Amplats plan will open the floodgates

If Anglo American Platinum (Amplats) succeeds with its restructuring plans in the face of government and union opposition, it would open a path for other mining operators to follow suit.

This view was made by global credit rating agency Fitch and captures the fears expressed by a couple of key stakeholders including the ruling party, ANC. South Africa’s ruling party has threatened to withdraw Amplats mining licenses if the company proceeds with its plans to close four shafts in its Rustenburg mining operations, saying this could set a bad example and lead to massive job losses. Amplats’ plans have caused an uproar as they may lead to loss of 14000 jobs.

In a statement released at the weekend Fitch said Anglo American Platinum’s decision to mothball and/or

sell higher cost operations in South Africa highlights the difficult mix of labour-intensive production and sharply rising wage costs in the country’s platinum and gold mining industries.

Fitch said gold and platinum mining in South Africa is more labour intensive than in many other countries and the four shafts being closed by Anglo American fall into this category; in part because of the depth at which mining takes place.

“We estimate that labour costs for South African gold and platinum miners account for around 40% of the total, compared to around 20% for coal and iron ore mines”.

The credit rating agency said big wage hikes, such as the 22% increase agreed between Lonmin and striking workers last year, are therefore harder for companies to absorb.

“This mix has been a growing problem for years, but we believe cost inflation is likely to have a marked impact on mining companies’ results in 2013 due to stagnant commodity prices. In previous periods of high cost inflation, the impact on results was masked by rising prices”.

“For Anglo American, the shutdown of four shafts at its subsidiary’s Rustenburg operations and the sale of the Union mines would cut platinum production by around 20%. The plans are likely to be neutral to positive for Anglo American’s credit profile, given the weaker profitability of the operations being closed”.

However, we expect the group to face significant political pressure to reverse or water down its plans as well as the potential for ongoing strike action and disruption at other facilities throughout the process, which could harm production in the near term”.

“While Anglo American has stopped short of announcing the permanent closure of the four Rustenburg shafts, we believe it is highly unlikely that they will be reopened in the foreseeable future, because of the company’s desire to focus on lower-cost, long-term projects”.

The agency added that smaller miners that decide to shutter unprofitable mines might be more willing to reopen them if gold or platinum prices rose enough to make the operations profitable again.

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