Restructuring looms in SA’s PGM sector as companies warn of sharply lower earnings

The platinum group metals (PGM) party is over — at least for now — and the scale of the hangover is becoming apparent.

Anglo American Platinum (Amplats) and Impala Platinum (Implats) both released trading statements on Thursday that made for grim reading.

Amplats said it expected headline earnings for the 2023 financial year to fall between 67% and 77%. Implats in turn said that it expected its interim headline earnings to decline by as much as 83%. Headline earnings strip out one-off events.

The market was clearly braced for Implats’ news, as its share price fell only 1.7% in morning trade. But Amplats’ outlook for its earnings was clearly worse than expected as its share price tumbled over 7% in morning trade.

The reason for this collapse in profits is simple: a collapse in prices.

Amplats said the PGM basket price it received for its product last year fell 35% in dollar terms, while Implats said that for the six months to the end of December dollar revenues had sank 37%. Both PGM producers will publish their results late this month.

Implats also cited a number of impairments which will all but wipe out its basic earnings for the period. This includes an impairment of R701-million for property, plant and equipment at Impala Canada, a reflection of “a further material decline in the palladium price and subsequent changes in planned operating parameters at this operation”.

As a result, Implats expects basic earnings and earnings per share (EPS) to plunge as much as 93%.

Amplats meanwhile also warned that “... inflationary pressures and exchange rate volatility have also led to higher mining and processing costs. The lower PGM prices led to a decrease in the value of purchase of concentrate inventory of ~R5 billion in the period which resulted in an increase in cost of sales.”

Soaring costs and crumpling prices are a double-whammy of note.

From record highs that were set a couple of years ago, PGM prices have subsequently been drenched in a blood bath that has shareholders seeing red.

Oversupplies, a global economy that has dodged a recession but remains fragile, and mounting concerns about regulations that aim to remove petrol and diesel-powered cars from the roads have all combined to undermine the once-frothy PGM market.

South African PGM producers have for months been warning of restructuring, which often means lay-offs.

Read more in Daily Maverick: ‘We can’t be blind to the market’ — Northam CEO paints bleak PGM picture 

With the 2023 results season looming, the numbers are now being crunched and counted and a wave of lay-offs is looking inevitable at a time when labour militancy has appeared to be on the rise in the wake of a spate of underground wildcat strikes late last year.

“If this price environment continues there needs to be very significant restructuring in the sector. You shouldn’t run a loss-making operation for a long time, it destroys value ... You need to have supply discipline if the market is telling you that it’s oversupplied,” Neal Froneman, the CEO of Sibanye-Stillwater, told Daily Maverick this week in an interview on the sidelines of the Cape Town Mining Indaba.

This is not just bad news for PGM producers and their employees. It also bodes ill for the South African economy and society more widely.

PGM companies and other mining houses threw the Treasury a lifeline when they paid record taxes from record profits based on record prices. Finance Minister Enoch Godongwana will not have that buffer when he delivers his budget speech in two weeks.

The PGM sector’s contribution to South Africa’s gross domestic product (GDP) will also sag at a time when the economy is barely growing, and the rand will suffer as hard currency export earnings tank.

And lay-offs in an economy with world-topping unemployment rates above 40% by the widest definition will be another blow to South Africa’s fraying social fabric as the typical mine worker has several dependants.

PGM prices may bottom out soon, not least because the demise of the internal combustion engine may not happen as fast as previously anticipated.

Read more in Daily Maverick: As EV sales stall, obituaries of the internal combustion engine look premature

But in the face of the climate crisis, the writing is surely on the wall, raising hopes among PGM producers that penetration rates for hybrid engines or hydrogen fuel cell vehicles which require PGMs will pick up pace.

Meanwhile, South Africa needs to brace for a depressed PGM sector and the economic and social consequences that will arise as a result. DM