South Africa s Platinum Mining Crisis Presentation : 30 January 2014. Roger Baxter Chief Operating Officer
Presentation Outline The Global Platinum Environment The South African Platinum Mining Industry Challenges Facing the industry Taking a Strategic Country Perspective of the Industry
The prospects of PGMs at a global level are driven mostly by economic growth, investment demand and automotive/jewellery sales Since 2008, the global platinum group metals market has been hit by the multiple effects of: The slide into recession in Europe due to the sovereign debt crisis (the biggest PGM market in 2012) The slowdown in economic growth in China (towards a soft landing). The continued below potential growth performance of the US economy. Structural demand changes: Negative secondary supply (recycling) The substitution and thrifting of platinum and rhodium with palladium. The erosion of the rhodium market Changes in demand towards jewellery away from industrial uses.
>70% of platinum group metals are used for industrial applications PGM demand by Application, 2013 (Source: JM, Platinum 2013) Investment 4% Petroleum 1% Other 4% Glass 2% Electrical 7% Jewellery 16% Autocatalyst : gross 57% Dental 3% Chemical 6%
Tons A large portion of the platinum market is located in recession-hit Europe and China 3 500 Platinum demand by application and country/region, 2012 3 000 2 500 2 000 800 105 405 Europe Japan North America China ROW 155 Investment demand in N America & China is minimal 1 500 600 455 1 950 1 000 500 0 250 30 190 1 330 400 185 100 130 310 335 180 135 Autocatalyst Industrial & other Jewellery Investment Source: Johnson Matthey, Platinum 2013
'000 oz Platinum demand growth has been weak, while palladium demand has recovered 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 '000 oz 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Platinum demand has only just recovered to pre-crisis levels. Jewellery demand growth has been a strong point. South Africa is the major producer 9 000.00 8 000.00 7 000.00 6 000.00 5 000.00 4 000.00 3 000.00 Platinum demand by application (Source: JM Platinum 2013) 10 000 9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 0 Palladium demand by Application (Source: JM, Platinum 2013) Autocatalyst : gross Dental Electrical Jewellery 2 000.00 1 000.00 0.00 Autocatalyst : gross Chemical Electrical Glass Jewellery Investment Palladium demand has recovered due to its intensity in petrol catalytic converters and recovery in automotive sales in North America and Japan and continued growth in China. Palladium has benefitted from substitution out of platinum/rhodium to palladium. Russia is the major producer
Compared to other commodities, platinum was the hardest hit by the Global Financial Crisis % 5,5 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 2007-0,5-1,0 2008 Global GDP 2009 2010 2011 Annual Global GDP (LH Axis) Pt Demand Ni Consumption Forecast Nickel Iron Ore Copper Platinum 2012 2013 2014 Cu Consumption Iron Ore Consumption 1,45 1,40 1,35 1,30 1,25 1,20 1,15 1,10 1,05 1,00 0,95 0,90 2015 0,85 0,80 Demand for industrial commodities was marginally impacted by 2009 financial crisis Platinum demand most impacted by both 2009 Financial and current Euro crises By 2014, Pt expected to still be below pre-crisis levels of demand. Source: COM/ AAP, IMF, AAplc Commodity Research 7
