Monday, 26 May 2014

Platinum Producers Production Update

All three platinum majors have reported quarterly figures, this is quick summary of their quarters and an assessment of the severity of the strike on the affected companies. 


The strike has had an adverse effect on the miners in the past quarter. It is interesting to note that Amplats is the least affected by the strike with regard to a change in volume produced as their geographical diversification pays dividend. Their open-pit Mogalakwena mine increased production by 3% and the Unki mine in Zimbabwe was up 4%. Amplats JV’s continue to produce and offtake agreements remain in place, JV’s made up the largest part of production this quarter (51%). Comparing Amplats production from their own mines (not including JV’s), we see a drop of 57% Y-o-Y and 46% Q-o-Q in production. Gross refined production of platinum (435 koz) and palladium (257koz) were roughly the same Y-o-Y as smelting operations were not affected by the strikes. Hence using a drawdown of concentrate inventory, sales to customers have continued normally. Production guidance for the year has been decreased to 2.1Moz from 2.3 - 2.4 Moz.


Implats reported their third quarter numbers in which they produced 205 koz of platinum and 126 koz of palladium. Looking at 9 month performance there has been a 18% drop in platinum production Y-o-Y. However, this drop can be attributed to  relatively poor performance in the first 6 months as well as the disastrous Q3. The Zimplats operations continued their progress increasing tons milled by 33%, but there is continued uncertainty over these operations as negotiations over beneficiation and indigenisation continue with the Zimbabwean government. The Impala Lease Area (ILA) operation located in Rustenburg is the largest single contributor to Implats at ~55% of production, these mines have been placed on care and maintenance until the strike is resolved. Implats have stated it will take about 3 months to get the ILA operations producing again, so the full year numbers will be disappointing. They estimate Q4 production at 150 koz. This will take FY2014 production to 1.14 Moz compared to 1.58 Moz last year (-28%). This will detrimentally affect unit costs which almost doubled Q-o-Q to R29 330 compared to R15 823 in March 2013. Over the 9 month period costs increased 15% , however if we normalising these costs (removing strike related costs and adding in the 131 000 ounces of lost production), costs would still be up 7.3%. Implatscontinues to use stockpiled concentrates from the Mimosa, Two Rivers and Marula mines to serve their customers.                         


Lonmin reported Q2 numbers; as Lonmin’s operations are concentrated in the Western Limb of the Bushveld Complex. Refined platinum production was down 68% to 60 968 oz for the quarter. Total PGM production was down 57%. However, sales for the quarter were 128 871 oz (down 41%). The stockpiling of material helped ensure they were able to continue supplying their customers. The average Rand basket price achieved was R10 845, down 2.4% Q-o-Q.                                   


The most notable occurrence is the fact that none of the producers have critically run short of concentrate to refine. Taking into account that the strike was expected, and they did stockpile material - the strike has continued longer than expected yet there hasn’t been any indication of this in the price. Amplats gave guidance of having 8 weeks supply on hand. Implats claimed they would run out of material at the end of March, yet they continue to supply customers. This tells me that the producers underestimated their inventory, which is a possibility, since platinum goes through various stages of pre-production and it is difficult to keep track of your inventory and physical counts are only done at year end(or every two years). Alternatively the platinum producers gave guidance on the low end of the spectrum in order to move to the platinum price. The last possibility is that demand is still muted. The diesel share of the car market has been showing a declining trend in Europe along with the amount of platinum used in catalytic convertors. The market is however showing signs of recovery in 2014 but it is slow. Regardless of which scenario occurred, it points out vigilance is required when examining future guidance and/or inventory estimates from platinum producers.

The current share prices of the platinum producers require sizeable increases to the platinum price to be justified. The valuation of Amplats looks the most inflated, however, with the proposed changes to the company going forward (i.e. divesting the Rustenburg assets), the company’s margins improve significantly as the open-pit Mogalakwena mine takes centre stage. The reality of the situation is that selling loss-making operations in this environment will be difficult, and at the moment the market is betting on these operations returning to profitability thus being worth significantly more than they are right now. So in order to sell these operations, Amplats would have to sink more money into them after the strike to return just to get them up –and-running and then attempt to return them to profitability, alternatively they could sell them at low prices. I am currently attempting to look-ahead with Amplats and modelling a few scenarios, but at the moment, at current prices (PE:86), it doesn’t look like a viable investment.

Shiraaz Abdullah
Sanlam Private Investments


Friday, 9 May 2014

Shoprite hiding away it's potential

Shoprite has been hiding in the shadows for the last 2 years, as share prices have been in a steady bear trend. From the above technical analysis, it is clearly seen, that a falling wedge is formed and with an break through the resistance line it will then signal for the bull trend to continue.

The question still remains when that will be?

Investors still have confidence within the share, as noted in the above, that a clear support level has formed around 14000c. Major institutions aren't running for the hills, with the dividend yield holding strong at 1.74%.

How can a dividend yield increase to a higher %?

  1. The company (Shoprite) has to pay out a larger dividend, or
  2. The  share price needs to decrease considerably.
 Shoprite share price has already decreased by 34% which in turn raised the dividend yield to just over 2%. Shoprite reported a 7.3% increase in dividend (interim results for the 6-month period ending December 2013).

Total Liabilities increased with 12.6% since the previous reporting period.
Total Assets increased with 15.1 % since the previous reporting period.

Shoprite still has a lot of growth potential.

A company continuing to expand into Africa and opening up more stores can only lead to better earnings.

I still value this stock at 25000c a share.