LISTEN: Amplats net debt will continue to fall

Chris Griffiths, Anglo American Platinum CEO.

WARREN THOMPSON: I’m the editor of Mineweb and joining me on the podcast today is the chief executive officer of Anglo American Platinum, Chris Griffith. Good to have you with us, Chris.

CHRIS GRIFFITH: Thank you, Warren, and good afternoon to your listeners.

WARREN THOMPSON: Today you reported production of 2.33 million ounces for the year ending December 2016, a very good result financially, you were able to limit cost increases to just 1.4% during the year and, of course, this allowed you to post headline earnings of R1.9 billion but massively reduced debt by R 5.5 billion to
R7.3 billion. Chris, a great set of numbers, especially considering where the company was a few years ago, you also gave some more news around how this rebalancing of the portfolio is now coming to the end of the process, as I understand it, can you just give us an update as to what your portfolio will look like by the end of this financial year?

CHRIS GRIFFITH: We would agree that we had a good set of production results and I think that comes from four years of really hard work of doing both restructuring and repositioning of the portfolio. We are producing the same amount of ounces now that we were a couple of years ago with 15 000 less people, with a quarter of the overhead. We’ve reduced our cost by 35% over the last two years, so I think that work is now starting to flow through to the business, so at the same time that we said that we would be exiting five of the assets, the most important of that was Rustenburg and then the next biggest one was Union, so we’ve made a couple of other announcements over the course of last year. Let me run through those quickly, Rustenburg, just over a year ago we made the announcement, a sale and purchase agreement with Sibanye, we said that we would seek to exit Rustenburg. We completed that deal in October 2016 and from November 1 Sibanye took over the operations of the Rustenburg asset. So that deal is done and Rustenburg is now part of Sibanye and we have exited one of the assets that were high on the cost curve for Anglo Platinum. We also made a couple of announcements at the end of 2016, one was our smaller joint ventures, so Pandora with Lonmin and that was also a sale and purchase agreement announcement. We also made an announcement at the end of 2016 about selling some of our very, very long-dated mining assets that are not part of the plan at Amandelbult for R1 billion to Northam. We expect a number of those sale and purchase agreements to complete in the course of 2017. Today we also announced I think the second biggest asset that was on our list to be disposed of after some very, very hard work by the team on the ground at the mine, to turn that mine around from what was a pretty dismal position a couple of years ago, what we did is a whole host of things over the last four years and we’ve now turned that mine around, it’s generating cash, it’s got low unit cost increases and so now it’s a saleable mine and something that someone can actually own. So today we announced that Siyanda, our chrome partner at the MASA Chrome in Union would be buying that asset from us. We think that that sale and purchase agreement can also be done in 2017. So we have done all the hard work I think for a number of our assets and many of those will complete in 2017. Then we’ve done the majority of the repositioning of the portfolio and at the same time we have drastically reduced the amount of debt on the balance sheet. So then we think that we have got a great portfolio of assets that dominates the first half of the cost curve. That’s the only way to be bulletproof in fairly tough market conditions. So we think by the end of this year we would have done that.

WARREN THOMPSON: The results of that are going to be continued to be seen because your financial director indicated today that you are expecting that net debt, which had fallen, to continue to fall because of what you yourself termed going forward you are looking to do only these high value capital light projects.

CHRIS GRIFFITH: Yes, there are a couple of reasons why we expect net debt to decline, as it did in 2016, decline again, perhaps not to the same amount but why we see debt to decline again in 2017. The underlying businesses are all generating cash and that’s always the most important area because the others are once-offs. We also then will see, as we complete a number of these deals, we should see the R1 billion from Northam coming through this year, we should see the R400 million coming through from the Union deal and we should see another R1.2 billion or so coming through from the second tranche of a customer pre-payment. Also, of course, we’ve got a little bit of working capital reduction at 65 000 ounces that was locked up due to the Waterfall Smelter run out and that will flow through into cash for this year. So to summarise that it’s underlying cash generation and a number of once-offs, some of the deals that we started last year will flow through this year, all of those will help reduce net debt.

WARREN THOMPSON: Okay, great, so I guess the question is and this refers then specifically to Mogalakwena, which is the jewel in the crown, as I understand it it’s only refining capability at Mogalakwena that’s stopping Anglo Plats from increasing its production there. So what is the investment case there, as you mentioned, you are holding back on any big investment decisions for a while, why is the increase in refining capability Mogalakwena not on the table?

