Amplats (AAL) South African Platinum Strike Ends: Four Key Takeaways

 @natrudy
on October 11 2013 12:21 PM
Platinum bars
Platinum bars Ilya Naymushin/Reuters

The world’s biggest platinum miner, the Amplats unit of Anglo American PLC (LON:AAL), announced the end of an 11-day strike in South Africa.

Here are some key takeaways. Company spokeswoman Mpumi Sithole told International Business Times in an email that most mining operations restarted on Friday.

1. The Union Fared Well

The African Mineworkers and Construction Union has bargained hard and has fared well, thanks to its efforts. The initial 14,000 job cuts announced by Anglo American Platinum, or Amplats, in January, first fell to 6,000 cuts earlier this year, then shrank to 3,300 job cuts by August 2013.

Now, Amplats has settled on about 1,336 job cuts, down significantly from its initial plan, according to a research note from HSBC Holdings PLC (LON:HSBA).

The company’s official figures include voluntary separation packages for 3,300 employees, but at least 1,250 jobs will be retained for the near future. Sithole declined to disclose the terms of the packages, but said they don’t include special severance pay.

“This was kind of dragged out for 10 months now, and finally, it seems that it’s not as bad as initially announced, though they haven’t avoided the retrenchments completely,” HSBC precious metals analyst Howard Wen told IB Times.

The 1,250 jobs, which will be retained for six months, are allocated to mines already shutting down, too, added Wen.

Some of those 1,250 jobs could also be extended come April 2014, as Amplats employees retire naturally and cutbacks on contract labor open up vacancies, according to the company.

“A further 328 job opportunities, which are currently occupied by contractors, will be reserved for permanent employees,” said Amplats, in its news release.

The company declined to provide an estimate of how many jobs could be kept after six months.

Neither labor nor management disclosed any possible change in compensation.

2. Platinum Production Losses Were Relatively Small

Amplats estimated that the 11-day strike, declared by the union on Sept. 27, lost them 44,000 ounces in platinum output.

But the company produced 2.2 million ounces in 2012, according to MineWeb. That’s from a total of 5.64 million ounces produced worldwide, according to metals tracker Johnson Matthey (LON:JMAT).

These production losses pale in comparison with strikes last year, said Wen, which affected most major platinum producers and resulted in production losses of 400,000 ounces. That labor unrest was sparked by an August 2012 police killing of 34 miners at the Marikana mine, owned by Amplats competitor Lonmin PLC (LON:LMI).

Sales to Amplats customers also were not interrupted, said the company, thanks to its existing inventory.

3. Platinum Prices Could Fall, As Production Ramps Back Up

Despite a brief price rally on Thursday, the good news of the strike’s end may calm concerns over platinum supply and lead to lower prices in the long term, according to a HSBC research note from Thursday.

“In the short-term, an easing of platinum supply concerns may weigh on the PGMs [platinum group metals], in our view,” wrote HSBC analysts.

Platinum opened at $1,381 per ounce in New York on Friday. Over the next year or so, however, platinum and palladium are expected to bounce back, driven by an American and European automobile market recovery, according to commodities experts.

Holdings in platinum exchange-traded funds, which are specialist investment vehicles, also hit an all-time high this week, at more than 2,430 kilo ounces, wrote UBS AG (VTX:UBSN) analyst Joni Teves in a research note from Friday.

Platinum prices have sunk recently, said Carlos Sanchez, a commodities trader with CPM Group, to IBTimes on Thursday, but he sees a strong floor for the metal.

“I wouldn’t be surprised to see it pick back up,” said Sanchez, citing external factors like unpredictable politics and weak data undermining the metal recently. “I think there’s a stronger floor: I think any price close to $1,300 per ounces would be a good buy, on a longer term basis.”

4. The Platinum Mining Industry Can’t Quite Rest Easy Yet …

But in a note of quiet alarm, HSBC analysts observed that there are problems on the horizon for platinum miners like Amplats and its close second in platinum output, Impala Platinum Holdings Limited (Implats) (JNB:IMP)

“We estimate the average cash operating cost of production for platinum to be near $1,650-$1,700 per ounce, which is well above current prices of $1,395 per ounce,” wrote the analysts on Thursday.

Wen said that these cash costs don’t include exploration and other capital costs, which could add an additional $100 per ounce in expenses.

Platinum miners are addressing this environment by shutting down mines and reducing output, he said, given that production costs are so high.

Mine consolidation at Amplat’s Khuseleka and Khomanani mines helped spark the strikes in the first place. Both Rustenburg region mines showed gross profit margin declines of 10 percent or more from 2011 to 2012, according to company data.

“Production issues would arise if output isn’t cut,” said Wen to IBTimes.

The problem of high costs in a low-price environment is similar to issues faced by the gold mining industry, as gold miners struggle to cut costs amid a gold price plunge.

Another miner, Implats, is also still negotiating with its workers over a proposed 5.5 percent wage increase.

The separate National Union of Mineworkers (NUM) had also filed a complaint in labor court challenging Amplats tactics during labor negotiations, though the court has now dismissed that NUM complaint, according to Amplats spokeswoman Sithole.

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