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TABLE OF CONTENTS Jun 23 - 29, 2014 Volume 100 Number 19 - 0 comments

Tentative deal could end lengthy South African platinum strike

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VANCOUVER — An agreement in principle looks set to end the longest strike in South Africa’s mining history, 21 weeks after more than 70,000 platinum miners walked off the job demanding a near tripling of wages.

The three affected producers — Anglo American (LSE: AAL; US-OTC: AAUKY) subsidiary Anglo American Platinum, Impala Platinum (LSE: IPLA) and Lonmin (LSE: LMI) — held firm that such increases were not possible in the current markets, where stockpiled inventories and global economic weakness have reduced platinum prices by 25% in a few years, just as rising power prices and wage increases pushed costs up.

Since January the two sides have slowly moved closer. By early June the Association of Mineworkers and Construction Union (AMCU) — which represents most of the striking miners and led the charge to go on strike — had reduced its demand to a doubling of the basic wage to R12,000 (US$1,200) per month over four years. The producers had countered with an offer to increase pay by 10% over four years, which would value the basic package at R12,000 per month. However, that amount came as a package that included allowances for necessities such as housing, which the union opposed.

On June 9, government-mediated talks broke off after failing to bridge the gap. Describing the negotiations, Natural Resource Minister Ngoako Ramatlhodi said the government could “take them to the river, but could not make them drink.”

Platinum and palladium prices, which had seen only muted reaction until then, began climbing. South Africa produces 40% of global supply and the strike has had 60% of this capacity idled, which means 30% of global output so far in 2014 has already been lost. Platinum and palladium are mostly used in catalytic converters, though jewellery demand is also notable.

By June 11 palladium futures for September delivery closed at a 13-year high of US$864.40 per oz. Platinum futures for July delivery also gained, closing at US$1,488.40 per oz., the midpoint of the 52-week range of US$1,327 to US$1,483 per oz.

Meanwhile, angst had been growing over the strike’s impact on South Africa’s languishing economy, which shrank by 0.6% in the year’s first quarter. It was the country’s first economic contraction since 2009. Economists said the strike was the main cause. The three producers estimate it has cost the industry more than U$2 billion in lost revenues and cost employees more than $900 million in lost wages.

Making matter worse, mining analysts speculated that the longer the strike lasted, the less likely it was that lower-margin operations could restart. A shift to mechanized mining, something the strike-weary producers were contemplating, would further reduce jobs.

Some of these concerns may be alleviating. On June 12 Impala, speaking on behalf of the three producers, said that “in-principle undertakings have been reached” with the AMCU. The offer being considered would see wages increase by R1,000 a month this year and next year, with a R950 boost annually the year after. The offer amounts to a 20% pay hike.

The deal would also see the union agree not to strike again for the next three years. In addition the producers proposed a forum with the union starting three months after workers return to their jobs to discuss wider structural problems, such as poor housing.

The AMCU has taken the offer to its members.

The deal came as a surprise, as the parties still seemed distant. Anglo American CEO Mark Cutifani recently described the strike as “a fight we had to have.”

On a joint fact sheet, the miners say wages represent between 55% and 60% of their production costs. The companies also say wages at their mines have increased by levels well in excess of the consumer price index, and note that miners earning an average basic wage already earn “almost double the average entry-level wage payable in South Africa.”

“What is being asked of us is unsustainable,” Cutifani was quoted as saying at a mining club dinner. “The productivity in the platinum sector is one-tenth the productivity in the Australian sector, and we are paying one-fifth of the wages.”

Independent economists Gilad Isaacs and Andrew Bowman came to a different conclusion. After a recent study examining the platinum industry over the last 14 years, Gilad and Bowman say producers are positioning the affordability debate in the context of the last two years, while prices have declined and costs increased. However, a longer timeframe gives a different perspective.

“It is remarkable how well the companies did, on average, over the last fourteen years [in particular during a boom period between 2000 and 2008], how their shareholders raked it in and how labour got a thin slice of the pie,” Gilad wrote in an article for AllAfrica. He notes that Amplats, Implats and Lonmin enjoyed operating profits of 37%, 44% and 41% between 2000 and 2008, and shareholders enjoyed hefty dividends and share-price increases as high as 12-fold, while workers reaped “few benefits.”

The sector has not fared well since 2008, when platinum prices fell and costs increased. However, platinum prices have been range-bound for the last 12 months and palladium prices have risen. The near-term outlook also remains bullish for platinum and palladium, for two reasons. First, the strike-ending deal is not yet definitive. Second, it will take months for operations that have been shuttered for five months to ramp back up to full capacity.

The longer-term outlook is also positive. London-based chemicals and metals firm Johnson Matthey estimates that palladium demand this year will exceed supply by 1.6 million oz., while platinum demand will top supplies by 1.2 million oz. The company, which produces a third of the world’s catalytic converters, says 2014 will mark the third straight year in which demand for the metals has outstripped supply.

Lonmin shares responded most strongly to news of the potential deal, gaining 9% in a day while Impala closed flat and Anglo American Platinum ended down 1.7%. The reaction is tied to Lonmin’s much greater vulnerability to the dispute: it is the smallest of the three companies and all of its main operations are in the strike-affected area, which means that unlike its peers, Lonmin cannot rely on mines in other parts of the country or abroad.

The company’s balance sheet highlights this vulnerability. Before the strike Lonmin had the most solid financial position among the three producers. With its key operations idled the company is losing cash at a rate of US$60 million per month and at the end of March it had only US$71 million in its bank account, compared with US$194 million a year before.

To gain breathing space Lonmin drew down all of its debt facilities in the first quarter, giving it access to $660 million.

In May company CEO Ben Magara was quoted describing the strike as a “bleeding” that could kill the firm if not stopped in time.

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