Coronation pulls out of platinum sector, warns of value destruction

South Africa’s fourth largest asset manager, Coronation, no longer has any direct exposure to platinum mining companies as the sector faces significant headwinds and is feeling the effects of historically poor capital allocation. 

This was revealed by the head of South African equity research at Coronation, Nicholas Hops, in an insight on the investment firm’s website explaining why the asset manager holds no shares in platinum group metals (PGMs) miners. 

Hops said that Coronation has been underweight the sector since December 2020 and has held zero direct positions in platinum miners since March this year. 

He said that despite JSE-listed platinum miners’ share prices falling on average 70% off their recent highs, “they do not represent compelling value for our client portfolios”.

“While there is the potential for short-term sector rallies, we believe that in its current form, the sector represents a value trap for investors.”

A key element driving Coronation’s decision to disinvest was the poor capital allocation decisions made by platinum miners over the past few years. 

Coronation hoped the windfall from high platinum prices would be returned to shareholders, but only 53% of the cash generated by miners in the past five years was returned. 

Instead, some miners “destroyed tens of billions of rand’s worth of shareholder money in pursuit of ill-fated acquisitions, much of which has since been impaired”.

“The sector faces cash losses and the need to fund committed projects. Given our view on the long-term outlook for PGM markets, we believe that the companies should be decommissioning producing mines and shuttering projects,” Hops said.

“This is, however, incredibly hard to do in South Africa, given how labour-intensive these assets are and how many lives would be impacted as a result.”

With delays in shutting unprofitable mines likely, the market will be provided with more platinum that it does not need. 

“Management teams have very tough decisions to make going forward, which increases the risk of further capital allocation missteps as some attempt to diversify away from their core markets.”

Employment implications 

Stats SA data shows that out of every 100 workers in the mining industry, 39 are employed in the PGM sector, 21 in the coal sector and 20 in the gold sector.

Mining houses like Sibanye-Stillwater, South Africa’s largest mining employer, have begun closing unprofitable shafts, slashing thousands of jobs.

Yesterday, Sibanye announced that it would enter into Section 189 consultations to retrench over 4,000 workers amid the company’s restructuring.

CEO Neal Froneman said job cuts in platinum mining are unavoidable as prices continue to fall, requiring “significant restructuring” of the sector.

“We certainly can’t run unprofitable shafts, and our cost structure is probably the lowest in the industry. So if we have loss-making shafts, of which we have a few, they will have to be closed, and I say this with all the sensitivities on potential job losses,” said Froneman.

The miner said that above-inflation increases in key cost components such as electricity, water, wages, and fuel, combined with the recent decline in PGM prices, have significantly impacted the global PGM industry’s profitability, including Sibanye-Stillwater’s South African operations.

Certain operating shafts are now loss-making and pose a risk to the sustainability of the remaining operations.

Therefore, the company will enter into discussions with organised labour and other affected non-unionised employees through their representatives regarding the possible restructuring of four shafts at its Southern Africa PGM operations.