CHRIS GRIFFITH: So it is absolutely one of the things that is in our pipeline of things that we are working on. So let me take you through the journey at Mogalakwena quickly, we started this journey when I came on board at the end of 2012. In 2012 Mogalakwena produced 300 000 ounces, we could see from 100 miles away that that was not anywhere near where that mine could produce that. We need to spend capital, we just need to put the right team in place and focus on the right things. Over the next three years we have increased the production, from 2013 to 2016, we have increased the production to over 400 000 ounces, spending no capital. What we’ve done is we have absolutely now pushed as hard as we can all of the things so the mining production and the concentrated production and what everyone previously thought was nameplate capacities we way exceeded those. That’s the right thing to do because that’s what you want to do, you want to sweat those assets, you want to make sure that absolutely everything you’ve invested in is generating a return. So at Mogalakwena we think that we have pushed that about as hard as we can, we’re going to put a little bit more, we think it will take us two years but that’s another only 15 000 ounces, so we’re doing more studies for further debottlenecking but that’s not going to move the dial. One of the things that we are now looking at as part of the suite of projects that we have on the table is actually to complete the project study in a number of assets, so at Mogalakwena what does the next big expansion look like, what does the next expansion at Debrogen look like, we’ve got an untapped deposit that we can bring on fairly quickly, it won’t have the same returns as Mogalakwena will but it will nearly have the same capital intensity. We’ve also got great opportunity in Zimbabwe at our Unki asset, which is currently sub-scale. We’ve got some fantastic opportunities and we’re doing all the project studies around those to be able to decide which of those project studies will turn into projects and which should go first, second and third. That’s a great position to be in so that capital competes for the best return. Now, the question you ask is why are you holding back, why don’t you just go for it and particularly you also said, well, as a result you guys are saying the market is in marginal deficit, therefore, if that’s the case why are you holding back on projects, so I think that is a good question. But to do that I need to take us back a couple of years, from 2012 it was absolutely clear that this market was in oversupply and it was being oversupplied with lossmaking production. So we were absolutely determined that the industry would never recover with that sort of mindset and the way we went about our business. So Anglo Plat said we’re going to shutdown anything that’s not making money and that we can’t turn around. Subsequent to that we shut down about 350 000 to 400 000ounces and every single mine that we have is generating cash. For the last five years the market has been in deficit but for 2012, 2013, 2014 there were some very big once-off events. In 2012 there was a slouch after Marikana, in 2013 about 900 000ounces flowed into ETFs and in 2014 you had one million ounces lost as the result of a strike. Now, anyone looking at that would say, ja, okay, the market is in deficit but those are once-offs. But much more importantly 2015 and 2016, where the world is a pretty tough place, there was a lot of concern around China and we saw a declining demand for jewellery, so the world was pretty tough but, more importantly, the market was in deficit in our view and in Johnson Matthey’s view, and most commentators, by about 400 000, 500 000, 600 000 ounces and those two years, the last two years are very important because that’s what the normal market looks like. Now, we said a couple of years ago, we were going through a process of reducing oversupply to the market, we think the market is now back in deficit but not hugely so, and we said that we would hold off against any major project expansion until after 2017 and then we could reassess. That doesn’t mean we are sitting in the background doing nothing and, as I said, we are doing our project studies, so if it came to the point that we said, okay guys, let’s go for it, we would have already got a two or three-year head start on what a normal project pipeline would look like. So I would summarise all that by saying that we believe the market is in modest deficit, there’s been an underinvestment in capital by all the producers in South Africa, so there will be base production decline. We don’t think that there’s a supply cliff, we think that what were previously known as the growth and expansion projects will just top that up with the fairly flat production and modest increases in demand. So I think it’s still a market to be careful in and I think we’ve got to carefully weigh up so that we don’t go back into an oversupply of market again, I think we have to be very careful about that and what we are being very careful about is how to maximise the amount of cash we’re generating and it’s not about how many ounces we can put on the market. But we have the ability at Anglo Plats, we’ve got some fantastic projects, that as the market wants us to bring new ounces to the market we can do that and we can do that fairly quickly. So hopefully that summarises those two issues that what are you doing about future projects and how are you thinking about the market. Warren, hopefully that answers your question.

WARREN THOMPSON: Yes, it does, Chris, and I think we’re going to have to leave it there on account of time but yes, hopefully we will continue to see that net debt falling and then obviously at the opportune time some of those projects being activated moving forward.

CHRIS GRIFFITH: Warren, thank you very much.

WARREN THOMPSON: Thanks very much. That was Chris Griffith, the chief executive officer at Anglo American Platinum.




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