Drop in Amplats profit suggests we may have hit peak platinum

The group is hostage to commodity prices and inflationary pressures outside of its control.
Tumela, an Amplats open pit mine in Limpopo. Image: Siphiwe Sibeko/Reuters

The fact that Anglo Platinum’s share price has dropped more by more than 50% since its peak in March this year tells us how radically the fundamentals for platinum group metals (PGMs) have changed in just a few months.

Weaker PGM prices, 10% mine inflation and a 4% drop in production pushed profits down 43% for the half year to June 2022.

Amplats’s share price is back to where it was pre-Covid, suggesting the post-Covid boom is well and truly behind us, and we have now passed peak platinum.

“People got used to the bigger numbers from precious metals producers and that was unsustainable,” says Peter Major, mining director at Mergence Corporate Solutions.

“These are big, mature operations. I’m not sure they can do much better under the circumstances. There’s not really much growth happening with the precious metals producers, unless one is talking about Northam. They are all totally hostage to these commodity prices.”

A worrying trend starting to appear in corporate income statements is inflation, particularly in key inputs such as diesel and fertiliser, which are up 61% and 55% respectively over the past year.

This is according to Craig Miller, finance director at Amplats, in a presentation to the media on Monday. Chemicals are up 17% over the last 12 months, which suggests the pressure on margins will remain for some time to come.

Interim results

Earnings before interest, tax, depreciation and amortisation (Ebitda) dropped 32% to R43 billion in the six months to 30 June 2022.

The drop is due to an exceptionally good first half in 2021, when large stockpiles accumulated in the previous months were processed, at an earnings margin of 59%.

Read: Amplats returns R80bn to investors on record profit [Feb 2022]

Sustaining a performance like that is a tall ask, and there are now signs that Amplats is reverting to more normalised performance.

The massive build-up in stockpiles in 2021 occurred as commodity prices were going through the roof.

It was fortuitous timing for Amplats, says Terence Hove, senior market analyst at Exness.

“What is being experienced now, and which explains the fall in the Amplats share price, is the future expectation of cash flows being lower and not as robust. Compounding this is China’s economic stop-start due to their zero Covid case stance. This has frankly damped sentiment globally as a slowdown in China translates to muted demand globally, and is reflected in oil prices each time an increase in Covid cases is reported out of China.”

The slump in profits for the first half of the year should not come as a surprise, given the inflationary build-up triggered by the Ukraine war and the knock-on effect on oil prices, adds Hove.

“Our own local perils in the constant power cuts have not exactly eased these pressures on production. With inflation persistently high, [and] continued monetary policy tightening for what seems to be the rest of 2022, production activity will remain subdued.”

Bright spots

Amplats CEO Natascha Viljoen highlighted some of the bright spots in the results, including the conclusion of a five-year wage agreement with trade unions at a 6.6% annual cost to the company, and the growth in the green economy, which relies heavily on PGMs.

Listen: Amplats CEO Natascha Viljoen on interims, on the SAfm Market Update with Moneyweb

Amplats recently launched the world’s largest hydrogen-powered truck – part of a fleet that will help decarbonise its operations and reduce greenhouse gas emissions at its Mogalakwena mine by 11%.

Read:

Viljoen says the group is ahead of target in rolling out renewable energy projects to wean itself off the grid and further reduce its carbon footprint.

PGM prices surged following Russia’s invasion of Ukraine in February, with palladium hitting a record high, but have since fallen back to pre-invasion levels. Russia accounts for about 22% of newly-mined PGMs, but nearly 40% of palladium. PGM prices peaked in March, with palladium at a record high.

Fears of further price spikes dissipated as no countries applied sanctions to Russian PGMs.

Prices eased as Russian metal continued flowing to end users.

Platinum, palladium and rhodium prices in USD

Source: ShareMagic

The first part of 2022 was characterised by supply chain bottlenecks as a result of the Ukraine war, while more recently the resurgence of Covid in China has put a crimp in demand.

This took some of the shine off production at the Mogalakwena mine, though the move to higher grade mining areas and longer concentrator run times at the PGM concentrator set up a stronger performance for the second-half of the year. Production was maintained at Amandelbult mine, but substantial improvements were recorded at the Mototolo and Unki mines due to concentrator debottlenecking projects.

Stay-in-business capex needed to keep operating for 2022, has been trimmed to R8.8 billion-R9.3 billion from the previous R9 billion-R9.5 billion. Expansion capex is likely to range between R2.9 billion and R3.7 billion for the full 2022 year.

Amplats ended the half-year period with net cash of R41.8 billion, down from R49.1 billion at the end of December 2021.

Cash generated from operations contributed R39 billion. The cash was used to fund capital expenditure and capitalised waste stripping, collectively amounting to R6.1 billion; pay taxation and royalties of R9.5 billion; and to pay dividends to shareholders of R33.1 billion.

An interim dividend of R81 per share, or R21.5 billion, was declared for the first half of 2022. This comprises a base dividend of R41 per share, and a special dividend of R40 per share. This compares with a dividend of R175 a share in the first half of 2021.

Listen to this MoneywebNOW podcast with Simon Brown on why not to expect another knockout year from Amplats or Kumba (or read the transcript here):

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