PLATINUM ON A KNIFE-EDGE PWC'S PERSPECTIVE ON TRENDS IN THE PLATINUM INDUSTRY - WWW.PWC.CO.ZA/MINING - PWC SOUTH AFRICA
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September 2016
Platinum on a knife-edge
PwC’s perspective on trends in
the platinum industry
www.pwc.co.za/mining
Contents
Introduction 3
Price history 4
Basket price 6
Supply & demand dynamics 7
SA supply prices 10
Production position 11
Processing capacity 19
Alternatives to Southern African mining supply 19
Conclusion 19
Contacts 20
SA Mine: – Platinum on knife
PwC 2
edge?
Introduction
Commodity prices are cyclical and are largely determined by
supply and demand. Investment decisions and corresponding
life-of-mine price decisions should therefore be taken taking
these basic facts into consideration.
However, as the recent cycle has shown, a number of mining
investment decisions, on the up and the down, were taken with
reference to much shorter-term price expectations resulting in
procyclical behaviour. There is a real challenge to determine a
realistic, not overly optimistic or pessimistic price for investment
decision purposes.
In our annual SA Mine publication we have, for some time now,
maintained that the rand platinum price is unsustainably low
and that we’ll either see a recovery in prices or the continuance
of mine closures. Unfortunately it is currently the latter that’s
occurring.
PwC 3 Platinum on a knife-edge
Price history Fig. 1 Real platinum prices (US$/oz)
The impossible question for
the mining industry and all its 2 500
stakeholders is when the cycle will
turn at the top and the bottom. If 2 000
one assumes that real prices oscillate
around a long-term real position, 1 500
then the price history of platinum
1 000
and gold provides an indication of
where these prices are in their cycle.
500
The $934 average platinum price for
the first six months of 2016 is below
0
the long-term average real price of
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
$994. Is it therefore undervalued?
Real gold Average gold Real platinum Average platinum
Average high platinum Average low platinum
Source: World Bank, PwC analysis
To take it to the extreme, for the Fig. 2 Indexed real prices (US$ )
period since 1970, during phases
when platinum traded below its long-
term average, its bottom-of-the-cycle
300
average price was $259 lower than
the overall average. It also stayed 250
below average for 1.4 times more
years than it was above. 200
150
Applying historic averages between
1970 and 2016 to estimate future 100
prices would suggest that the average
50
real price of platinum would be $735
over the next 16 years. Following 0
the same unrealistic logic implies
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
an average gold price of $537 for 16 2016
years once gold drops below its real Gold Platinum Iron ore Copper Nickel Coal
average of $786 in 2018. Quite a
sobering thought. 100 = Average real price since 1970
Source: World Bank, PwC analysis
The above analysis is obviously
simplistic and doesn’t take into
account all variables. However, one
can understand why there are a
number of investors sceptical about The similarity in the cycle is evident
whether the cycle has turned. in the graph. It also shows that
all these commodities, other than
Figure 2 compares the main global gold, are currently below the long-
commodity prices in real terms term real price average, with nickel
indexed against their average real trading at approximately 50% of its
price since 1970 which is set as 100. long-term real average.
PwC 4 Platinum on a knife-edge
Figure 3 reflects the correlation Fig. 3 Real platinum price compared to world and
between global GDP growth in
China current USD GDP growth
current dollar terms and the
platinum price movements.
35 2 500
30
25 2 000
20
15
1 500
10
$/oz
5
1 000
0
-5
-10 500
-15
-20 0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
World GDP growth China GDP growth Real platinum prices $/oz
Source: World Bank, PwC analysis
Platinum demand is largely driven Fig. 4 Commodity intensity (Indexed at 100 for maximum)
by mature developed economies.
As China’s growth moves from
infrastructure-driven growth to 100
China GDP:
- $ 7.3k/capita
US GDP:
- $ 42k/capita
consumer-driven growth, platinum
demand should increase.
India GDP:
75 - $ 3.2k/capita
50
25
0
0 5 10 15 20 25 30 35 40 45 50
GDP per capita (real, 2005
Late cycle commodities e.g., platinum, nickel
Early cycle commodities e.g., steel, iron ore
Mid cycle commodities e.g., copper, lead, zinc
Source: Xstrata, reproduced with permission in Mine:
The growing disconnect (PwC, 2012)
PwC 5 Platinum on a knife-edge
Basket price Fig. 5 Indexed real prices of main income drivers for
SA platinum producers
Platinum companies’ revenue is not
solely determined by the platinum
price. While platinum provides more 400
than 50% of revenue, other platinum 350
group metals (PGMs) palladium 300
and rhodium along with the base
250
metal nickel provide meaningful
contributions to revenue. Additional 200
by-product revenue is derived from 150
other PGMs, gold and other base 100
metals. 50
0
Figure 5 shows real prices for these 1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
commodities indexed to their average
real price since 1970.
