit of USD 153m in 2011.

Mike Schmidt, the CEO of ARM, which recently considered bidding for Lonmin, believes “there will be some level of consolidation” in the sector. “We need to pull down fence boundaries as there is too much duplication on capital infrastructure,” said the boss of the diversified miner, adding that companies need to work together in areas such as smelting.

African Rainbow Minerals seeks PGM growth

Despite the challenges facing the sector, Schmidt said ARM is keen to balance its portfolio and is focussing growth efforts in platinum. “We believe the medium- and long-term prospects for [platinum group metals] are good,” said Schmidt, adding that PGMs are at the bottom of the cycle.

The USD 5bn market cap company is “consistently looking” at opportunities but does not want to overstretch itself, said Schmidt. This news service previously reported that ARM was deterred from bidding for Lonmin prior to the latter’s USD 817m rights issue late last year due to its indebtedness.

ARM’s acquisition criteria is for an asset of which it can gain operational control, one that is at the lower end of the cost curve and something that may offer some synergies, said Schmidt. It is not looking to move into smelting or refining, which he believes are best left to the big players who do it already.

ARM’s current operations are located on the Eastern Limb and this is where it is likely to focus, according to an equity analyst. ARM has two platinum mine joint ventures: Modikwa with Amplats and Two Rivers with Impala. Schmidt says that ARM is unlikely to buy out either JV partner and describes the relationships as serving ARM exceptionally well.

Amplats’ Union operations on the Western Limb are therefore unlikely to interest ARM, said a shareholder. They are also unlikely be of interest to Lonmin, as there are no real synergies, said a source close to the company.

Schmidt wouldn’t be drawn on targets but Aquarius and Northam are probably on his watchlist, said a sector banker. Both companies have operations on the Eastern Limb (Aquarius also has extensive operations on the Western Limb).

Aquarius’s diversified shareholder base would be unlikely to stand in the way of any takeover offer, noted a second analyst. Meanwhile, Northam’s second biggest shareholder ENRC [ENRC LN] is looking to sell its 13.52% stake and this may encourage third parties, he added. Aquarius, meanwhile, is still awaiting approval from South Africa’s Department of Mineral Resources for its acquisition of Northam’s Booysendal South mine, a transaction announced last May.

Sedibelo and Wesizwe deals show faith in sector

The long-term belief in the fundamentals for the sector can also be demonstrated by two notable recent transactions. In January, Wesizwe [WEZ SJ] confirmed the approval of a USD 650m loan from the China Development Bank to fund the development of its Bakubung project. The mine is expected to start production in 2018 with annual production likely to be 350,000 oz pa. This follows a 2010 investment from a consortium of Chinese groups.

In December, South Africa’s Industrial Development Corporation (IDC) completed its purchase of a 16.2% stake in Pallinghurst Resources’ [PGL SJ] PGM assets, Sedibelo Platinum Mines, for ZAR 3.24bn (USD 367m). The implied valuation for the assets, post cash, was ZAR 23.24bn (USD 2.63bn). The IDC’s focus is on ‘beneficiation’, a policy to encourage social benefit from the mineral resources sector.

Pallinghurst is expected to float Sedibelo in the fourth quarter of 2013, according to a source familiar with the matter.

Another anticipated listing is that of Ivanplats, the latest venture from serial mining entrepreneur Robert Friedland. The indicated mineral resources at his Flatreef discovery were recently expanded to 29.2m oz of platinum, palladium, rhodium and gold, with an additional 44m oz in inferred mineral resources at a 2.0 g/t 4PE cut off. The deposit was described by someone who recently visited the site as exceptional.

Despite saying in December that he was planning a secondary listing in London, Friedland appeared to have changed his mind when he spoke at Mining Indaba, claiming that a listing in Johannesburg was more appropriate.

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