Aquarius battens down hatches

There's an old joke about an Irishman being asked for directions, and he replies: 'Well, I wouldn't start from here.' You get the impression from Aquarius Platinum that, given its time over again, it would not choose to conduct its business in South Africa.

In the last year the group has had to mothball two of its currently uneconomic mines, got the hump with its mining contractors, had an armed attack on one of its shafts by disgruntled former employees of a mining contractor, had a sharp rise in so-called "section 54" safety stoppages, put up with poor industrial relations as a result of inter-union rivalry, seen US dollar platinum group metals (PGM) prices slump while production costs have risen.

Weighted average on-mine unit cash costs in South Africa increased by 39% in Rand terms in the year to June from the year before. Profitability at mine level (on-mine earnings before interest, tax, depreciation and amortisation, or EBITDA) was $29m compared to $206m the year before. Decreasing metal prices caused a negative $31m sales adjustment to be incurred.

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Group revenue tumbled 29% to $486m from $683m the prior year, partly because of a 14% fall in production but also became PGM prices were down 17% in dollar terms and down 9% in Rand terms. Measured on a PGM ounce basis, group revenue decreased by 17% to $1,158 per PGM ounce from $1,395 per PGM ounce in the preceding year.

Total cash cost of production was $531m, up 22% per PGM ounce in dollar terms (and 34% in Rand terms) as a result of the aforementioned trouble and strife in the whole South African mining process.

There was a bit of good news relating to the mothballed mines at Marikana and Everest. Aquarius has opted against taking a charge related to the carrying value of these assets.

There is no doubt that the group is in "hunker down" mode, however, until things get better.

The group's view is that PGM prices have been hit by the grim economic environment in Europe and "the abiding and much-publicised surplus across the entire suite of metals."

Although underlying demand for metals remains on an upward path, the short-term outlook for platinum is not so bright. The metal is used extensively in the manufacturer of cars - catalytic converters and the like - and the onset of recession has led to subdued demand for new cars.

"On the supply side, the industry is producing slightly less, but none of the major producers have indicated a willingness to cut production in any meaningful way," Aquarius gripes, though with some justification as it has put two of its mines into care and maintenance mode.

"The result is a continuing surplus that will take some time to work through, as emissions standards are implemented for heavy duty trucks and other diesel applications in Europe and the US, and auto emissions regulations are rolled out in developing world nations," Aquarius predicts.

On the bright side, demand for platinum jewellery in China has remained robust, helped by the relative cheapness of platinum in comparison to gold. China may have a massive population, but even a booming middle class in the People's Republic is not going to buy enough jewellery to reverse Aquarius's fortunes.

The group is doing what it can to cut costs and improve operations, moving to a tested hybrid hanging wall support methodology to retain complete mine safety while enhancing profitability, and switching to an owner operator model and ending its contractor arrangement with mining services provider, Murray & Roberts Cementation. Nevertheless, the group remains dependent on the global economy pulling out of its slump, and that may take some time.