Rodium Palladium Platinum Nickel
While platinum is trading almost 100 = Average real price since 1970
on the long-term real average level, Indexed to long-term average
palladium is trading above and nickel Sources: World Bank, PwC analysis
and rhodium are trading well below
the long-term average.
It is notable that there is seemingly
an inverse relationship between Lower nickel prices that lead to lower In order to determine a basket
the price of nickel and palladium. nickel supply therefore invariably price per platinum oz produced,
Whereas primary platinum supply lead to lower palladium production we used production for 2015 from
is dominated by South Africa, South and an increase in palladium prices. Anglo American Platinum, Impala
Africa produces only approximately Platinum, Lonmin and Northam
40% of primary palladium supply Platinum.
with Russia producing a similar
amount mainly as a by-product to its
nickel mining industry.
Figure 6 illustrates an estimated Fig. 6 Real basket price per platinum oz (US$)
platinum basket price based on
current production profiles. This
is merely an indication, as the 3 500
fluctuation in the other prices
3 000
making up approximately 9% of the
current basket value were not taken 2 500
into account. 2 000
1 500
The impact of changes in production
profile for these producers e.g. 1 000
moving from the more platinum-rich
500
Merensky Reef to UG2 or the recent
increase in mining of the Platreef was 0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
also not considered.
Real basket Average
Sources: World Bank, PwC analysis
PwC 6 Platinum on a knife-edge
The average platinum basket price in Fig. 7 Indexed real platinum basket price compared
the first half of 2016 was 11% below
to real platinum price
the long-term real basket price,
compared to the platinum prices
that was at 6% below the long-term 250
average price. The difference is
explained by high rhodium prices in 200
1990 and 2007 and high palladium
prices in 2000, which helped elevate 150
the basket price.
100
Although there are minor differences
in the basket price and the platinum 50
price as an approximation of
the revenue value of platinum 0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
companies, the platinum price is
probably a good enough indicator of
Real basket index Real platinum index
revenue.
100 = Average real price since 1970
Sources: World Bank, PwC analysis
Supply and demand Platinum demand emanates mainly
from autocatalysts (40%1), jewellery
dynamics (34%1) and general industrial
demand. More recently investment
Assessing the platinum and platinum demand has also grown.
basket price in US$ real terms
assumes that only demand will drive Autocatalyst demand, subject
price. That is, the global economy to technology improvements, is
measured in dollar terms will dictate relatively fixed, and driven by
at what price it will be willing to regulatory requirements on new
pay for platinum and producers will vehicle sales. Recycling of spent
have to fall in with those prices in autocatalysts provide a meaningful
the long run. Supply cost therefore contribution into the autocatalyst
presumably does not play a role in demand, but is not sufficient to
long-term price dynamics. supply all autocatalyst demand
due to higher requirements from
When one deals with a global regulations and higher vehicle sales.
commodity that is ‘readily’ available This demand is fairly insensitive to
from a variety of producer countries, price movements as it makes up a
it is fair to assume that in the long very small percentage of the total
run supply is more flexible. Demand vehicle cost.
will therefore dictate price.
Jewellery and investment demand
The lag in bringing supply online are much more price sensitive and
from investment decision to delivery often provide the balancing demand
and reducing supply, once loss figure to fill shortfalls in supply or to
making, results in the temporary take excess supply.
under and over supply that drives the
cycle around the long-term average.
1 According to World Platinum Investment Council
PwC 7 Platinum on a knife-edgeThe purpose of this discussion is Fig. 8 Platinum demand (‘000 oz)
not to focus on the demand side.
However, the historic demand graph
indicates the long-term growth 10 000
trend that was only temporarily 9 000
interrupted during the financial 8 000
crises of 2008 and 2009. 7 000
6 000
There is no reason to believe that
5 000
that this growing trend won’t
4 000
continue. New industrial and medical
applications as well as general 3 000
economic growth supports the other 2 000
demand category. 1 000
0
New emission controls and vehicle 1975 1980 1985 1990 1995 2000 2005 2010 2015
sales growth supports autocatalytic Autocatalyst Investment Jewellery
converter growth despite ongoing Other (Chemical, electrical, glass, petroleum, medical)
efforts to use platinum more
efficiently or to substitute platinum Source: Johnson Matthey (www.platinum.matthey.com)
with palladium and rhodium.
