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Desperate platinum producers look to bond markets for funding

Cynthia Carroll, chief executive officer of Anglo American Plc, speaks during a news conference at the World Economic Forum Annual Meeting of the New Champions in Tianjin, China, on Monday, Sept. 13, 2010. The World Economic Forum Annual Meeting of the New Champions takes place from Sept. 13-15. Photographer: Nelson Ching/Bloomberg *** Local Caption *** Cynthia Carroll

Cynthia Carroll, chief executive officer of Anglo American Plc, speaks during a news conference at the World Economic Forum Annual Meeting of the New Champions in Tianjin, China, on Monday, Sept. 13, 2010. The World Economic Forum Annual Meeting of the New Champions takes place from Sept. 13-15. Photographer: Nelson Ching/Bloomberg *** Local Caption *** Cynthia Carroll

Published Aug 14, 2012

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Carli Cooke

Platinum producers in South Africa, which account for three quarters of global output, are facing plunging profits and surging costs, raising the prospect of violating loan terms and forcing them into the bond market.

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Earlier this month Northam Platinum said it planned to sell R2 billion of bonds and Aquarius Platinum said it would consider more funding if it went ahead with an acquisition.

Last month Lonmin said it was examining increasing borrowing and a unit of Impala Platinum (Implats) said it might require more money.

With Anglo American chief executive Cynthia Carroll saying that the weak platinum market might persist for 18 months, the companies may struggle to raise financing.

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The yield on Aquarius’s $300 million (R2.4bn) worth of bonds due in 2015 has almost tripled this year to 23.6 percent. JPMorgan Chase’s index of dollar bonds from metals and mining companies in emerging markets has declined 136 basis points to 5.47 percent. Credit default swaps on South Africa’s dollar debt fell 45 basis points in the past six months, dropping to a 13-month low of 122 last week.

“It’s going to be a very bold banker who bankrolls platinum miners at this point because it’s not only about return on capital, it’s also about return of capital,” said Ruben Beelders, a fund manager at Gryphon Asset Management. “If that hole in the ground doesn’t actually deliver platinum that can be sold, you’re not going to get your capital back.”

The debt of Anglo American Platinum (Angloplat), which is controlled by Anglo, almost doubled to R10.9bn in the six months to June. The company posted its first interim loss since since at least 1999, according to Bloomberg data, and it suspended dividends. The trigger was a 22 percent fall in the platinum price over the past year, a 24 percent jump in power costs and an increase of as much as 9 percent in wages at the company. Debt might be slightly lower by year-end, Angloplat said last month.

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Lonmin also lost money in the first six months of its financial year, while Aquarius has closed most of its mines, posted a record annual loss and fired contract workers who then rioted at one of its operations, killing three people.

The four biggest platinum producers – Angloplat, Implats, Lonmin and Aquarius – have $2.47bn in debt, according to Bloomberg data. That compares with $1.61bn at the end of their last financial year. Lonmin was examining options and Implats had no immediate borrowing plans, the companies said. Aquarius did not respond to e-mailed questions.

“They’re not in a good position to negotiate terms,” said Rudi van der Merwe, the chief investment officer at Standard Private Bank Equity Advisory Services, a unit of Standard Bank. “This could be quite a prolonged slump.”

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Lonmin, which posted a loss in the six months to March 31, said it had net debt of $356m.

Without raising more capital, net debt might increase to $400m by the end of the current financial year, Nomura Holdings told clients. The company might breach a covenant on net debt to earnings before interest, tax, depreciation and amortisation, by the end of financial 2013, the institution added.

“Scenario analysis leads us to believe that Lonmin will be the first to break, and at a potentially high cost to investors,” Nomura analysts said in the note. “We argue a fund raising (through debt or equity) and return to growth would aid Lonmin’s longer-term valuation.”

Lonmin has cut planned capital expenditure by more than 40 percent over the next two years to an annual $250m.

The companies have had little relief from the exchange rate of the rand, in which most of the costs are met while the metals are priced in dollars. The rand is expected to gain to R8 to the dollar by the end of this year and R7.75 by the end of 2013, according to surveys.

“The mining sector has relied for a long time on the currency, but we’ve learnt in this past cycle that the currency is not just a one-way bet anymore,” Beelders said.

The rand fell against the dollar for 14 consecutive years until 2001. It has gained in six of the past 10 years.

While recent debt sales by South African companies have helped cut borrowing costs, most have been in better financial positions than the platinum producers.

The three-month interbank agreed rate in Johannesburg, where most of the producers are based, has fallen to 5.075 percent, the lowest on Bloomberg records that began in 1999. The three-month London interbank offered rate has fallen for the past two months to 0.44 percent.

Recent corporate issues by South African companies have been oversubscribed.

AngloGold Ashanti last month replaced revolving credit facilities with a $1bn five-year loan. It also sold $750m of bonds in its first offering in more than two years. The 5.125 percent, 10-year bonds were sold at a yield 380 basis points more than similar-maturity US treasuries and yielded 4.64 percent on August 10.

Companies ranging from Transnet to Mediclinic are selling bonds or reorganising existing loans. They are benefiting from a plunge ingovernment bond yields, with the yield on the 6.75 percent bonds due 2021 falling 123 basis points to 6.76 percent this year.

Investors may be more wary of platinum producers.

“Producers are stuck between a rock and a hard place in that there’s a surplus of platinum supply on the market while you’re facing continual price and cost pressures,” Clinton Duncan of Avior Research said. “You burn cash or you have to shut down until the situation turns around and in order to do that you’ve got to have a flexible labour market, which South Africa doesn’t really have at the moment.”

Share prices have plunged. So far this year, Implats and Angloplat are the two worst-performing shares on the Top40, declining 22 percent and 19 percent, respectively, compared with a 9.7 percent gain for the blue chip index. Lonmin has declined 22 percent and Aquarius 75 percent. – Bloomberg

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