Having suffered losses in production at Northam Platinum’s Zondereinde operation, following an 11-week wage strike, the company has revealed that it is on track for recovery in preparation for a predicted turn in market conditions 2018.
The strike seriously affected production at Zondereinde, taking three months thereafter before normalized production levels were resumed. By the end of the financial year, however, production had improved considerably.
The effect of the strike on production was marked by a drop of 18.9%. However, PGM sales were down by a lesser extent, or 8.2% at 9 827kg. Unit costs were abnormally high, skewed by the lower production volumes. Capex for the year came in at R351 million, allocated mainly to the smelter rebuild, the deepening project and hostel conversion programme.
Platinum strike to effect global supply from 2018
One of the major features of the current economic environment, and of the PGM markets in particular, is the failure of the markets to react to the supply shortfalls occasioned by the strike in South Africa, giving rise to the postulation that above-ground stocks have comfortably satisfied demand since the 2008 financial crisis.
“The research we have available to us suggests that we are unlikely to see a more marked and sustained recovery in the platinum price until 2018 and beyond, when significant deficits in platinum supply will start manifesting,” said incoming chief executive Paul Dunne.
“For us at Northam now the challenge is to position the company favourably in order to draw substantial benefit from a turn in market conditions, which for platinum is anticipated to turn in 2018, while we are already seeing some movement in palladium and rhodium prices.”
The effects of labour relations in South Africa
The labour relations climate in the sector, and indeed the country, remains fraught, and there are already early signs of industry restructuring. With these opportunities in the offing, Northam has recognised the importance of being optimally positioned and strategically fit to act purposefully and swiftly.
“I have referred previously to the imperative for the restoration of our empowerment status, the acceleration of a number of Mining Charter initiatives including the housing and accommodation strategy, and the perceived lack of a social wage, all of which remain critical elements of our licence to operate in the future,” said Dunne.
Making the most of opportunities
In anticipation of any opportunities arising, Northam has embarked on a strategic review of the business – an exercise with clear terms of reference and limited life span.
“This process is being managed by a small and lean, but extremely proficient internal team, supplemented by an external consultancy with specialist industry knowledge. Our approach is two-pronged, but runs in parallel lines, with an internal operational focus, and a broader external business strategy,” said Dunne.
Northam’s 2014 financial year results
Northam’s financial performance was dominated by the effects of the 11-week strike at the Zondereinde operation: revenue losses reached the R750 million level before a settlement was reached on 29 January 2014.
In spite of the lower production volumes from Zondereinde, sales volumes were supplemented by Booysendal’s contribution and also from a release of inventory. The higher volumes, combined with the effects of a higher rand metal basket price drove sales revenues higher to R5.3 billion, thereby compensating marginally for the moribund US dollar PGM prices.
A 38.4% increase in cost of sales reflects the higher operating costs, increases in refining and related costs, along with a substantially higher depreciation charge, associated with the inclusion, for the first time, of costs relating to the Booysendal mine.
The net taxation charge of the group fell by 84.5% to R26.2 million. A marginal profit of R19.6 million was earned for the year – resulting in earnings per share of 2.4 cents.
In a balance sheet strengthening exercise in the first half of the financial year the group successfully raised a total of R1 billion in additional cash and financing facilities through a R600 million claw back rights offer underwritten by Coronation Asset Management, and a R400 million additional revolving credit facility. R120 million was also raised through a tap issue on the domestic medium term notes programme during the year.
Northam’s Zondereinde operating performance results
The strike seriously affected production at Zondereinde. After the strike it took some three months before normalized production levels were resumed. By the end of the financial year production had improved considerably. The effect of the strike on production was marked by a drop of 18.9%. However, PGM sales were down by a lesser extent, or 8.2% at 9 827kg. Unit costs were abnormally high, skewed by the lower production volumes. Capex for the year came in at R351 million, allocated mainly to the smelter rebuild, the deepening project and hostel conversion programme.
The smelter was rebuilt and successfully recommissioned thereafter at a cost of R54.0 million. The facility is operating normally.
Progress on ore reserve development in the north west quadrant of the mine and the deepening project was curtailed during the strike. Following a slow restart, these activities are progressing satisfactorily.
In the absence of further disruptions, Zondereinde mine’s production in the year ahead should be at normalized levels, while costs will continue to reflect the inflationary effects of higher wages and electricity tariffs and the weaker rand. Capex in the coming year is forecast at R331 million. The deepening project should absorb approximately R105 million, with the balance allocated to routine capex items, including R28 million for an autoclave replacement and a further R42 million for the hostel conversion programme.
Northam’s Zondereinde and Booysendal operating performance results
The group’s new mechanized Booysendal mine on the eastern limb continues to ramp up to steady state, anticipated by the end of 2015. The mine posted an operating loss for the year, but is anticipated to make a positive contribution in F2015.
At R539.6 million, capital expenditure was significantly lower than the previous year, given the near-completion of the construction and development work. Forecast capital expenditure in F2015 is expected to be R483.4 million of which R78.4 million will be allocated to routine capital, and of the R405 million project capital, R50 million is to be spent on a project to investigate the feasibility of mining Merensky ore at Booysendal.
Looking ahead for Northam Platinum
Social and economic uncertainty is likely to continue to influence the fortunes of the platinum industry in the near future. Barring any disruptions to Northam’s operations in F2015 and F2016 Zondereinde mine is expected to continue in steady state production.
The Booysendal mine is anticipated to reach steady state production by October 2015. The stable financial performance of the group therefore is largely dependent on improved industrial relations, improved demand for platinum group metals in the global economy (which could result in higher US dollar metal prices), achieving production targets and benign cost inflation.
A weakening R/US dollar exchange rate as well as above average increases in administered prices such as Eskom’s power tariffs pose a risk to cost inflation.
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