Current mining supply delivers
1.1oz of palladium for every 1.0oz of
platinum mined, while automotive
demand is at a ratio of 2.3 to 1. Just
10 years ago this ratio was at 1.3 to 1
indicating significant substitution has
taken place. An excessive increase
in substitution of palladium for
platinum could result in another
spike in palladium prices, as was the
case in 2000, which will force users
back to using more platinum.
The global drive for emission
control will support demand for
platinum group metals on the one
hand and could reduce it on the
other. Whilst hydrogen fuel cell
cars make use of platinum group
metals, electric cars won’t require
autocatalysts. New technology will
provide an interesting dynamic to the
automotive demand for platinum.
South Africa provides more than 70%
of primary mined platinum supply
and more than 55% of total supply,
including recycling. This dominant
supply position provides platinum
with somewhat unique supply and
demand fundamentals.
PwC 8 Platinum on a knife-edgeIn the beginning of 2008 when the Fig. 9 Global platinum supply (‘000 oz)
global economy reached a peak, the
local electricity producer, Eskom,
could not meet South Africa’s 9 000
electricity demand. The world 8 000
took notice as platinum supply is
7 000
electricity intensive.
6 000
Concerns over the ability of South 5 000
Africa to supply platinum, coupled
4 000
with the height of the cycle, resulted
in all-time record prices for the 3 000
metal. The subsequent global 2 000
economic crises meant a significant 1 000
fall in prices.
0
1975 1980 1985 1990 1995 2000 2005 2010 2015
However, it seems consumers made
use of the opportunity to increase Southern Africa Russia Others Recycling
stock levels to hedge themselves for
potential future supply scares that Source: Johnson Matthey (www.platinum.matthey.com)
might impact prices in the short
term.
At the end of 2012 these excess Suppliers also reduced stock holding
stock levels were estimated by SFA since 2014 to generate cash in the
(Oxford) to be 4.1 million oz, or strained mining environment.
almost equal to one-year’s supply
from South Africa. It is these stock According to the World Platinum
levels that have been blamed for Investment Council, excess
low prices, despite the contraction stockholding had reduced to 2.4
in mining supply and while demand million oz at the end of 2015. In
kept growing, albeit at marginal addition, ETF platinum holdings
rates. were at 2.5 million oz.
Consumers’ decision to invest The actual excess stockholding and
in stockholding paid off as the how long there will be an excess
industrial action in the platinum is subject to debate. It will be
mining sector in South Africa has interesting to see whether consumers
resulted in a significant decline in believe the current stockholding is
supply since 2012, particularly in sufficient or whether stockholding
2014 when there was a five-month could reduce further as supply falls
strike in the Rustenburg area. short of demand.
PwC 9 Platinum on a knife-edgeFigure 10 provides the annual Fig. 10 Global platinum supply (‘000 oz)
over or under supply of platinum
as tracked by Johnson Matthey
and the cumulative position since 2 500 2 500
1975. The top SA producers provide
1 500
similar information. Based on their 2 000
Movements in stocks
Real platinum $/oz
assessments, the cumulative supply 500
0 1 500
shortfall over the last 10 years is even -500
worse than the shortfall calculated by 1 000
Johnson Matthey. On the other side, -1 500
other market commentators reflect -2 500 500
much lower shortfalls.
-3 500 0
Based on this cumulative position,
the excess stockholding is not Movements in stocks Cumulative movement in stocks
Real platinum $/oz H1 2016 based
apparent. The graph displays the
historic inverse relation between
excess supply and price with an Source: Johnson Matthey, World Bank, PwC analysis
exception in 1980. For example, the
shortfall in production from 1999 price. It is hard to see how the
to 2004 preceded the significant shortfall in supply since 2012
increase in the platinum price from won’t result in an increase in
2003 to 2007. From 2010 there is an future prices.
apparent anomaly as the production
shortfall coincided with a decrease in
SA supply prices Fig. 11 SA platinum producer unit cost inflation compared to SA CPI
If South African supply dynamics
play a larger price-determining 35
role in platinum, then one needs to 30
look at the platinum price in real 25
rand terms. In order to determine
20
real prices we used a South African
15
Consumer Price Index (CPI) adjusted
price. 10
5
However, based on platinum 0
company reporting it is clear that -5
input costs have grown well above -10
CPI inflation in the last number 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
of years. We therefore weighted
Unit cost inflation SA CPI
the reported unit cost increases of
Anglo American Platinum, Impala
Source: Stats SA, Company annual reports, PwC analysis
Platinum, Lonmin and Northam
Platinum since 1996 to estimate
producer input unit cost inflation, as
shown in Figure 11.
