Platinum miners are one of the most attractive opportunities across global equity markets in 2018, writes RWC Partners’ Louise Keeling.
The tough operating environment has forced positive changes at platinum miners in particular, which now look set to bear fruit.
The industry is showing signs of being more rational and that returns on invested capital are set to improve.
There are parallels with the steel industry which went through a similar process.
We are beginning to see firms dumping the failed rulebook of maximising volumes to try to manage high-fixed costs, as this has caused dramatic oversupply and poor returns on capital.
A period of strikes in 2012-2014, coupled with the lower platinum price, has also forced the companies to re-assess their behaviour not just from a production perspective but also their approach to labour relations.
Ownership of the world’s platinum resources remains highly concentrated across a few companies and regions around the globe (Anglo American Platinum, Impala Platinum and Lonmin accounted for 86 per cent of platinum production in 2016).
This market structure is being enhanced further by Sibanye Stillwater buying Lonmin, resulting in 3 rational players dominating the market.
Now is the time for the platinum producers to show that they can be disciplined in their production.
There are signs that this is occurring as primary supply (i.e. mined rather than recycled ounces) is gradually coming down, with existing mines increasingly being shut or placed under care and maintenance as they are uneconomical to mine under current metal prices.
We are owners of businesses not renters. We want management to make the right strategic decisions for the long run.
Amplats (Anglo American Platinum) is one company which has been allocating capital more sensibly to account for the environment it operates in.
Since 2012, it has been focused on right-sizing its cost base and only mining profitable ounces. Consequently, they have repositioned their mine portfolio and either disposed of, or placed under care and maintenance (i.e. mothballed), the high-cost mines.
At the same time, Amplats has been working on improving labour relations and working conditions. For example, they have invested in family housing near the mines so that employees can live with their families.
Meanwhile, Impala Platinum, which announced last year a comprehensive strategic review of its main mine, is now also focusing on managing costs and production volumes down to improve the mine’s profitability.
The company is also currently reviewing its executive remuneration policy. We are encouraging them to incentivise a rational competitive environment by only mining profitable ounces.
For their long-term plan, we would like to see Return On Capital Employed over three years as a key metric.
This would encourage appropriate capital investment i.e. neither over-investment nor excessive cost cutting which could lead to unintended downtime or have a negative impact on the safety of the working environment.
While both Anglo American Platinum and Impala Platinum trade at a small fraction of the market price, using current platinum prices in a more rational competitive market, it is hard to imagine that these assets wouldn’t trade closer to their asset-backed valuation.
Additional pressure has suppressed investor interest in the platinum sector as enthusiasm for electric vehicles is rampant.
However, a more rational supply-side can adjust to lower demand.
Furthermore, hybrid vehicles need the same amount of platinum as a combustion engine.
We believe that the intrinsic value of these guardians of scarce resources is many folds higher than their current share prices.
Louise Keeling is the portfolio manager of the $1.6 billion RWC Global Horizon strategy.
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