GDP - % change koz Pt Economic weakness in EU zone resulted in downward pressure on the spot price of Platinum GDP is a key driver to Pt 6 5 4 3 2 1 0 2000-1 -2-3 -4-5 2001 2002 2003 Historic GDP & Pt Demand 2004 2005 World GDP, % change 2006 Year Euro Area GDP, % change Pt Demand (koz) - RH Axis 2007 2008 2009 Financial Crisis 2010 2011 6.800 6.600 6.400 6.200 6.000 5.800 5.600 5.400 2012 5.200 5.000 4.800 4.600 4.400 demand Pt demand is mainly driven by carbon emission legislation hence Euro dependence Europe consumes 40% of Pt demand and 40% is used in autocats Platinum has not recovered because its demand most impacted by Euro crisis and increased recycling Automotive producers have reduced load rates and thrifted away from platinum towards palladium Source: IMF, Johnson Matthey 8
Previous demand expectations stimulated the creation of over capacity Platinum gross demand (koz) Platinum (koz) Platinum price (US$/oz) 10000 Gross platinum demand profile In 2006 industry forecasted platinum demand growth of 5% (CAGR) from 2007 to 2012 8000 6000 Demand decreased by 0.5% (CAGR) from 2007 to 2012, versus growth of 5.4% from 1982 to 2007 4000 2000 0 1975 1982 2007 2012 Autocatalysis Industrial Jewellery Investment Secondary platinum supply profile 2500 2 000 2000 1 600 1500 1 200 1000 800 500 400 0-2000 2002 2004 2006 2008 2010 Secondary platinum supply (recycling) Platinum price Source: Johnson & Matthey * Jewellery and industrial recycle from 2005 only Fundamental shift in demand composition impacted platinum price elasticity: Autocatalyst demand growth under threat as vehicle manufacturers continue to reduce load rates Non-bridal jewellery demand in China is price sensitive and so is global jewellery recycling Investment demand increased price volatility However, the structural changes seen over the last 5-10 years in the South African platinum mining industry resulted in a decline CAGR of 1.7% for the past 5 years 9
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Tons In addition, Platinum supply has grown due to a surge in scrap supply Since 2006 South Africa s production of PGMs has been shrinking, while recycling and other producers have gained (i.e. A net loss to RSA) 100% Platinum supply by source (Source: JM, Platinum 2013) 90% 80% 70% 60% 50% 40% 30% 20% 10% Scrap recovery Others Zimbabwe North America Russia South Africa 0%
2007 2008 2009 2010 2011 2012 2013 2014 US$ per ounce Falling demand and modest growth in supply has led to some surpluses in the pgm market In period 2009-2011 the cumulative surplus in the platinum market was 1.1 million oz, before the strike induced deficit of 340 koz in 2012 & 605 koz in 2013. The result has been a weakening in prices from 2011. 2500 Platinum price 2000 1500 1000 500 0
2007 2008 2009 2010 2011 2012 2013 US$ per 3E ounce The RSA production weighted basket price is lower than the platinum price 2500 2000 Platinum, palladium and rhodium production weighted PGM basket price for South Africa versus the platinum spot price US$ Platinum price per oz 1500 $1493/oz 1000 500 US$ South African production weighted price per oz $1208/oz 0
Presentation Outline The Global Platinum Environment The South African Platinum Mining Industry Challenges Facing the industry Taking a Strategic Country Perspective of the Industry
PGM mining has grown to become one of the largest components of the RSA mining sector In 2011, the pgm mining sector: Was the largest component of the South African mining sector on the basis of its contribution to GDP (2.7%), export earnings (11.1%), and employment (194 980). Produced 289 tons of PGM, valued at R84 billion. Employed 194 979 employees and paid them R30,4 billion in salaries and wages. Paid R7.3 billion in corporate tax (5 largest companies). Paid R500 million in community investment.
