platinum

World’s tenth largest gold miner to become 5th largest platinum miner too

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South Africa’s biggest domestic gold miner, Sibanye Gold, has confirmed that it is to acquire Anglo American Platinum’s (Amplats) Rustenburg platinum mining operations.  Sibanye was spun out of Gold Fields as a separate company some three years ago, and in its own right is already the world’s 10th largest gold miner in terms of gold output – 49.4 tonnes last year.  Assuming the Rustenburg acquisition goes ahead, and there’s no reason to suggest that it will not, the company will also become the World’s fifth largest producer of platinum group metals with current output of over 800,000 platinum ounces per year – around 13% of global new mined platinum output based on the latest quarterly production figures as assessed by the World Platinum Investment Council.

Sibanye’s CEO, Neil Froneman, is of the opinion that now is the ideal time to make such an acquisition given his view that precious metals prices are currently at, or near, their likely low points in the commodities cycle.  Even so it is something of a gamble given that many of the operations are marginal producers at the current platinum price, albeit just about profitable in the first half of 2015 in generating cash of around US$19 million – but the platinum price is currently around 10% below its half year average.  Amplats has, however,  been rationalising operations at Rustenburg, closing unprofitable sections and reducing the labour force and will continue this process until the transaction is complete.

The Rustenburg platinum mining operations are similar in many ways to Sibanye’s gold mining operations involving narrow ‘reef’ structures, and are exceedingly difficult to mechanise without excessive ore dilution.  Because the rocks are younger than in the Witwatersrand gold mines, the rock temperature gradient is higher and there can be problems in dissipating heat as the mines get deeper – but in general the Rustenburg operations are not as deep as the gold mines and the platinum reefs are generally more consistent in dip and grade.  Sibanye has excellent experience  and a good track record so far in working these types of narrow reef horizons and is confident it can carry this over to Rustenburg.

Should precious metals prices pick up this will be seen as a very opportune acquisition, although if not the operations could prove to be a short term drag on the company’s financial performance.  There are some inbuilt protections against this in the proposed deal, while there are also arrangements which will limit Sibanye’s potential profits from the operations over the next six years should pgm prices and profitability pick up.

Sibanye Media Release

The full Sibanye media release is set out below – and a more detailed report on the proposed transaction is set out on the company’s website – www.sibanyegold.co.za where the full SENS (Johannesburg Stock Exchange’s Stock Exchange News Service) statement is available.

Sibanye today announced the proposed acquisition of the Rustenburg Operations from Anglo American Platinum Limited (“AAP) for an upfront consideration of R1.5 billion in cash or shares and a deferred consideration equal to 35% of the distributable free cash flows generated by the Rustenburg Operations over a six year period, subject to a minimum nominal payment of R3 billion(“Deferred Payment”). Should there still be an outstanding balance at the end of the six year period, Sibanye may elect to extend the period by a further two years. Any remaining balance at the end of this period will be settled by Sibanye either in cash or shares.

In addition to the Deferred payment, which allows for a favourably extended payment period; should the Rustenburg Operations generate negative distributable free cash flows in either 2016, 2017 or 2018, AAP will be required to pay up to R267 million per annum to ensure that the free cash flow for the relevant year is equal to zero. This provides important capital investment and downside price protection for Sibanye, facilitating ongoing capital investment in the first 3 years following the conclusion of the Transaction. Should higher prices result in early repayment of the Deferred Payment during the first 6 years, Sibanye will share the upside with AAP.  

Commenting on the Transaction, Neal Froneman CEO of Sibanye said: “We have for some time indicated our interest in participating in the PGM sector and believe that these assets provide an attractively priced entry at an advantageous moment in the price cycle. The Rustenburg Operations are similar in nature to Sibanye’s current gold operations and, after extensive engagement with AAP and completing a thorough due diligence, we are confident that we will be able to realise value for our stakeholders by leveraging our successful operating model. The Rustenburg Operations have been significantly restructured and are well positioned to benefit from a recovery in PGM market conditions and provide a platform to grow regionally within the PGM sector. The outcome is a sensible commercial transaction, which is strategically advantageous for both parties.”

Consistent with its transformation objectives, Sibanye will be including a consortium of Broad Based Black Economic Empowerment stakeholders (“BBBEE Stakeholders”) such that, at the closing of the Transaction Sibanye will own 74% of the Rustenburg Operations, with the BBBEE stakeholders owning 26%. Discussions are underway with the following broad based partners: employees, the surrounding community, the Royal Bafokeng Holdings and the Bakgatla-Ba-Kgafela Traditional Community.

The Rustenburg Operations are located centrally on the Western Limb of the Bushveld Complex, near the town of Rustenburg and comprise the Bathopele, Siphumelele, and Thembelani (incl. Khuseleka) mining operations, two concentrating plants, an on-site chrome recovery plant, the western limb tailings retreatment plant and associated surface infrastructure as well as approximately 4 months of working capital on a going concern basis. The lease area covers an extensive 28 km strike length with the ore body extending 8 km down dip.

