2021 Review: Mining sector

‘No mining company wants to take this cash that it’s finally making after years of hard work … and put it in the ground when no one’s going to protect it’: Peter Major from Mergence Corporate Solutions.

FIFI PETERS: Let’s get to that mining conversation. This follows the latest deal coming out of the platinum mining space, in which Anglo American Platinum will sell its Bokoni platinum mine to African Rainbow Minerals [ARM] in a share-and-purchase agreement deal valued at around R3.5 billion. This is the latest deal happening in the sector.

To speak more about it, as well as to review some of the main happenings in the mining industry for 2021, I’m joined by Peter Major from Mergence Corporate Solutions. Peter, thanks so much for your time. Just your take on the latest transaction between Amplats and African Rainbow Minerals?

PETER MAJOR: Well, Fifi, the first thing most people are saying this year when they see these big deals going through are these top-of-the-cycle deals. And yes, that’s a very valid question because these are the highest metal prices in the PGM [platinum group metals] sector we’ve ever seen by far. They have been coming down for quite a few months, five or six months. The companies are so flush with cash and their PEs [price-earnings ratios] are quite low, so they’d rather do a cash deal; even borrowing money is cheaper than issuing your shares at such a low PE. But these do look like top-of-cycle deals and I think on this one Amplats knows what they’re doing.

It’s been a difficult mine for decades. It’s kind of far away from the main operations that Amplats and the other producers have. I was a little surprised that ARM wanted to take this on. It has a large resource, it’s a huge area, but it wasn’t the highest-grade platinum mine all the years that Amplats had operated it, and it was always a small-tonnage producer. So you could never really get the critical mass to amortise the huge cost you have. You need to get 200 000 tonnes a month or 150 000 tonnes a month.

So I think Amplats is getting a decent deal here. They’re getting it at R3.5 billion – not that they really need it so much on their current operations, but it turns it over to somebody who will put more time and effort into it, which ARM will. ARM has tons of cash and I think not enough mining operations to keep them busy. That’ll certainly happen here.

FIFI PETERS: To the market and the consensus view’s point that these are top-of-the-cycle deals I wonder if there’s something that these mining companies know that we don’t, [such] that they’re willing to buy mines at such high prices. Could this indicate that we could see the same of this kind of acquisition and merger activity for 2022 or, to your point about the commodity prices starting to lose a little bit of steam, isn’t it for now?

PETER MAJOR: No, I think there are going to be more. I do think commodity prices are going to continue to fall in 2022 but, boy, they are holding up well. We’ve also seen a rotation. If you remember a few years back, when oil was $100/barrel, oil hasn’t even come close to a hundred dollars now.

But natural gas has gone berserk; natural gas is up 600% this year, and we are seeing close to record-high coal prices, and close to record-high base metal prices. So yes, the PGMs went to double what they’d ever been before, but they’ve been falling for most of this year. Gold we know hit its all-time high about a year-and-a-half ago. It’s been falling and kind of staying at a lower level. So it’s a shift. It’s hard to say the commodity cycle is over when different commodities, heavy mineral sands, titanium, rutiles, zircon – they’re getting back near their all-time-highs.

I think we will see this kind of activity carry on into the next year because mining companies almost across the board are virtually choking on cash. We know not very many mining companies ever want to pay out that cash in dividends; they’d rather buy more projects, and they always think they can probably choose a better project cheaper than their competitors. It’s seldom the case at the top of the cycle, Neal Froneman [Sibanye-Stillwater CEO] proved the deals you can get at the bottom of the cycle, but it’s going to be hard for anyone to prove they’ve got a deal buying at the top of the cycle like we’ve seen this year.

FIFI PETERS: So much cash that some mining companies are even willing to engage in a bidding war, no disrespect to them. I’m referring to the hardest deal right now on the table between Impala and Northam Platinum for Royal Bafokeng. Last time you and I spoke, Peter, Impala had not yet made its mandatory offer for Royal Bafokeng Platinum. What do you make of how that deal has progressed, and how do you see things playing out?

