Platinum Is a Cash Cow for Miners, But Dividends Remain Elusive

LAGOS (Capital Markets in Africa) – Platinum miners have finally hit pay dirt with soaring prices and a weak South African rand. But the mood in the industry has been scarred by years of deep losses.

Even though analysts say companies like Impala Platinum Holdings Ltd. and Sibanye Gold Ltd. will reap their best profits in years, executives are cautious about restarting dividends. Labor disputes, currency volatility and the need to reduce debt levels are some of the reasons they’re holding tight on the purse strings.

It’ll be part of the discussion as the mining industry meets for the two-day Joburg Indaba that starts on Wednesday. Here are some of the issues they’ll likely address.

Cash Dividends
Anglo American Platinum Ltd. resumed payouts in 2017 following a six-year hiatus. Now Chief Executive Officer Chris Griffith is considering a special dividend. Amplats’s rivals have so far lacked the balance sheet strength to follow suit, but the CEOs of both Implats and Sibanye have said they may start paying dividends again next year.

Still, while earnings projections paint a favorable outlook, shareholders may need to curb their expectations, according to Arnold Van Graan, an analyst at Nedcor Securities Ltd. “A lot of this initial free cash flow could first go toward repaying debt and recapitalizing ore bodies and dividend payments could initially be lower than investors expect,” he said.

Price Dynamic
South African CEOs will analyze the outlook for platinum-group metal prices as a key barometer of their ability to resume dividends.

Palladium rallied to a fresh record above $1,700 an ounce on Monday, and Russia’s MMC Norilsk Nickel, the world’s No. 1 producer, has said the supply gap for the metal used mainly in autocatalysts may widen. That deficit will probably persist over the next few years as tougher vehicle emissions standards underpin demand, according to Morgan Stanley.

Sister metal rhodium has doubled this year and even platinum, the relative laggard, has gained 11%.

Currency Key
For South African mining companies, the rand is the crucial swing factor determining profitability. Over the past 18 months, the currency has dropped 22% against the dollar, driving up the shares of miners that pay most of their costs in rand.

The currency won’t strengthen significantly anytime soon, according to analysts polled by Bloomberg, as South Africa’s fragile economy is weighed down by concerns over the nation’s debt-laden power utility.

Cost Control
South Africa’s platinum industry is emerging from the past decade as a more efficient operation. Anglo American Plc’s Amplats unit led the way in shutting or selling higher-cost mines, and now Implats and Sibanye are following the same path.

A successful transformation requires some labor union buy-in, even as painful job cuts loom. Producers also need to conclude a three-year wage deal without strike action.

The lean years have fostered a new realism in the industry, said Rory Kutisker-Jacobson, a portfolio manager at Cape Town-based Allan Gray Ltd., which holds shares in many of the biggest platinum miners. “One really positive thing is when you talk to these management teams they are acutely aware that things can change quickly on the downside again,” he said.

Source: Bloomberg Business News