No silver lining to miners’ cloud

The release this week of half-year results for a number of miners, largely in the platinum and iron-ore sector, painted a bleak picture of the sector’s prospects, with all the companies indicating that spiralling costs, falling production and productivity are affecting profits.

Most of the results were buoyed slightly by the weak rand, which fell faster than commodity prices, but analysts warn that the high price of consumables will eventually catch up if commodity prices weaken.

Kobus Nell, mining analyst for Stanlib, said on Wednesday that Kumba Iron Ore, the better performing of the two Anglo American companies that released results this week, was under pressure despite paying an interim dividend of R20.10 a share and reporting taxed profit of R10.2-billion.

He said Kumba had to deal with less profit and increased costs at Sishen Iron Ore as a result of the increased amount of waste that had to be mined, which pushed production down. This was offset to some extent by the strong performance of the newly commissioned Kolomela mine.

According to Kumba chief executive Norman Mbazima, total sales for the six months dropped by 5% to 22.1 tonnes from the record 23.4 tonnes in the first half of 2012.

Export sales were down 3%, while domestic sales were down 25% and, on top of this, prices were marginally down in the first half of 2013, averaging about $137 a tonne, against $142 a tonne in the corresponding period in 2012.

Market under pressure
Mbazima said steel-market fundamentals were under pressure as a result of the Chinese economic slowdown, which he warned at the presentation of Kumba’s six month results could result in supply exceeding demand.

His concern is not unfounded. Markets, including the JSE, reacted immediately on Wednesday to a preliminary study which showed that activity in the Chinese manufacturing sector had slowed to an 11-month low, suggesting the economy was slowing faster than expected.

“There is no doubt that China plays a massive role in the price of steel and iron ore,” said Nell.

Nell said Angloplats was facing cost pressures, which included restructuring costs, labour issues and decreased dollar/metal prices.

Angloplats opted to suspend its dividend for half year as an indication of its concerns.

The company attributed its diluted headline earnings of R5.14 a share, up 88% on the same period last year, to a weak rand and better sales.

The costs
The costs associated with restructuring the company and the impact of wildcat strikes at Rustenberg are expected to have a lasting impact.

Added to this, the average platinum price decreased by 10% quarter on quarter, while palladium decreased by 4% and rhodium decreased by 6%. Platinum closed the quarter 16.3% down, at $1 337 an ounce.

Nell said an improvement in the motor industry in the United States and China would have a larger impact on palladium than on platinum.

“Platinum miners will need to look at how to maximise on the demand for palladium, a by-product of platinum mining.”

In the present environment increased cost competition was likely among BHP Billiton, Rio Tinto and Anglo American, which the first two were more likely to be able to absorb because of large expansion plans in Australia.

Nell said that for South African mining companies to experience growth going forward what was needed was a stronger dollar and strong commodity prices rather than a weaker rand.

A weak rand
“A weak rand in that environment would not be ideal because, in the long term, the companies feel the pinch on consumables like fuel which has to be imported,” he said.

The rand strengthened on Wednesday to R9.68, after increasing to almost R9.60 earlier in the day, which Nell saw as a slight move back towards emerging markets after news from the US that quantitive easing was likely to be phased in.

David Shapiro of Sasfin said the market was skittish and responding to headlines.

“The rand is strong on the dollar weakness as worries over quantitative easing fades and the markets seem more upbeat about the euro and positive data coming out of Europe, and for some reason, a strong euro, seems to go along with improved commodity prices, which sees the rand improve as well,” he said.

But Shapiro said the mining sector would remain under continued pressure. “Prices at best will remain static and other pressures like labour issues will weigh on the sector.”

On a positive note, however, he believes these are cyclical trends. There was a high supply of commodities, but once miners cut back on production, demand would increase.

“Companies spend in the good times and cut back when the going gets difficult. It’s a trend we have seen many times,” Shapiro said.