Current PGM (4E) Mineral Reserves comprise approximately 9.7 million oz and Mineral Resources 88.8 million oz. With annual production of over 800,000 oz the Rustenburg Operations are placed firmly as the fifth largest PGM producer globally.  AAP recently rationalised and restructured the Operations, eliminating loss making production and  reducing the workforce by approximately 7,500 people. Operational optimisation will continue under AAP until the conclusion of the Transaction, but in H1 2015, the Rustenburg Operations generated approximately R261 million in cash, despite prevailing low PGM prices.

 

Gold, silver, pgms news headlines from Sharps Pixley

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The decreasing importance of gold to South African economy

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Readers of LawrieOnGold may be interested in thefollowing note from Statistics South Africa (the SA government statistical body) drawing further attention to the continuing decline in the once dominant South African gold mining industry.  When I worked in the South African gold mining industry in the late 1960s it was producing over 70% of the world’s gold at over 1,000 tonnes a year.  Today South Africa is moving down the table of global gold miners and was estimated by consutlancy GFMS as to only have produced 164.5 tonnes in 2014 and in danger of dropping below Canada currently lying in 7th place

Top 10 World Gold Producing Countries 2013/2014 (tonnes) 

Rank Country 2013 output 2014e output Change Y/Y
1 China 438.2 465.7 +6%
2 Russia 248.8 272.0 +9%
3 Australia 268.1 269.7 +1%
4 USA 228.2 200.4 -12%
5 Peru 187.7 169.3 -10%
6 South Africa 177.0 164.5 -7%
7 Canada 133.3 153.1 +15%
8 Mexico 119.8 115.7 -3%
9 Indonesia 109.2 109.9 +1%
10 Ghana 107.4 106.1 -1%
World 3049.5 3109.0 2%

Source: GFMS, Mineweb

The Statistics South Africa comment and accompanying chart is set out below:

Monthly gold production reached a new monthly low in January, according to data released by Stats SA. Although a number of temporary factors might have contributed to the unusually low level, general historical trends show that gold has lost the prominent place it once had in the South African economy.

Stats SA has published comparable mining production indices that go back as far as January 1980, for the industry as a whole as well as for various minerals, including gold, iron, platinum and coal. The indices provide an indication of the level of production, set against a particular base period. Currently, the index has been set to 100 for the base period of 2010.

Historical values of the gold index show the extent of how production has fallen. In January 1980, the index was 359,0, while the volume of gold produced was far lower in January 2015, resulting in the low index of 48,4. In other words, South Africa produced 87% less gold in January 2015 compared with the same month in 1980. Figure 1 shows how the monthly gold production index has fallen. What is not shown in the graph, however, is that production started on its downward trend well before January 1980.

Figure 1: Monthly gold production index, 1980-2015 (Base: 2010=100)

sagold

The fall in production has reduced gold’s contribution to the South African economy. The metal contributed 3,8% to gross domestic product in 1993, falling to 1,7% in 2013. In terms of sales, gold made up 67,0% of all mineral sales in 1980, falling to 12,5% in 2014. Coal currently leads the pack, having contributed 27,0% of total mineral sales in 2014.

South Africa has also fallen in global gold production rankings. Prior to 2007, the country held the number one spot as the top gold producer in the world, according to the U.S. Geological Survey Mineral Resources Program. By 2014, South Africa had dropped to sixth place, according to Thomson Reuters GFMS, falling behind other countries such as Peru, USA, Australia, and Russia. China is currently the world’s top gold producer.

So with the waning importance of gold to South Africa, does the future hold any promise for the industry? One estimate suggests that the country will soon need to look beyond the precious metal as a major resource. Stats SA’s 2014 Environmental Economic Accounts Compendium provides 2011 estimates on depletion rates for various minerals. At current production levels, South Africa will exhaust its coal resources in 119 years, and platinum in 218 years. For gold, resources will be exhausted in only 33 years. An update to theCompendium is due for release before the end of this month, containing new depletion estimates, but if this estimate holds true, many South Africans alive today will see the country taking on a much reduced role on the global gold mining stage.

Given the fall in the gold price over the past three years, this will also have impacted adversely South Africa’s income from this source as well.  Indeed current metals and minerals pricing across the board will be having a damaging effect on the country’s exports and economy.  With even bigger falls in coal and iron ore, both of which are significant for the South African economy, and a comparative fall in platinum , South Africa’s other principal metal export by value, the government is surely wrestling with a significant change in its balance of payments, whichis thus a contributor to the large falls in the South African Rand against the rampant U.S. dollar.  Indeed, were it not for the fall in the Rand, which has applied something of a cushion in terms of Rand earnings, the production figures for the county’s metals and minerals might well have fallen further.  The fall in the Rand has enabled some marginal operations to stay afloat which otherwise would probably have closed down.

