SA’s platinum sector’s outlier: A company that’s expanding and holding costs

Royal Bafokeng Platinum is near the epicenter of South Africa’s labour relations minefield . But in contrast to its peers,

RB Platinum's one of the most appealing shares in the mining sector. CEO Steve Phiri is a big reason.
RB Platinum’s one of the most appealing shares in the mining sector. CEO Steve Phiri is a big reason.

the Black owned and run business has negotiated skillfully enough to avoid any explosions. As CEO Steve Phiri explains in this interview, that’s been helped by the dominance which the more mature NUM has at the mine. It’s not the only way that RBP is swimming against its industry’s tide. In stark contrast to the trend of cutting back wherever possible, Phiri’s group is investing almost R12bn in the new Styldrift mine – one and a half time the business’s current market cap. It is managing to fund the project through cash flows – and still pay dividends. Reason, says Phiri, is an obsessive focus on cost. In the last six months the cost per ounce rose a fractional 1.6%. Keep that up and RBP will soon be the lowest cost platinum producer on earth. A definite stock for long-term investors to consider.

STEVE PHIRI: Yes, it was. It was doubled (earnings) and you have correctly put it. It’s as a result of course, partly to the exchange rate, which was in our favour, as well as a result of increased grade per gram. That also helped with the revenues. It’s a combination of many things, including the cost containment. I don’t think it’s a mean achievement to only increase your cost per platinum ounce by about 2%, so our drive to cost containment is paying dividends at the end.

 ALEC HOGG: Ja, and you saw that coming through very aggressively, but I guess that gives the other side, your counterparty – Labour – something to grind you with in the next wage negotiations.

STEVE PHIRI: Well, certainly. I would do the same if I was them, but they contributed quite a lot in the efficiencies, in the productivity and also in the revenue itself. The fortunate thing I did – I would say fortunate for want of a good description – is that we are not going on wage negotiations this year because we had a three-year wage agreement which only expires in June next year so we’re not negotiating this year. However, in the process of the three-year wage agreement we also revised the bonus system which is linked to performance and it was an initiative, again, of the unions themselves in conjunction with us – the management at the mines. We’re coming with a lot of innovative ideas so that people produce and can earn from what they produce.

ALEC HOGG: While we’re on the labour discussion, Marikana is just around the corner, or the anniversary of Marikana. It’s just around the corner physically from where your mine is. Are you expecting any disruptions?

STEVE PHIRI: No, there is no sign at this stage to expect any disruption. As I said our trade union is mainly National Union of Mine Workers and – not that National Union of Mine Workers per say is a cushion for us – but it’s the quality of the leadership or the trade union leadership that we’re having on the ground. No, we’re not expecting anything. Even in the past when Marikana happened we did have some disruption of some sort but not in the magnitude that Lonmin had, that Anglo-Platinum had and early on in the year that Impala had. We managed to quell the situation and I still need to give credit to the quality of the union leadership at our operations.

ALEC HOGG: Well, it helps if you don’t have to deal with AMCU, I guess, who perhaps, by your conversation or what you said now – the quality is not quite up to the NUM standard.

STEVE PHIRI: Well, I wouldn’t say that because I don’t know much. I’ve not dealt with AMCU. However, what we know is that we have got a policy of freedom association, which is of course entrenched in the Constitution, so every trade union is welcome to organise and to associate. The workers can associate according to the union of their choice but on the management side any union that has the right membership for recognition, we will support . We will give them the instruments of work, the office space, the encouragement and the training development that we’re doing. We’ve done a lot with our National Union of Mine Workers – giving them the necessary leadership training. So I wouldn’t pass judgment on AMCU per say, because I’ve not dealt with AMCU itself. But any trade union that is new, that is coming into the situation, is always going to find time to settle down and get its house in order.

ALEC HOGG:   Well, something that makes you unusual at Royal Bafokeng, is the fact that you are investing heavily at a time when we see cutbacks, pretty much everywhere else, on the proposals that have been put on the table in the past. If I read your numbers correctly you’ve still got a budget of something like R12bn worth of projects that you’re busy with.

STEVE PHIRI: Yes, when the market is down, you can only expect it to go up and when you have a quality asset like styldrift, you’d better invest in growth. We are doing that now, so that when the market picks up, we are there with the market, we are there to benefit with the market upsurge. Thats exactly what we are doing. But on the other hand we are able to finance, to fund the project from excess cash-flows that we currently are generating. We have created more funding flexibility with the revolving credit facility, and we are very reluctant, and quite slow for that matter, to go to the capital market at this stage, when we don’t need the market immediately. We will go there once the time comes but it has to be, strictly speaking, the lowest amount that we possibly can raise rather than the highest amount.

ALEC HOGG: Very sensible management all around, Steve, and it’s a contrast – and I’m sure you saw Mark Cutifani’s comments on the overspending that one sees at the Anglo-American projects. He was pulling his hair out at what he inherited there. How have you managed to keep your projects within budget, and in fact in the case of the Merensky replacement – which is already, itself, a R2bn project – ahead of schedule?

STEVE PHIRI: I think it’s getting the right people doing the right jobs, qualified people doing the jobs themselves. I’m so proud of the team that I have that is doing those projects. But even more so, many companies have the practice of appointing contractors to do the job, and a turnkey project. We do have those, but we run the project. We manage the project with them. We know what they want. It’s like building your house and you give it to your contractor. You’re never there to do that. You don’t have an inspector chosen by you to inspect the house on your behalf and at the end it’s not a house that you want to live in because you never really questioned the decisions there. So we are there every time of the day; every minute we are there to say ‘is this according to my plan? Are you doing the right thing? Because I am going to be staying in this house. I’d better know that you are building the right house for me’ and that’s what we are doing. Our management team is there on the ground.

ALEC HOGG: It’s a really good story; more than doubling the size of your business market cap at the moment – just under R9bn – another R12bn in expansions going on. We saw the numbers coming out today for the first half, doubling the profits. But there is a little niggle and that’s to do with your dispute with the Revenue Services. Just let us in or give us some insight on what’s going on there.

STEVE PHIRI: Well, it’s an old thing. When Royal Bafokeng Holdings – our major shareholder, restructured the whole thing and received the mineral rights from the shareholder then – Royal Bafokeng Nation. It was about the shareholder loan that was concluded between Royal Bafokeng Holdings and Royal Bafokeng Nation and therefore that loan had some interest. When we accept it as RBR now – our subsidiary – we took RBR in and we are assessed on the basis of the interest that was written off for tax purposes. We were refunded that interest and there was an assessment to that extent. Now SARS has reviewed that and they are saying no. That was a mistake and they want us to justify why that previous assessment has to stand. We still believe that we’ve got a very good case and the prospects are quite great so we’re not spending sleepless nights on that.

ALEC HOGG: It’s a lot of money.

STEVE PHIRI: We’re not worried about that.

ALEC HOGG: A lot of money in stake.

STEVE PHIRI: That is around R500m and that is the total amount allowed.  The 28% Company Tax there would be around R165m or so.

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