PwC 10 Platinum on a knife-edgeThese platinum companies have Fig. 12 Real platinum rand price (2016 basis)
generally experienced above-
inflation unit costs increases. In
the price boom years leading up to 45 000
2008, there was a pervasive produce- 40 000
at-any-costs attitude across most 35 000
of the mining sector. South Africa 30 000
also faced above-inflation wage 25 000
and electricity increases during this 20 000
period. 15 000
10 000
A large portion of the cost base 5 000
created before 2008 was not removed 0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
from the industry once prices had
crashed. Although input costs grew
CPI peal platinum price R/oz Producer real platinum R/oz
at a rate closer to CPI, they did not CPI real rand average Producer real rand average
decrease proportionately. Average high producer Average low producer
The high unit cost increases from Source: PwC analysis
2012 to 2014 were impacted by
severe industrial action in the In contrast, producer real price Production position
platinum sector. Although variable figures suggest that the platinum
costs decrease during strikes, fixed price is presently trading 35% below The recent commodity cycle,
cost remains and lower production the long-term average of R23 056/ reflected in Figure 2, was largely
volumes therefore result in higher oz ($1 646 at R14:US$). It is also the result of Chinese infrastructure-
unit cost increases. trading below the average of prices driven demand. The stronger-for-
at the bottom of the cycle of R18 053 longer view resulted in a produce-
The 2015 and 2016 reduction in unit ($1 289). at-any-cost attitude among bulk
cost is largely as a result of increased commodity producers, notably iron
production following the strike with Platinum has now been trading ore, coal and copper.
a similar fixed cost basis. Cost-saving below average for 7.5 years. The
initiatives in the severely low-price previous down cycles did not exceed This resulted in significant new
environment also played a roll. In nine years. Based on supplier-based supply, which led to an oversupply
particular the closure of marginal real price averages, platinum is due of these commodities, coupled with
shafts and renegotiation of supply for a recovery in rand terms. The a decrease in demand as China’s still
agreements assisted. recovery could happen through a substantial growth is transitioning
weaker rand exchange rate, a further from infrastructure-driven growth to
Figure 12 illustrates real rand prices decrease in unit costs as inefficient consumer-driven growth.
for platinum in 2016 (to June) terms mines/shafts are closed or through
since 1970. CPI increases were an improvement in the underlying Despite significant investment in
used up to 1996 in both cases, with US$ price in a stable currency platinum mines, supply has not really
producer unit cost increases reflected environment. increased. The capital expenditure
since 1996 for the producer real histories of Anglo American
platinum price. Platinum, Impala Platinum, Lonmin
and Northam Platinum show
The real rand prices using South significant investment. However,
Africa CPI reflects a long-term real levels of investment already started
average price of R9 229/oz or, using decreasing from 2008 in contrast to
the recent R14:US$1 exchange rate, a capital expenditure by the overall
price of $659/oz. This average would global mining industry, which only
suggest that platinum is still traded started decreasing in 2013 and is still
at 60% above the long-term average. higher than 2007 levels.
PwC 11 Platinum on a knife-edgeIncreased capital expenditure from
Fig. 13 Platinum capital expenditure by four largest SA producers
1997 to 2003 resulted in increased
production up to 2006. Although
there was further capital expenditure 60 000
growth from 2006 to 2008, this did
50 000
not result in increased production.
