Analysing mining – all of the companies, the production and the earnings
Anglo American reported a 10 percent drop in interim group underlying profit and saw cash costs down 2 percent. The rest of the week has seen data from mining companies Aquarius Platinum, BHP Billiton and Kumba Iron Ore. Kobus Nell, Mining Analyst at Stanlib joined Alec Hogg on CNBC Africa to discuss all of the details. With succinct analysis on production, profits, and exactly where the split between profit producing and profit eating resources is. He also looks at when and if the companies affected by the platinum strike can be expected to recover to pre-strike production levels. Kobus offers a wealth of expert insights for everyone who is trying to get a balanced view on all of the mining company's reports. – LF
ALEC HOGG: Well, Anglo American reported a ten percent drop in the interim group underlying profits for the financial results just released this morning. The company also saw cash costs down two percent. The rest of the week has seen data from mining companies Aquarius Platinum, BHP Billiton, Kumba Iron Ore, and of course, this morning we also had Lonmin. Kobus Nell, Mining Analyst at Stanlib is with us in the studio. Let's start off with Anglo, Kobus. I see the share price is up two percent today. It takes the last year's gain to 38 percent. It's quite a lot to live up to. Did they?
KOBUS NELL: Yes, I'd say it's a decent result. Certainly, I think that what we saw when Mark Cutifani came in was a lot more focus, doing the simple stuff as they said, right? I think they had a lot more focus on value as opposed to volume in their business and ultimately, I think that's what shareholders want to hear. Its early days. There's still quite a bit of risk. If you look at what their debt did, they debt still expanded about 18 percent from the last six months and we expect that to increase further from the existing $11.5bn to between $15bn and $16bn per year, and then normalising back to the $11bn normalised levels. It is still very price-dependent and I think a lot of these, as we've even seen in these results… Even though it was a good result, good cost management, and a great improvement from a volume perspective in a new diamond business etcetera, we've unfortunately seen other segments like the iron ore side, the coal side where prices have been under pressure and that is weighing on their operating result.
ALEC HOGG: If you unpack it, the iron ore side – iron ore and manganese is the biggest chunk of the profits. Just over half of that is diamonds and copper and then the rest is pretty much nowhere. Is that a normal result or are there areas…? Clearly, you would expect platinum to do a lot better next time.
KOBUS NELL: Yes, those are the two key areas. The iron ore side was still about 40 percent of their operating profit, and that's in the likes of Kumba contributing to that number. It certainly has been dominating earnings for all these diversified miners over the last five, six, or more years when the iron ore price was really strong, when we've seen those margins sitting very flat in the income statements. The iron ore price, where it trades now below $100.00/$95.00 per ton, is very different from the $130.00/$150.00 levels and even as high as $180.00/$190.00 in the really good days. From that perspective, there is pressure. It's still a massive part of their portfolios, certainly. On the other hand, you have the platinum side. We all know about the strikes that played out and we've that the damage it's done in Anglo Platinum's numbers. Certainly, that has flowed through and if you kept your platinum contribution flat from the comparative period last year, your operating profit would have been pretty flat. That would give you an idea. Platinum has weighed a lot in these numbers as well.
ALEC HOGG: The second half of the year from platinum…
KOBUS NELL: I think the expectation is there for it to recover. They still have to live with ramp up process, which will take about a quarter for them to get back.
ALEC HOGG: You'll probably see it next year.
KOBUS NELL: Yes, because then your base is much lower and hopefully… We've seen the prices moving in the right direction. Fundamentally, it's also improving.
ALEC HOGG: Guys like you are no doubt having a look at the consequences of the strike and how management of Anglo Platinum in this instance, reacts to it. Are you expecting that in a year's time there'll be quite a lot less people working at Anglo Platinum and in fact, that there'd be bigger investments in the mechanised mining as a consequence of the experience that was had?