PETER MAJOR: Boy, it’s turned out a lot tougher, especially when Impala came and raised their bid to R150/share. I thought that’d do it. But Northam wants this thing bad. [Northam CEO] Paul Dunne’s very smart and he knows a lot more than I do and probably everybody else, because he’s making a power play – pay high and pay hard; and poor Impala, their PE is down to 4.5. So they’re having to pay more of this in cash and give shares at a very cheap price, which they don’t want to do.

I think the big message here for me – I’ve been here 40 years, Fifi, in this country, involved in mining – the big loud, clear message is these companies will bid crazy prices. They will use this extraordinary amount of cash to buy something where there’s a big worry they are overpaying instead of putting that money in the ground.

This is where government should be looking in the mirror and asking itself why these companies are paying crazy prices. That’s unprecedented. South Africa for 120 years had a reputation for putting huge amounts of money in the ground. Western Deep Levels was the first underground mine that was going to cost $1 billion. Here Anglo American was going down four kilometres to get ore, so there was massive capex in the country, 560 000 jobs just in gold mining alone.

This government must be held to account – what have they done to change the environment that companies would rather buy each other and buy assets overseas at the risk of overpaying, instead of putting that money in the ground, creating hundreds of thousands of jobs and supporting huge construction industries in the towns?

That’s the sad loud message here.

FIFI PETERS: For the longest of times one of the policy headaches that prevented the mining industry from doing a lot more of that – putting money in the ground – was the debate over empowerment and whether ‘once empowered’ meant ‘always empowered’. This is something that has recently been cleared where legally I believe government has said it will no longer challenge [those in the] mining industry that have done empowerment deals in the past and have met their quota. I wonder whether this legal progression that we have made over the empowerment deals will be enough to start getting a lot more mining cash in South Africa’s mining grounds in 2022.

PETER MAJOR: No, I don’t think it is, Fifi, because every time the DMR – the Department of Mineral Resources, the government – relents, it only relents when all the odds are against it. This relenting is only when they’re being held by the law or by world finances, and it’s pried out of their hand, and they fight and kick and scream all the way.

Do you really want to be partners with somebody that has to be forced to do things, for our mining minister to say he ‘had to be forced by the president’ to up the size of alternative energy, of solar-power generation? He admits it in public, he thinks it’s cute that ‘the president had to force me to up it to a hundred’. Well, it seems to me the only thing a president should ever have to force a minister to do is resign. Aren’t they there to do his bidding, aren’t they there for the good of the country, and why even add a hundred limit? Why not 200, why not 500?

These grudging little tokens that they give out on the Minerals Act are not nearly enough. It it’s not just that any more. It’s Eskom, it’s zama zamas [illegal miners], it’s rule of law. It’s the failure of army and police to protect mining companies’ assets. No mining company wants to take this cash that it’s finally making after years of hard work – they cut the cycle right – and put it in the ground when no one’s going to protect it. People are still threatening to take it from you and give it to arbitrary partners. There are just so many things government needs to do to encourage mining companies to put the money in the ground, and they just don’t show any sign of willingness to do that.

FIFI PETERS: I think you’ve given a lot of useful points that government needs to take on board for 2022 – if someone from government is listening to the show. Nonetheless, in closing, your top three picks in the mining sector, and why?

PETER MAJOR: Oh boy, this is always the hardest part of the conversation. [Laughing] If the cycle’s going down, you don’t want anything, even if it’s cheap, because it’s going to get cheaper.

But it’s interesting. We’re talking about ARM buying from Anglos. ARM has the lowest PE, firstly, a 3.3 PE. It has good assets and the mines they run they manage fairly well. I would be buying some ARM here and Exxaro is right behind them. You know, these are two companies that have a lot of assets and no matter what they do, they seem to make money. I think I’d even take them over Sibanye, to be honest. Sibanye is just about as cheap and much better managed. But those three. I would buy arm, Exxaro and Sibanye – and a little bit of Impala. I really covered myself here.

FIFI PETERS: All right, Peter, thanks so much for that those stocktakes. Peter Major of Mergence Corporate Solutions, have yourself a great festive season.

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