This capital expenditure was really of 40 000
a sustaining nature, such as replacing
30 000
end-of-life shafts, and did not result
in an increase in mine production. 20 000
10 000
In fact platinum production for
South Africa’s four largest platinum 0
producers started decreasing 1996 2000 2004 2008 2012 2016
from 2007, as shown in Figure 14. Total nominal Capital expenditure in producer real terms
Since almost all platinum mined in
Southern Africa is refined by Anglo Source: PwC analysis
American Platinum, Impala and
Lonmin, (Northam Platinum is the
only notable exception), Figure 14 Fig. 14 Platinum production by the four main SA suppliers (‘000 oz)
is a fair reflection of total Southern
African supply. 6 000
The significant decrease in 5 500
production since 2012 was mainly as
a result of various industrial actions 5 000
that culminated in a five-months
strike in 2014. A number of smaller 4 500
platinum producers have also been
4 000
put on care and maintenance since
the 2008 crash, which has also
3 500
negatively impacted the overall
supply. 3 000
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: PwC analysis, company annual reports
Fig. 15 Indexed South African PGM production
120
100
80
60
40
20
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
2001=100
Source: Stats SA
PwC 12 Platinum on a knife-edgeSince 2014, platinum mines have Fig. 16 EBITDA margin
experienced relatively low levels
of industrial action. However, SA
mines have not been able to bring 30%
production back up to the pre-2012
25%
levels. In fact, they are struggling to
maintain production at 2012 levels. 20%
As a result of low prices and the 15%
increased cost base, platinum
companies have been struggling 10%
with low margins. The earnings
before interest, tax, depreciation, 5%
amortisation (EBITDA) and
0%
impairment for platinum miners, 2011 2012 2013 2014 2015
as calculated in PwC’s SA mine
publication, reflect a declining trend
over the last five years. Source: PwC analysis
Low margins have meant that A number of junior companies had no Weak balance sheets post the
platinum companies have often option but to put projects on care and 2014 strike have also necessitated
not been able to fund existing maintenance or to dispose of their the disposal of non-core assets,
development commitments from projects. Even the major producers restructuring of balance sheets
cash generated from operations. have been forced to reconsider and halting or delaying of new
marginal mines, which has resulted development projects.
Cash that could otherwise have been in closures or early retirements of
used for new developments was used shafts.
for survival during the prolonged
industrial actions in 2012 to 2014,
resulting in weaker balance sheets.
PwC 13 Platinum on a knife-edgeThe table below summarises recent mines put on care and maintenance, early retirement or developments stopped or
delayed.
The inability of the industry to generate sufficient cash places a significant constraint on its ability to develop new
mines in order to maintain existing demand, let alone supply into new demand, once demand for platinum starts
growing.
Table 1: Mines recently put on care and maintenance or developments delayed
Mine Year put on care Production before Prospects
and maintenance being put on care and
maintenance
(Platinum [‘000 oz])**
Smokey Hills 2012 and 2016
Everest (Aquarius Platinum) 2012 50 Now part of Booysendal
South development, as
discussed in Table 2
Crocodile Bridge (Eastern Platinum) 2013 50
Anglo American Platinum consolidation 2013
of Rustenburg mining operations
(Khuseleka and Khomanani shafts)
Anglo American Platinum consolidation 2013 50-100 reduction
of Union mine and closure of declines.
Elands platinum (Glencore Xstrata) 2015Figure 17 provides an estimated Fig. 17 Southern Africa platinum production profile (Existing mines)
production profile for the next 25
years based on company annual
reports, technical reports and 6 000
estimated production profiles.
5 000
The existing producing shafts include
mines already well progressed in 4 000
their ramp-up, such as Impala’s
16 and 20 shafts and their return
3 000
to service 14 shaft, Booysendal
North’s Merensky expansion,
2 000
Bokoni’s refocused expansion, as
well as a number of minor planned
1 000
improvements to production.
0
Despite these increases, the
existing shafts will barely maintain
2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041
production at current levels up to
2021. At current price levels, it is Existing producing shafts
questionable whether that will in
fact be maintained. The possibility Source: PwC analysis, company annual reports, reserve statements and investor information
of any significant industrial action
or mine failure or significant safety environment for the next 10 years, Platinum mining companies are
shutdown is also not included. The which even includes an effective facing a number of development
graph therefore provides a best-case annual growth of 3% over the challenges at present:
production profile for existing mines next five years before supply starts
based on current plans. declining. However, if demand, net • The
depth of new shafts is
of recycling, continues to grow at the significantly greater than was
The significant decline expected in
average 2.2% for the last five years, the case for previous generation
2022 will be the result of various
then this Southern African supply shafts. This increases the cost of
mines reaching closure. These
growth will barely offset future development, the time to develop
include: Kroondal, Mototolo, shaft 4B
demand growth. and the cost to operate.
at Lonmin and reduction at Zimplats.
The ongoing decrease thereafter is The development mines used • The absolute essential focus on
based on expected mine closures for indicative ramp-up production for safety has also increased the cost
mined-out shafts. projects in early stage ramp-up base.
such as Royal Bafokeng Platinum’s
This projection corresponds with • Lower
grade as a result of a move
Styldrift 1, PGM’s Maseve mine and
the comments raised by a number from the Merensky to Platreef
Wesizwe’s Bakabung mine. It also
of mining executives around the and UG2 reefs. UG2 and Platreef
includes earlier stage committed
platinum supply cliff approaching generally have a lower 4E grade
developments such as Northam’s
in five years’ time and the increase and lower platinum content as a
Booysendal South, Ivanhoe Mines’
in long-term prices post 2020 in percentage of total 4E ounces.