PGM Mining, a significant contributor to the economy, exports, taxes and employment 2008 2009 2010 2011 2012 Average past 5 years contribution to GDP Real R m 27,021 26,592 28,151 28,303 24,921 26,998 % of GDP % 2.3 2.2 2.4 2.7 1.9 2.3 GDP growth rate % -9.3-1.6 5.9 0.5-11.9-3.3 Contribution to GDP plus multipliers & induced effect % 4.9 4.7 5.0 5.7 4.1 4.9 Share of Mining GDP % 26.4 27.3 27.7 28.7 22.6 26.5 Production (PGMs) M'oz 8,866,102 8,725,443 9,237,025 9,288,337 8,177,145 8,858,810 Production (PGMs) Kgs 275,767 271,392 287,304 288,900 254,338 275,540 % growth in production % -9.3-1.6 5.9 0.6-12.0-3.3 Sales value R m 91,353 57,782 73 787 83,853 69,204 75,195.8 Exports as % of total merchandise exports % 13.0 10.4 11.8 11.2 9.0 11.6 Employment number 199,948 184,162 181,969 194,980 197,847 191,781.1 Wages paid R'm 23,302.8 24,456.8 26,553.7 30,414.9 34,400.0 27,825.7 Wages paid per worker (annual) R' annum 116,544 132,801 145,924 155,990 173,872 137,815 Capex spent (top 5) R'm 17,130 12,691 15,063 17,648 15,633.0 Taxes paid (top 5) R'm 7,843 598 5,455 6,840 5,184.3 Dividends paid (top 5) R'm 16,212 808 406 4,066 5,373.1 Social taxes (SLPs, etc) R'm 320 308 250 461 334.9 Source: COM, DMR, StatsSA, SARB
Presentation Outline The Global Platinum Environment The South African Platinum Mining Industry Challenges Facing the industry Taking a Strategic Country Perspective of the Industry
Since late 2011, SA PGM Mining in crisis, hit by a combination of: Falling pgm demand and prices (especially for platinum and rhodium) Rapidly escalating input costs Structural changes in the industry (shift to UG2 ores) Falling productivity Illegal strike action This has resulted in a significant 59% of the pgm mining sector being in a marginal or loss-making position on a cash cost and sustaining capex basis on average in 2012 (average price was $1556/oz)
SA PGM Mining in crisis contribution to the economy has fallen: In 2012, total PGM production fell by 10.4% to 254.3 tonnes. Platinum mining s direct share of GDP plunged from 2.7% in 2011 to 1.9% in 2012. Due to the decline in the rand PGM price and lower production, total PGM sales fell by 17.6% to R69.2 billion. Between June 2012 (just before the major strikes in July 2012) and September 2013 employment on South Africa s platinum mines declined by 15,627 to 191,286 jobs. About 45%of the PGM mines are loss-making. Further restructuring is inevitable.
The PGM mining industry is in crisis mode The industry s safety performance has improved, but more needs to be done (very big focal point). Demand has been weak and prices have fallen. Input costs are rising too quickly. Productivity has been falling. Strikes and industrial activity are affecting production. Despite R1.7 billion being invested by the industry in community development in the past 6 years, it is still perceived to be contributing too little to communities and the development of the country.
Input costs are increasing at a very rapid pace A large proportion of the input costs are driven by administered prices such as electricity & water or by international pricing (steel and diesel). Between 2007-2012: Electricity prices to the mining sector has risen from 18 c/kwh in 2007 to 61 c/kwhin 2012. This is a significant 238% increase. Diesel costs have risen by an average of 15.7% per annum on the back of higher international oil prices (up 69.3% overall). Reinforcing steel prices have increased by 15.3% per annum in the same period (57.5% in total). Average remuneration paid per worker employed in the RSA mining sector grew by 12% per annum between 2007 and 2012, nearly 5 percentage points higher than producer inflation.
Inflation in input costs has simply been too high (and mostly out of control of the miners) Cost inflation affecting the mining sector, average annual increase in costs, 2007 to 2012 (Source: StatsSA, CoM EAU) Electricity prices for mining Pgm mining cash costs per 4e ounce Diesel Reinforcing steel Labour costs Structural steel Cement Total producer price inflation rate Mining machinary 4.4 7.2 9.1 12 11.2 15.7 15.3 18.1 26 0 5 10 15 20 25 30
Eskom s proposed price increase in MYPD3 will result in a 587% increase in price in 11 years (platinum industry cannot afford this increase) Eskom proposed trajectory Actual trajectory so far Up 238% in 5 years UP 587% in 11 years Source: NERSA/ESKOM
Electricity, steel, stores & labour costs increased by R28 billion (200%) between 2006 and 2011, while South African PGM production fell 7.8%.
