Not only did Anglo American Platinum (Amplats) report very good results in the first half of its financial year, management says the second half may be even better.
Amplats CEO Chris Griffith said during a webcast that total production of platinum group metals (PGMs) will probably be slightly higher in the second six months than in the past six months. Amplats produced some 2.15 million ounces of precious metals in the six months to June, with a target of 4.6 to 4.9 million ounces for the full year.
Griffith also reiterated earlier estimates that production cost will be in the region of the R22 000 per ounce of platinum produced, which is on par with production costs in the first half of the year. He further expects that metal prices will remain stable.
If his three predictions come true, profits will increase further and represent a considerable turnaround from the difficult period it was in a few years ago. In 2015 Amplats reported a huge loss – a total loss of R12.3 billion and a loss of 48 cents per share to be precise – and the share price plunged to a low of R156.
The recovery in profitability since then has seen the share price increase by around 430% to the current R830.
Not at all a bad return over a period of about three years.
The latest interim results serve as a good summary of what Amplats has achieved in the last few years, and of changes in the market for platinum metals over the period.
Following the big and disrupting restructuring at Amplats a few years ago, which saw the sell-off of several mines and reduced production levels at others, it has focused on managing the smaller group effectively and profitably.
“Amplats is a much stronger business today because of the actions we have taken in recent years and I am pleased to say that there are further opportunities to unlock the full potential from our operations,” says Griffith.
In the past six months, PGM production has been steady at 2.15 million ounces, with costs kept as low as possible to maximise the benefit of higher metal prices.
Although operating costs increased by some 13% per ounce of platinum produced, Griffith points out that they were slightly higher than expected in the period due to power failures that disrupted production schedules and led to the failure of some electrical equipment that had to be repaired or replaced. A strike of a few weeks at one of the mines further affected production costs.
The group also opted to schedule maintenance work in the first few months of its financial year as PGM markets are usually busier in the second half of the year with higher trading volumes.
Nevertheless, profit before tax increased by 214% to more than R10 billion compared to R3.2 billion in the first six months of 2018.
After government took its cut of R2.7bn, profit after tax was some 223% higher than a year ago at nearly R7.4bn.
Amplats reported headline earnings of R28.15 per share (120% higher than the comparable figure of 2018) and declared a dividend of R11 per share, which some analysts at the presentation described as conservative. The interim dividend was nearly equal to the annual dividend of R11.25 of the full 2018 financial year.
Griffith says Amplats will stick to a 40% payout for the time being, conscious that Amplats still has net debt and that there are a few challenges ahead, such as the increase in electricity costs and the annual wage negotiation that has just started.
It is important to note that the biggest boost to profits came from a steady increase in metal prices, especially in the prices of palladium and rhodium, and the significant weakening of the rand. The average price of palladium increased to $1 400 per ounce in the past six months compared to the average of $1 005 in the previous year.
Rhodium increased from an average of $1 838 to $2 840 over the two periods. Palladium and rhodium are now by far the biggest source of revenue at nearly 58% of sales value, while platinum revenue declined from 41% of the total to 29% due to slightly lower prices.
Prices of palladium and rhodium picked up due to higher demand for exhaust catalysts in vehicles with petrol engines, driven by an increase in cars with petrol engines and even more legislation to reduce emission levels.
Much of Griffith’s optimism for the second half-year is probably based on the ticker running across his computer screen (it’s fairly safe to assume he has both a computer and a price ribbon), which shows that current spot prices for platinum, palladium and rhodium are currently even higher than the averages of the last six months.
|Average prices achieved|
|Per ounce||H1, 2019||H1, 2018||Change||Current|
|Palladium||$1 400||$1 005||39%||$1 500|
|Rhodium||$2 840||$1 938||47%||$2 204|
|Iridium||$1 457||$1 054||38%||$1 460|
|Gold||$1 317||$1 312||0%||$1 427|
Source: Amplats interim report; spot prices from InvestMine
However, it is noteworthy that the significant fall in the value of the rand was really the main reason for the increase in revenue and earnings. Amplats notes that the price of its basket of precious metals increased by 16% in dollar terms – but a massive 33% in rand terms. This was due to the decline in the exchange rate from an average of R12.38 per dollar to R14.26 in the period.
The rand has recovered from the very weak levels of a few months ago and is currently on the better side of R14 per dollar and will hopefully stay here. It seems unlikely it will see R11 any time soon.
Griffth acknowledges that there are a few uncertainties ahead, not the least of all the current wage negotiations. Nobody would be surprised if unions take a very hard line after seeing the group’s solid results; management can expect a hard time when putting their stance across.
“The negotiations with unions just commenced,” says Griffith. “We are cautious not to embed unsustainable cost increases in the form of a large wage increase into our base cost. We are conscious of the fact that PGM prices go up and down.”
The main challenge will be at Amplats’ Amandelbult mine, where labour costs are the biggest single cost item, equal to some 60% of total costs.
Cost-control efforts continue
Amplats financial director Craig Miller says the company did very well with its efforts to control costs, posting a 6% increase in total unit costs compared to mining inflation of 7.6%. The main challenges remain labour and energy cost, including high increases in electricity and fuel prices.
Amplats is hitting back at higher energy costs by installing solar systems to produce its own electricity and putting fuel cells into its large transport trucks to reduce expenditure on petrol and diesel. These initiatives also help to reduce its own emissions.
The cash flow statement shows strong cash management.
The cash reserve increased by R2.7 billion after investing R3 billion in plant and equipment and repaying another R900 million towards debt. Amplats has repaid more than R5.8 billion worth of debt over the last 18 months.
Says Miller: “Cash flow is most pleasing. It could have been higher but for lower levels of ore mined during the period.”
Griffith ended his presentation by affirming the guidance he offered investors at the beginning of the year, and with a prediction that the PGM market will remain at the slightly stronger levels due to a slight deficit in the market, especially with regards to palladium and rhodium.
Bloomberg estimates headline earnings of R56 per share for the full financial year, just about double what Amplats produced in the first six months and also double what it did in the full financial year to December 2018. The share price of R830 thus represents a forward price-earnings ratio of 14.8 times and a forward dividend yield of 2.7% if the dividend tracks the earnings.