Flatreef and Zimplats portal 6 (still
consensus price forecasts.
subject to board approval).
• Based on reserves disclosed by the
Having a significantly declining top 4 producers, a mine would on
These new developments, if they
production profile based on average have to mine 1.25 tonnes
adhere to their stated development
existing mines is not uncommon. UG2 reef for every 1 ton Merensky
and ramp-up periods, will provide
There is an expectation that future reef to deliver the same number
an increase in supply up to 2021,
developments will be able to deliver of platinum ounces to the plant.
after which supply will decline to the
into the shortfall in order to sustain UG2 concentrator recoveries
5moz mark again. Even at the highest
production and where appropriate are generally also lower than
forecast point of 5.5moz in 2021,
grow production. Merensky recoveries further
supply along with stable other global
supply, will still be below the average increasing cost per platinum
Figure 18 adds current in-
demand net of recycling for the last ounce.
development projects to the
three years as estimated by Johnson
production profile. This figure
Matthey.
reflects a fairly stable production
PwC 15 Platinum on a knife-edgeThis implies that 1 ton of UG2 ore Fig. 18 Southern Africa platinum production profile
needs to be mined to deliver an
equivalent number of platinum
ounces to the concentrator. To 6 000
add further cost, the recovery in
UG2 processing is generally also 5 000
worse than Merensky ore.
4 000
• Negative
view of the global
investment community on mining
3 000
investments, in general, as
reflected by the severe decrease
2 000
in market capitalisation of mining
companies and weakened credit
1 000
ratings, has raised concerns over
the ability to source funds for
0
future development.
2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041
Taking into account the general
challenges faced by the industry, Existing producing shafts Development shafts
ongoing liquidity concerns and the
ability to fund expansions Figure Source: PwC analysis, company annual reports, reserve statements and investor information
18 reflects a fairly optimistic supply
position for both the existing supplies
investment, but companies would Sibanye Gold’s purchase of Anglo
and new developments. Recent
have to feel comfortable that the American Platinum’s Rustenburg
threats of industrial action could also
price increase is sustainable to invest assets, which is still subject to
create additional pressure on supply.
in human resources and equipment regulatory approvals, could provide
to mine areas previously suspended. an interesting dynamic in the ability
A summary of recent new
of these Rustenburg shafts to extend
developments indicates the
The bulk of these areas were mined lives and increase production mainly
substantial cost and time required
on a labour-intensive conventional on the back of the UG2 resource.
to add fairly limited ounces to the
basis. The lack of true retrenchments
overall production profile. Table
required to reduce the platinum Medium-term supply increases
2 includes only some significant
workforce over the last two years could come from mines put on care
replacement projects. There are
is reflective of the aging workforce and maintenance or developments
also a number of ongoing sustaining
and the unwillingness of the new delayed.
capital investments required to
generation to do conventional mining
maintain production at current As indicated in Table 1, the mines
underground.
levels. The impact of potential on care and maintenance did not
underdevelopment in this regard According to company disclosures, have significant production. They
is likely to only play out in a couple natural attrition, early retirements would probably require a significant
of years’ time when the lack of and voluntary separation packages premium to existing prices to be
flexibility will become apparent. accounted for the biggest portion brought back into operation. It
Table 2 indicates the significant of employee reductions. It is is also questionable whether the
shortfall in production and delayed questionable whether platinum independent smaller companies
steady-state production experienced mining companies will be able would have the financial backing to
by recent major mine developments. to attract a trained workforce to invest in a return-to-service-mine
increase production in the short without a substantial increase in
If supply shortfalls continue, then
term. Training and skilling-up of price to incentivise new investors.
prices will eventually have to go up
resources will have to be factored
to incentivise new production. Where
into the investment decision to go
will this supply come from?
back to old working areas.
The most likely source of new supply
Existing shafts might have their
in the short to medium term is from
lives extended with appropriate
existing mines where unprofitable
investment if prices justify it. This
supply was previously cut back.
will result in a smoother decrease in
Bringing back that supply won’t
production from 2022 than currently
require significant time or capital
estimated.