There has been structural changes in the RSA PGM mining sector, such as an increase in the mining of UG2 ores, which has reduced platinum grades Precious metal Merensky ore % of UG2 ore % of recovered metals recovered metals Platinum 59% 41% Palladium 25% 34% Rhodium 3% 9% Ruthenium 8% 12% Iridium 1% 1.9% Osmium 0.8% 1.7% Gold 3.2% 0.4% Total 100% 100% Source: Platinum Smelting in South Africa, R.T.Jones, Mintek
1990=100 Productivity has fallen, while real costs per unit of output have risen quickly 250 RSA platinum mining labour productivity (kgs produced per employee) and real labour costs per kg of pgm produced, based indexed to 1990 200 real labour costs per kg produced indexed 150 100 Productivity, kgs per worker indexed 50 - Source: DMR/StatsSA/Chamber
Tough actions required to ensure the long term sustainability of the industry US$ per oz Platinum mining industry breakeven analysis (cash cost + maintenance capex), 45% marginal or loss-making in Jan 2014 at average price of $1446/oz 2000 Platinum cost curve (cash costs plus stay in production capex) FY2014 1800 1600 1400 1200 1000 800 600 costs + sus capex January 2014 price 400 200 0 Source: Company reports, JP Morgan. Analysis is based on spot prices as at January 2014 26
The Illegal Strikes in 2012 exacerbated the situation The PGM mining sector was hard hit by the illegal strikes and the Marikana Tragedy. 50 lives were lost and the reputation of the PGM sector and South Africa as a key mining investment destination was tarnished by the developments. The strike induced decline in production exacerbated the cost squeeze faced by the industry, as there was less production covering the overhead cost structure of the industry. Approximately R13 billion in revenue was lost and many related industries were negatively affected by the strikes. Further strike action in 2014 could further undermine the PGM mining sector
Every day lost to strike activity in 2014 is significant for the industry and country DESCRIPTION OF LINE ITEM 2013 data UNITS PER DAY 1 Revenue Rand 197,701,871 2 Purchases of goods and services Rand 66,926,196 3 Electricity/water costs Rand 18,112,036 4 Capital expenditure per day Rand 30,312,158 5 Taxes and royalties Rand 7,358,295 6 Dividends to shareholders Rand 426,778 7 Wages and salaries paid Rand 87,711,730 TOTAL LOST REVENUE AND FOREX PER DAY Rand 197,701,871 TOTAL OPPORTUNITY COST PER DAY (lost sales, costs incurred, lost payments, etc.) Rand 408,549,064
Presentation Outline The Global Platinum Environment The South African Platinum Mining Industry Challenges Facing the industry Taking a Strategic Country Perspective of the Industry
The Deputy President s Mining Dialogue Process and the Minister s Peace Accord All stakeholders signed a Peace Accord in February 2013, focused on calming the situation and restoring law and order in affected areas. In August 2013, the stakeholders developed a Framework Agreement for a Sustainable Mining Industry under the leadership of the country s Deputy-President. The focus of the DP s Mining dialogue process is to: Stabilise the industrial relations environment. Promote law and order. Get the mining industry back on track from an investment and growth perspective.
Way Forward It is imperative that South Africa maintains its dominant position in the supply of PGM s, given our rich endowment of PGM resources We need to restore stability to our production cycle and reposition the industry for growth by focusing on competitiveness. All stakeholders have a role to play in contributing to community development including all tiers of government, mining companies, communities and organised labour. There is a critical need to restore investor confidence in the sector and create an stable environment to promote investment in PGM mining. Promoting beneficiation and R&D. These goals are best achieved through collaborative efforts with all stakeholders, agreeing on the challenges to be dealt with and working on the best way forward.
Conclusion Platinum mining matters for the growth, development and transformation of South Africa