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Platinum star – Laudable actions by one platinum producer address the whole sector’s problems

29/01/2013

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

The Value Perspective has not had many nice things to say about the platinum industry over the last six months but, now there appear to be some positive developments, we are more than happy to flag them up. Starting with Platinum is losing its shine, we have been arguing the imbalance between supply and demand – namely too little demand and stubbornly high supply - was unsustainable.

At long last, some significant players within the sector look to be getting their act together to address this issue. One sign of this was the $817m (£512m) rights issue by Lonmin at the end of last year and while we may have had our doubts about that, we are much keener on the latest development.

As part of a wide-ranging review by Anglo-American, Anglo-Platinum or Amplat, which is 80%-owned by the mining giant, has reached some new conclusions on its future strategy.  It will now focus its attention on its best mines while putting on ‘long-term care and maintenance’ – essentially mothballing – a number of its more unprofitable operations and selling off other non-core projects.

All of this appears to be a highly sensible course of action – as does Amplat’s plan to rationalise its capital investment, which is not only consistent with having fewer mines to worry about but also with reducing costs at its remaining projects.

One potential concern, which we considered in articles such as Emerging risk, is the political fall-out from taking these actions in countries such as South Africa where most of the world’s platinum mines are located. Commentators are already mentioning around 14,000 job losses although there is also talk of various investments Amplat will be making to try and create new jobs in other sectors.

Assuming the political issues can be dealt with, Amplat’s plans should have a significant impact on the amount of platinum the company will be producing, which in turn should feed through to total world platinum production as a whole and should help to address the supply and demand imbalance we have been concerned about.

Anglo-Platinum’s management team deserves a great deal of praise for deciding to take some difficult decisions with a business that is actually one of the more profitable platinum operations in the market. For such a large player to take these sorts of actions is potentially very significant for the broader industry.

Valuation is, naturally, the most important factor when evaluating potential investments, but situations where attractive valuation is combined with management teams willing to take difficult decisions are particularly worthy of attention.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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