PwC 16 Platinum on a knife-edgeTable 2: New shaft developments
Project Original board Original Original Stage of Current annual Steady state Original expected annual
approval estimated time to estimated cost* development production achieved steady-state production
develop
(Platinum [‘000 oz])**
Modikwa (Anglo 2000 2005 planned R1.85billion In production 105 135 in 2006 162
American
Platinum and
ARM)
Marikana (Anglo 2005 Limited added Care and N/A 55 in 2010 145
American to the pool and maintenance
Platinum and share assets. from 2012 with
Aquarius reserves now
Platinum) mined from
Kroondal
Twickenham 2001 8 years to 2009 R3.2 billion Care and N/A N/A 2001: 160
(Anglo American planned (2003) maintenance
Platinum) Decision to from 2016 2008: 180
slow down 2008:R5.9 billion
development in
2003.
Updated
development
approval 2008
and slowed
again in 2013.
Unki 2003 5 years to 2008 R0.63billion In production 66 2012 58
planned
Kroondal 2003 3 years to 2006 R0.75billion In production 263 213 in 2008 280 (130 increase on
existing 150)
Mototolo (Anglo 2004 3 years to 2007 R0.675billion In production 114 95 in 2007 132
American
Platinum)
Pandora JV 2000-2003 10 years to 2012 R3.1 billion Development Included in N/A 230
(Lonmin and delayed Lonmin total
Anglo American Decision
Platinum) to revise
development
plan for Lonmin
in 2004
Saffy (Lonmin) Revised 5 years from In production Included in N/A
development 2004 to be Lonmin total
plan 2004 done by 2009. A
5-year reduction
from the original
plan.
K4 (Lonmin) Revised 7 years from Care and N/A N/A
development 2011, a 6-year maintenance
plan 2004 reduction from from 2012.
the original plan. Development
delayed.
Hossy (Lonmin) Revised 2008 Orderly closure Included in N/A
development planned for Lonmin total
plan 2004 2017
Lonmin total Revised 2011 >R6 billion In production 760 Sales peaked 1150 in 2011
development in 2006 at 953
plan in 2004
including above.
* Note that capital costs are not comparable as they are often disclosed in current cost terms with different base years impacting on the total value. Some
numbers are also disclosed in nominal terms. In addition, some projects were acquired with previous development done, which reduced the remaining costs
required to develop as indicated here.
** Not all projects disclose estimated platinum production. Some of the production numbers were derived from PGM or 4E production forecasts and should
therefore only be seen as an indication of size and not an absolute value.
Source: Company annual reports, websites and investor presentations
PwC 17 Platinum on a knife-edgeProject Original Original Original Stage of Current Steady state Original expected
board estimated time estimated development annual achieved annual steady-state
approval to develop cost* production production
(Platinum [‘000 oz])**
Mogalakwena North 2006 4 years to 2010 R4 billion for In production 2015: 400 2015 200 original +230
(previously PPRust), expansion expansion = 430
expansion project
(Anglo American
Platinum)
Everest (See Put on care and N/A 2011 100
Booysendal South) maintenance
(Aquarius) in 2012 Sold to
Northam. (See
Booysendal South)
Booysendal North 2009 7 years to 2016 R3.9 billion In production 93 2016 93
UG2
Booysendal North 2016 Short term R0.3 billion In development N/A N/A 15
Merensky
Booysendal South 2016 6 years to 2022 R4.2 billion In development N/A N/A 116
Impala 16 shaft and 2004 8 and 5 years to R6.6 billion Ramping up Part of Impala 16 shaft in 355
20 shaft (replacement commence ramp production production
shafts for the lease up production in in 2013 and
area) 2012 and 2009 20 shaft in
production in
2015
Impala 17 shaft 2008 10 years to full R8.9 billion Care and N/A N/A 180
(replacement shafts production 2018 maintenance from
for the lease area) 2015
Leeuwkop (Impala) 2013 8 years to first R1.3 billion for Delayed capital N/A N/A 145
production in phase 1 only investment from
2021. Ramp up 2014
to 2026
Marula (Impala) 2002 3 years to 2005 R1.4 billion In production 78 70 in 2008 103
Styldrift 1 (Royal 2008 9 years to 2017 R11.8 billion Ramping up to be N/A N/A 123
Bafokeng Platinum) in production in
2020
Bakabung Mine 2008 5 years to start R5.6 billion In development N/A N/A 250
(Wesizwe Platinum) production in
2013. Ramp up
to 2017
Maseve (PGM) 2008 3 years to R5 billion First concentrate N/A N/A 140
commence produced in 2016.