As for South Africa’s gold mines, the major Witwatersrand operations are getting ever deeper (which substantially increases mining costs and dangers, and grades are declining and there is little prospect of significant new discoveries to replace the output falls.  One can see little chance of anything but a continuing drop in output year on year unless there is a very significant rise in the gold price in the offing.

Dearth of gold articles!

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Apologies for the apparent dearth of gold and precious metals articles from me published here this week.  Its not that I haven’t been writing – I have – but most of my work in the past week has been going direct to Mineweb – my main source of income –  so you can still read my thoughts and comments on what’s happening in gold and silver – and sometimes in other metals too – (notably platinum in the past week) so you can always read them there.

Here follow links to some of my recent Mineweb articles.  I’d hate to deprive you of my thoughts however obscure they may be!  Apologies if you have already read all or any of them

China gold demand up 17% ytd

Russia cools gold reserve additions in January

Platinum price puzzles

Can platinum regain its premium over gold in Q2-Q3?

Have the big banks been manipulating gold and silver prices?
 African mineral development risk: The best and worst nations

And my latest – published today:

HK January gold exports to China confirm strong demand

LBMA’s panel of experts’ views on gold, silver, platinum and palladium in 2015

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Each year The London Bullion Market Association (LBMA) organises a competition whereby it invites a number of professional analysts, mostly from banks and other financial institutions, to predict precious metals prices for the year ahead.  This year it received entries from a record 35 such analysts and one would think the accumulated expertise, averaged out, might be a great indicator of what is to happen in the year ahead.  But, be warned,  on past performances this is sometimes far from  the case.  The individuals are also asked to give their reasons for their predictions and these make for some interesting reading.  The full resultant ‘survey is available for download directly from the LBMA by clicking on this link.

A slightly edited version of the executive summary for the competition entries and averages is set out below:

LBMAtab

Tabulation courtesy of the LBMA

This year’s LBMA forecast contributors are predicting that the gold price will remain broadly flat in 2015, but are more bullish (marginally) on the price prospects of the other precious metals forecasting increases of 2.1% (silver), 5.6% (platinum) and 5.3% (palladium) from that prevailing over the first two weeks of the year. Ross Norman of Sharps Pixley is the most bullish analyst with his forecast of $1,321 for the average gold price which gives him a great advantage should the gold price take off this year as anything above this level will gain him victory in the gold price competition and add to his impressive tally of past first places.  Adam Myers of Credit Agricole the most bearish with $950 and he again would benefit should the gold price take a really big dive this year and end amongst the debris promulgated by the out and out anti-gold brigade.

(For the record, here at LawrieOnGold we do believe that there are enough positive factors out there for gold that Ross Norman’s prediction could even be conservative and that Adam  Myers’ bleak forecast, which if it came about would probably drive 50% of the world’s gold mines into serious deficit and likely closure, is the most unlikely result for the year.  But we shall see.)

The analysts cite a number of factors which they see as likely to restrain gold prices in 2015, including the possible further strengthening in the US dollar, interest rate hikes by the Fed possibly commencing  in the second half of 2015, QE programmes in Europe (although some see this as gold positive) and a weak oil price reducing gold’s attraction as a hedge against inflation.  But the price could be supported by strong retail demand from China, India and elsewhere but only limited support is expected this year from the official sector suggesting a decline in Central Bank purchases.

Analysts are slightly more optimistic about the prospects of silver in 2015, forecasting a modest increase in price of 2.1% to $16.76/oz, with prices forecast to trade in an average range of $13.91 to $19.36. Ross Norman is again the most bullish ($18.56) with Robin Bahr of SocGen the most bearish ($13). Negative price factors again include expected strengthening of the dollar, disinflation as well as slow growth from China and the Eurozone thus affecting industrial demand for the metal. But some positive factors which could lend support to prices include expected additional global investment in solar power, continued support of silver ETFs and expectations that retail investors may take advantage of attractive prices.

Analysts are more bullish about the prospects of the platinum group metals in 2015 despite the current fall in the platinum price to below that of gold.  Platinum is expected to be the best performer with prices forecast to average $1,294 in 2015, 5.6% higher than its price in the first half of January although still 6.6% below its average price in 2014. Bart Melek of TD Securities offers the most bullish forecast of $1,434 and Glyn Stevens of International Commodities the most bearish at $1,098. Analysts cite positive influences on the price to include a supply deficit (despite expected improvement in South African production).  Rising costs might also push prices higher along with strong demand from China and industrial investors. On the negative side is the weak outlook for gold prices and macro-economic factors which are likely to act as a restraint on prices.

