Despite record platinum prices, SA's platinum majors have taken hefty knocks from rand strength and scary legislation
Confused and disillusioned - you have a right to feel that if you own platinum shares. There have been huge contradictions between what the experts have been saying should happen to platinum stocks and what the market has been doing to them in the real world.
In the past year, the platinum price ran to record highs above US$700/oz, yet the share prices of platinum companies collapsed, losing up to 50% of their value.
First to crash to the floor were the world's three biggest producers, Anglo American Platinum (AngloPlat), Impala Platinum (Implats) and Lonmin, which are all SA-based producers.
The biggest worry in the market seems to be whether the SA mines, which account for more than 70% of world platinum output, can expand fast enough to match forecast increases in demand.
They will be constrained by the strength of the rand against the US dollar and the new minerals dispensation being introduced in SA. Among other measures, this proposes a 4% royalty to be charged on turnover for platinum companies.
The one company that bucked the trend - and has doubled in value over the past six months - is Australian-listed Zimplats, which operates a platinum mine in Zimbabwe.
But, I hear you cry, so what if Zimbabwe has the world's second-largest known resource of platinum? Isn't the country in social and political meltdown? Yes, it is. Surely no sane investor would choose such a country over SA, with the world's greatest known platinum resource? The reasons will become clear later.
Briefly, those are the main developments in the platinum industry in the past year, but there are many undercurrents and secondary developments worth exploring in detail.
The outlook for the metal continues to be good. That is why AngloPlat is pushing ahead with its expansion programme to get production to 3,5m oz (from 2,2m oz in 2002) by the end of 2006 at a cost of about R15bn.
AngloPlat chairman Barry Davison says the company will achieve this, though the start-up date for some new production expected to come on stream in 2005 has now been moved to 2006.
Despite these big growth projects, in the 12 months to end-April AngloPlat shares dropped 61% from a high of R510 to a low of R200. Lonmin's performance over the same period was only slightly better, showing a 59% slump from R190 to R77 - but Lonmin managed to blow up its smelter during this period, which affected production. Implats is down "only" 46% over the same period.
The reason for AngloPlat's weakness is the "creeping takeover" being carried out by parent Anglo American Plc, which has now pushed its stake above 70%. Anglo can carry on with this process uninhibited without being forced to make an offer to minorities.
Nearly all analysts have recommended that investors switch from AngloPlat to Implats because they believe Implats shares have a far better chance of being rerated.
That may happen now that the future of parent Gencor's 46,5% holding has been sorted out. Gencor was dragged into the asbestos litigation against UK company Cape Plc by lawyers trying to claim more than R1bn from the company in damages. The unbundling was put on hold as a result. In the end, Gencor agreed to pay R460,5m without admitting liability and on the express condition that the unbundling exercise would be completed free of interference.
With the shares unbundled, Implats is viewed as being "in play", either as predator or as prey. The group has been pushing ahead with its own growth programme to double production to 2m oz/year within five years.
This is being achieved through a series of joint ventures, of which two key ones are in Zimbabwe: Zimplats and Mimosa. Implats CEO Keith Rumble says the group bought into both operations on the basis that it was acquiring assets so cheaply it was worth taking the huge political risk.
Implats now has a 50% stake in Mimosa and a 36% stake in Zimplats (30% when fully diluted after allowing for 15% of the operation to be sold to Zimbabwe interests through an empowerment deal).
Mimosa is now held 50-50 by Implats and Australian junior Aquarius Platinum. And Implats is gearing up to bid for the rest of Zimplats , starting with the 15% held by Absa Bank.
That's why the Zimplats share price has performed so well over the past six months, running in anticipation of the takeover bid, which Implats management signals is only a matter of time.
Zimplats is building towards full production of 100 000 oz of platinum from 2004 from its open-pit mine, but is also looking at an underground expansion which could double annual production. Mimosa is being expanded from a production level of 15 000 oz/year of platinum to 65 000 oz/year by 2004.
Davison has thrown cold water on investment in Zimbabwe for nearly a decade, saying the platinum deposits that AngloPlat controls in SA are superior. Yet, in April this year, AngloPlat confirmed it would go ahead with the Unki mine in Zimbabwe. This is expected to come into production from about 2007 and reach full output at 58 000 oz/year.
Totting it up, Implats consulting engineer Les Paton says Zimbabwe could be producing about 600 000 oz/year of platinum within 10 years. SA's total platinum output at present is about 4,1m oz.
Another notable feature of the platinum sector over the past year has been the growing involvement of newcomers to the business, in the form of companies listed mainly on foreign stock markets.
One is London-listed Cluff Mining Plc, which is looking at developing a separate mine at Blue Ridge and a second mine in partnership with AngloPlat at Sheba's Ridge.
Then there's the highly successful Aquarius, which has brought its second mine, Marikana, into production and is looking at development of its third, Everest South.
There are also exploration companies like London-listed Jubilee Platinum Plc looking at potential projects in SA.
None of these companies is listed on the JSE, or likely to be, because of the opposition of the SA Reserve Bank towards dual listing structures for foreign-domiciled companies. That means SA investors cannot get at them other than by using their R750 000 offshore investment allowance.
But SA investors will get the chance to buy into one promising newcomer which is highly likely to list on the JSE, Royal Bafokeng Resource Holdings (RBR). This is the resources arm of the Royal Bafokeng Nation and is headed by former Implats CEO Steve Kearney.
RBR holds a 1,5% stake in Implats and earns a 22% royalty out of Implats mining profits. In addition, RBR holds a 34,9% stake in ferrochrome producer SA Chrome and a 50% stake in a joint venture with AngloPlat to develop the Bafokeng Rasimone/Styldrift mine near Sun City.
RBR needs about R10bn to fund its ambitious growth and diversification programme over the next five years. It will raise some of this money through a listing on the JSE.
Speculation is also that it will convert its 22% royalty into Implats equity and then buy more Implats stock to establish itself as a "significant" shareholder in the group. "Significant", according to Kearney, is up to 26%, which is the range in terms of new mining dispensation for the amount of equity that should be held by black economic empowerment partners .