production in In ramp up to
2011. Ramp up production in 2020
to 2013
Sedibelo (Platmin) 2007 2 years to R1.7 billion In production 88 Reached 175
production in current
2009. Ramp up production
to 2011 levels in
2013
Flatreef (Ivanhoe 2014 6 years to R12 billion In development N/A N/A 175
Mines) steady state in
2020/21
PwC 18 Platinum on a knife-edgeDevelopments delayed or put on The location and dynamics of advancements that improves the
care and maintenance would be individual projects will determine effectiveness (ability to capture
the first to be reactivated. Even if whether making use of existing more emissions for less platinum) of
development were to recommence infrastructure or building new PGMs and therefore requires lower
immediately, they wouldn’t be able to concentrating capacity is most PGM content for the same emission
fully offset the expected decrease in feasible. The time to build additional control.
production from shaft closures in the concentrating capacity is generally
next 10 years. less than the time to develop a mine In a low-price environment, the value
and is not seen as constraint to of recycled material might be less
New open-pit mining operations, growth at this stage. than the cost to collect, decant and
which generally provide more process it. If prices increase recycling
flexibility in medium-term supply, Given the reduction in Southern is incentivised.
could assist in providing the African mining supply since 2012,
necessary supply once required. there is sufficient smelting and Although catalytic converters now
Shallower resources in Zimbabwe refining capacity subject to electricity require more PGMs to comply with
could also assist in bringing supply and environmental regulatory new regulations, the increased
production on stream quicker than compliance. However, the higher substitution of platinum by
the deep-level shafts in South Africa nickel and copper content in the palladium will also impact the
if the ownership uncertainty is Platreef and Zimbabwe ore could number of platinum ounces available
addressed. provide interesting base metal for recycling.
refining dynamic in the future.
In the long term there are still a Conclusion
number of good platinum resources Alternatives to
to be mined in South Africa and We are optimistic that platinum
Zimbabwe. Once prices increase, a Southern African prices should recover in the
number of them will be brought to mining supply medium term from their current
feasibility stage or into development. unsustainable low rand price levels.
Outside Southern Africa, Russia is
As can be seen in table 2, such the main supplier of platinum with The lack of investment in platinum
developments will require significant Norilsk Nickel the world’s fourth- mines as a result of the low-price
capital and time investment. largest producer with production of environment post 2008 and severe
Technology is likely to play a key role approximately 650koz per year. industrial action from 2012 to 2014,
in their success, both on the supply will continue to put pressure on the
side and the demand side. The key Platinum constitutes 8% of Norilsk existing supply deficit.
for miners is to ensure that only Nickel’s revenue and is merely
those assets that can be mined in a a by-product. Although Norilsk It is debatable how long above-
sustainable and profitable basis are Nickel has a number of projects in ground stocks can supply into
developed in order to avoid excess development, these projects are of this shortfall. While recycling will
supply, which will again fuel the a sustaining nature and should not continue to assist in reducing the
commodity cycle. create significant additional supply in supply shortfall, it won’t be able to
the short term. supply into any real demand growth.
Processing capacity
If mining companies cannot meet The ability of platinum mining
We will comment more extensively demand, the question is whether companies to increase production
on metal processing capacity in a alternative supply is available. once prices rise in a disciplined way
follow-up document. Recycling has grown to over two and without significantly impacting
million platinum oz per year with a their unit cost, will determine the
There is currently excess substantial portion now also coming fate of South Africa’s platinum
concentrating capacity in the from jewellery. industry in the next 10 years.
industry as a whole. However, Doing this in a sustainable way and
infrastructure cost to take ore to the Stricter emission control regulations maintaining their social licence
excess concentrating capacity could could increase the content of PGMs to operate in a challenging socio-
be costly in the form of infrastructure in catalytic converters, which economic environment is likely to be
(conveyor, rail, transport equipment) would create a bigger incentive to the biggest requirement for long-
or in running costs when trucked recycle. Countering the impact of term success.
using existing infrastructure. stricter regulations is technological
PwC 19 Platinum on a knife-edgeContacts
Michal Kotze
Africa Energy, Utilities & Mining Industry Leader
T: +27 (0) 11 797 4603
Email: michal.kotze@za.pwc.com
Andries Rossouw
Mining Assurance Partner
T: +27 (0) 11 797 4060
Email: andries.rossouw@za.pwc.com
Africa Mining Centre of Excellence
Email: mining.africa@za.pwc.com
PwC 20 Platinum on a knife-edge© 2016 PricewaterhouseCoopers (“PwC”), a South African firm, PwC is part of the PricewaterhouseCoopers International Limited (“PwCIL”) network that consists of separate and independent legal entities that do not act as agents of PwCIL or any other member firm, nor is PwCIL or the separate firms responsible or liable for the acts or omissions of each other in any way. No portion of this document may be reproduced by any process without the written permission of PwC. (16-19416)
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