Palladium prices are forecast to average $838.40, up 5.3% from where it started the year and 4.4% above its average price in 2014. Rene Hochreiter of Sieberana Research is the most bullish with a forecast of $950 and again Glyn Stevens the most bearish with a forecast of $738. The palladium price is expected to benefit from a supply deficit as well as improving industrial demand and strong car sales in North America and China.

Overall all credit should be accorded to the analysts for setting precise forecasts out for all to see opening their judgements  up to negative comment should they end up being way out in their predictions. But then the kudos for being nearest to correct can bring some very positive accolades from their peers and followers.

To find out more about what the analysts predict will happen to prices for precious metals this year, and tables showing also their high and low price forecasts for the precious metals and what the factors are which are likely to affect their price, read their ‘expert’ views by clicking on the link noted at the start of the article and repeated here.

LBMA top gold forecaster: gold price to average $1321 in 2015, silver $18.56

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The annual LBMA precious metals price competition’s top gold forecaster over the years, Sharps Pixley’s Ross Norman, is bucking the mainstream analyst consensus with a $1321 average gold price forecast for 2015.  Silver $18.56, Platinum $1268, Palladium $876.  Slightly modified version of article posted to Mineweb.com – the website for the best global mining and metals news and comment.

Lawrence Williams

In his submissions to this year’s LBMA precious metals forecasting competition, Ross Norman who heads up London bullion broker Sharps Pixley, and who has been probably the most successful forecaster in the LBMA panel in the past, says he is going out on a limb with his forecast for the gold price average this year at $1321. (It would certainly have been out on a limb last month although perhaps seems less so now given the gold price performance so far this year.) He is also looking for a gold price high of $1450 and a low of $1170 during the year. With most of the forecasting panel being bank and institutional analysts, whose forecasts tend to be much more conservative – some would say decidedly bearish – Norman must have a good chance of adding to his wins if gold’s advances continue.  The LBMA is expected to publish its full listing of its annual competition forecasts later this week, along with the analyst participants’ reasons for their predictions.

Norman has been the outright winner of price forecasting sections of the LBMA competition five times in the past  – usually by ‘going out on a limb’ which was a pretty good policy when the gold price was in its bull market phase  Norman has also had numerous Top 10 positions.  Perhaps he tends to favour the more bullish trends so will he be back on track again this year?  If the current momentum in the gold price gathers more strength still his forecasts could even prove conservative but it would perhaps be foolhardy to automatically assume that gold’s good start to the year will not beget a serious correction at some stage later on.

Norman’s stated reasons for his fairly positive predictions on gold this year are as follows: “If markets move on what you don’t know today, but will know tomorrow then it follows that many factors such as a US interest rate rises should already be factored into the current price… it also begs the question what the new drivers for 2015 will be. We see ongoing declines in economic growth prompting central banks to fight deflation by resorting to inflationary pressures in H2.  If our outlook for gold in dollar terms is bullish, in emerging currencies it may be even more so as investors seek to insure or hedge against currency debasement. As such, we foresee good demand for the physical.”

He sees gold already demonstrating that it has turned a corner and sees investor flows returning strongly but reckons there are unlikely to be runaway prices beyond the $1450 level without either significant new product innovations or without the sort of black swan events in the economy that few would wish for, although the potential for these looks ever greater following the SNB’s decision of last week to drop the Swiss Franc peg against the Euro.

He is also fairly bullish on silver, looking for an average price of $18.56 over the year, encompassing a high of $21.75.  In percentage terms these are big rises from the prices prevailing at the beginning of the year.  This is commensurate with the general pattern of silver moving up faster than gold on the upside – and he also reckons that investors will take comfort from silver ETF holdings which have remained firm (unlike gold ETFs) coupled with reported retail sales of the physical – coins and bars -which have also remained robust.

He seems to be a little more sanguine in his views on platinum.  Despite many analysts seeing platinum in serious supply deficit this year, he is looking for a yearly average price at $1268 – somewhat below that of his gold forecast suggesting that at some stage during the year the platinum price will fall back below that of gold as it has now already done on Friday after struggling to stay above the gold price level for most of last week.  He does foresee a high price during the year of $1480 – thus higher than that he sees for gold.

Finally there is palladium – the precious metal probably most supported by analysts in recent months due to what are seen as continuing strong fundamentals.  Norman is looking for an average price over the year here of $876 with a 2015 high reaching $975 as against the price at time of writing of $755.  Palladium was last year’s best performer in the precious metals sector and Ross suggests it may have trouble matching last year’s 10.9% increase, but even so he feels the junior precious metal as having another positive year based on continuing attractive supply/demand fundamentals despite the backdrop of a relatively weak global economy. He also points to an assessment suggesting an ongoing supply deficit in the order of 1.4 million ounces which will keep the metal well bid. Of the four metals, palladium remains once again his favourite, although, on his predictions perhaps gold and silver will do even better!