South African Mines Too Deep, Root Of The Platinum Strikes Issue
(Kitco News) - Mining strikes between South Africa’s platinum giants and workers is fast approaching two months and there appears to be little movement from either side towards a resolution.
Bruce Shapiro, president of MineAfrica Inc. and Edward Sterck, vice president, research analyst at BMO Capital Markets, both see the current state of the actual mines as a key issue.
“What I think is really at the root of the problem is the structure of the existing platinum mines,” said Shapiro. “They’re very deep, they’re very difficult to work, very labor intensive and very costly.”
“That’s really the problem they’re really all wrestling - it doesn’t necessarily make sense to progress some of these projects,” said Sterck. “In a way you’d be better off curtailing higher cost production and trying to benefit from your lower cost operations from improvements in U.S. dollar and PGM prices, assuming that the production that comes off the table is enough to stimulate a price response.”
The strike began Jan 23 when the Association of Mineworkers and Construction Union (AMCU) downed tools at Anglo American Platinum Ltd. (JSE:AMS), Impala Platinum Holdings Ltd. (JSE:IMP)(LSE:IPLA) and Lonmin plc (JSE:LOLMI)(LSE:LMI) mines in South Africa.
At the center of the issue are wages, with the AMCU demanding higher pay and the platinum companies stating the demands are too high.
Essentially, workers are looking for more money as they need to work a few kilometers underground, while the mining companies are already seeing high costs from mining so deep in the ground. Shapiro said that mining at excessive depth will eventually be replaced.
“I think what you’re going to see is a new breed of platinum mine coming on-stream that can be highly mechanized and are not as deep,” he said.
Two companies he highlighted with this ability are Platinum Group Metals Ltd. (TSX:PTM)(NYSE MKT:PLG), with its Waterberg discovery, and Ivanhoe Mines’(TSX:TRQ) Platreef project – both located in South Africa.
While mechanized mining may be the future, at the moment South Africa boasts a labor force that is not quite as skilled as other countries. This raises issues when a company may no longer be able to afford running a mine at the current platinum prices. Spot platinum was last quoted down $5.00 at $1447.00 an ounce.
“One can understand how the government is keen on employment when, on average, each of these miners supports ten extended family members and so you’ve got no real social support in South Africa,” said Sterck.
“The flip side of that, of course, is for the companies out there, it’s very difficult for them politically to close down loss-making operations.
“The longer the strike goes on, the more distressed the situation the companies are likely to end up in, so the harder it’s going to be for them to restart some of the more expensive operations,” he added.
This all leads to the question, how will this affect platinum supply?
At the end of 2013, banks and firms all listed that platinum supply would be in deficit for 2014, it was just a matter of by how much. Not taken into account of course was the lost supply from the strike, which Reuters pegged yesterday at roughly 10,000 ounces per day for a total of 440,000 ounces per day.
According to Sterck, there will be possibility of a supply issue if the strike isn’t resolved shortly, especially on the industrial side.
“At the moment it’s difficult to say for certain, and the reason is the producers have continued to meet their contractual commitments from inventory,” Sterck said. “This is a fairly broad-brush statement, but those inventories are largely expected to be depleted at some point during March, and we’re getting quite close to the end of that right now.
“So thereafter, I would expect there to be a price response - it’s been pretty quiet so far, considering how long the strike has gone on for,” he added. “Even if we have a resolution tomorrow and production starts next week, it’s fair to say there will be an interruption to supply in order to rebuild those pipeline inventories that have been drawn down.”
By Alex Létourneau of Kitco News aletourneau@kitco.com
Follow Alex Letourneau @alex_letourneau
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