KOBUS NELL: Look, a lot will depend on the intended sales or unbundling of two of their very labour intensive mines: the Rustenburg complex as well as the Union mine. That still presents a massive part of their employee base. If they can manage to sell that on, or unbundle that off, and you look at the Anglo American Group, specifically Anglo Platinum, yes then it will be a lot less dependent on labour. I think all three big producers have said they're first going to see to what levels they can normalise operations, to what levels they can be economically managed, and then make a decision on saying 'where we should we shave edges off'.
ALEC HOGG: Anglo Platinum can do that because they have other mines and they're part of a very big group. Lonmin can't just unbundle or sell of its mines so I guess we have to watch that one very closely and watch how the management performs there. What did you think of the operational/interim management statement that came out today?
KOBUS NELL: Yes, the production report: The shares are strongly up and I think what the market liked to see is a zero net debt type of number at the 30th of June mark, which they pointed out. Certainly, in the period, they've been very light on CapEx. Where they normally spend about $300m, it should have gone up to about $400m. They're now only going to spend about $100m.
ALEC HOGG: That's a big implication for the Rustenburg area because it's another |$300m less, so R3bn less is going to be put into fixed investments.
KOBUS NELL: In this period, and we know in mining that if you don't invest, you're not going to mine. At some point, they will have to catch up with this. Clearly, they're very conscious of the pressure on them at the moment, just coming out of the rights issue in 2012. I think there's a lot of pressure from that perspective. If you could also see, they've released a lot of stock out of working capital into your cash line item in your balance sheet. They've cut massively back on CapEx, so they're running a very conservative operation – very defensive at the moment, to try to protect that cash flow number and the net debt number. Remember, there is some governance on debt that's hanging over their heads and that they have to be careful on.
ALEC HOGG: You don't want them to start getting on your back even more than they are. A little bit earlier, Izan de Bruin was saying that he's a bit disappointed that it's taking them so long to get back to full production. What's your reading?
KOBUS NELL: I think generally, they pointed out to 80 percent at the end of September. I think some of the other mines pointed out a number closer to 90 or even a little bit above that. It's a long process. As they pointed out, you have to go through all the things such as checking your employees again from a medical perspective, retraining, recertifying in certain areas, re-establishing your teams again, and making sure the environment is safe to go in so it's a very costly side. I think what we've seen up to now has been costly, but they've had the advantage of 'no work, no pay'. What we're going to see now where they're going in, is they're going to pay full expenses and full costs, but you don't get the full benefit of your production on the other side.
ALEC HOGG: Do you own shares in Lonmin?
KOBUS NELL: No, we don't. At the moment, it's a share that I think, if it can't get out of its marginal cost producing position on the cost curve, It's going to struggle – especially in the market where you're not necessarily going to see a runaway PGM (platinum group metal) prices. I think its strategic intention was to invest the money to get the K4, which is career for shaft, which is much better ground into the profile, and with that actually drawing down the effective cost of their portfolio. Obviously, the strike has impaired their ability to do that now and that's pushed that out. The problem with that is as we've seen in this game; the 'wait and see' scenario can be very costly sometimes.
ALEC HOGG: So in your opinion, the market is maybe just a little too optimistic.
KOBUS NELL: I put it to you that there's a lot of risk on the share. We're going to see a strong market – metal price market. I think the share will run away, but as I've said, it has a lot of catch up investment in terms of CapEx that it still has to do. It's already running into net debt position of probably between half-a-billion to one billion in the September numbers. Then they have to normalise their working capital profile and their CapEx.
ALEC HOGG: Many challenges there.
KOBUS NELL: You can see this company next year I think, pushing up to about $2bn to $3bn in debt if there's no major free cash flow that the company can actually produce.
ALEC HOGG: Kobus, thank you for those insights. Kobus Nell is a Mining Analyst at Stanlib, running his slide rule – figuratively, anyway – through Lonmin and Anglo American Corporation.
Remember, you can email us on powerlunch@abn360.com or send me a twee to @alechogg. After the break, we'll take a look at the success of African Brands – talking to the man from Brand South Africa who is, in his turn, in engagement with the Chief Executive of Brand Kenya.