Winds of change blowing for Anooraq and Amplat at Bokoni

Vancouver — Twin tragedies have bookended four months of turbulence and change at Anooraq Resources (ARQ-V) and Anglo American (AAL-L) subsidiary Amplat’s Bokoni platinum mine in the Limpopo Province of South Africa.

Operations were suspended in mid-November after an employee was reportedly struck by a dump-truck at the Middlepoint Hill UG2 shaft. The South African Department of Mineral Resources issued a week-long safety stoppage at the shaft, causing an estimated production loss of 1,500 oz. of platinum group metals.

Then another tragic death occurred on Feb. 15 after a worker fell from the 6-E17 raise line. The Mineral Department imposed a subsequent suspension of Bokoni operations that was lifted on Feb. 17.

The deaths over-shadowed restructuring agreements between the joint-venture partners following Anooraq’s financial troubles in the currently challenging platinum space.

Compliance and safety have been ongoing concerns at Bokoni, as Anooraq and Amplat attempt to increase production and lower cash costs with platinum prices falling approximately 12% in the past six months.

Progress had been made despite inflation in labor and material costs, as third quarter 2011 production improved 19% to 33,358 4E oz. (platinum, palladium, rhodium and gold), and unit operating costs fell 14% to US$1,375 per 4E oz.

In an effort to continue production increases and address safety concerns, Dawid Stander was named managing director at Bokoni in the first week of February. Stander, who had been working as an independent consultant, was general manager at the mine from 2001 to 2005 when production increased by 100,000 PGM oz. He has 32 years experience with stints at BHP Billiton (BHP-N, BLT-L, BHP-A) and Impala Platinum (IMP-J).

In a joint statement, Anooraq CEO Harold Motaung and Amplats executive head Vishnu Pillay emphasized Stander’s past safety and performance improvements at the mine.

Stander’s appointment was part of a joint strategic restructuring of Bokoni operations. The companies announced an agreement on Feb. 2 that would see the refinancing of Anooraq’s outstanding debt, as well as the restructuring and recapitalization of the Bokoni Platinum group.

Under the agreement Amplat will decrease Anooraq’s US$368-million outstanding debt by US$213 million in exchange for a 100% interest in the Boikgantsho platinum project bordering the Mogalakwena Mine, and the eastern sections of the Ga-Phasha platinum project 250 km outside of Johannesburg. Ownership considerations at Bokoni will remain unchanged, with Anooraq at 51% and Amplat at 49%.

The remaining debt balance will be reconsolidated into a new debt facility with an initial low-interest-rate schedule designed to escalate — from 0% to 12% — in tandem with increases in Anooraq’s cash flow.

Following the completion of a feasibility study, Amplat will also provide Anooraq with an additional US$159 million under the consolidated debt agreement in order to cover the costs of a $US325-million capital development program. Improvements include the installation of a new concentrator plant, and acceleration of production plans at the Middelpunt Hill Delta UG2 expansion project. The capital expenditures are expected to raise Bokoni’s output by 100,000 PGM oz. by 2016.

Despite steps to stream-line and expand operations at Bokoni, parent-company Anglo American — who owns a 79% share in Amplat — cannot be enthusiastic about its subsidiary’s bottom-line contributions. Amplat cut 2012 output targets in late February, and initiated an employment freeze after annual profits tumbled 64% to US$463 million last year.

According to Anglo American CEO Cynthia Carroll, decisions on Amplat won’t be forthcoming until later in 2012, as she told reporters in a conference call, “We are looking at the size and the shape of the platinum business and how we can fundamentally shift it and return it to the sort of returns we had in 2008.”

Analyst’s opinions on Anglo’s forward looking strategy regarding Amplat vary. In a Feb. 20 note to clients, Deutsche Bank analysts Tim Clark, Rob Clifford, and Grant Sporre speculated that “closure of shafts is more likely given the structural position.”

Dropping the platinum portion of its business would decrease Anglo’s market value by roughly US$15 billion, speculatively making it a more attractive target for take-over bids from interested parties, including the new unit formed following the acquisition of Xstrata (XTA-L) by Glencore International (GLEN-L). Xstrata approached Anglo in 2009 with a merger proposal, and industry analysts have speculated Anglo may be an eventual take-over target for the new major mining power.

A Reuter’s survey revealed a bearish attitude towards 2012 platinum prices amongst analysts, as median forecasts for the year dropped 15% to US$1,610 since July 2011.  Platinum is qualified as one of the late-cycle commodities that typically lag behind primary resource indicators. Prices are tied to broad European economic demand in automotive production, as well as the Chinese jewellery market.

David Jollie, an analyst at Mitsui Precious Metals, said in a late January interview, “End user demand will be needed to help investors drive any price rises, and a weak outlook for European automotive output (and hence platinum use) is worrying.”

Declining platinum prices and high costs affiliated with doing business in Africa — the world’s largest platinum producing area — continue to raise marginal-cost questions for invested companies. Though the recent restructuring and expansion agreements between Amplat and Anooraq may see unit costs fall as production output rises, questions remain over the long-term ownership dynamics of the project.


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