Anglo American Platinum's decision to mothball and/or sell higher cost operations in South Africa highlights the difficult mix of labour-intensive production and sharply rising wage costs in the country's platinum and gold mining industries‚ Fitch Ratings says.
“If the company succeeds with its restructuring plans in the face of government and union opposition‚ we would expect other operators to follow suit‚ the rating agency said.
Fitch recently downgraded South Africa’s Long-term foreign currency Issuer Default Rating (IDR) by one notch to 'BBB' from 'BBB+' and Long-term local currency IDR to 'BBB+' from 'A'.
The Outlooks are Stable. The agency also downgraded the Short-term IDR to 'F3' from 'F2' and the Country Ceiling to 'A-' from 'A'.
It cited as one of the reasons for the downgrade the recent labour unrest in the mining industry which prompted Amplats to take the action it is taking.
"Gold and platinum mining in South Africa is more labour intensive than in many other countries and the four shafts being closed by Anglo American fall into this category; in part because of the depth at which mining takes place.
"We estimate that labour costs for South African gold and platinum miners account for around 40 percent of the total‚ compared to around 20 percent for coal and iron ore mines. Big wage hikes‚ such as the 22 percent increase agreed between Lonmin and striking workers last year‚ are therefore harder for companies to absorb.
"This mix has been a growing problem for years‚ but we believe cost inflation is likely to have a marked impact on mining companies' results in 2013 due to stagnant commodity prices. In previous periods of high cost inflation‚ the impact on results was masked by rising prices‚" Fitch noted.
For Anglo American‚ it added‚ the shutdown of four shafts at its subsidiary's Rustenburg operations and the sale of the Union mines would cut platinum production by around 20 percent.
"The plans are likely to be neutral to positive for Anglo American's credit profile‚ given the weaker profitability of the operations being closed.
"However‚ we expect the group to face significant political pressure to reverse or water down its plans as well as the potential for ongoing strike action and disruption at other facilities throughout the process‚ which could harm production in the near term.
"While Anglo American has stopped short of announcing the permanent closure of the four Rustenburg shafts‚ we believe it is highly unlikely that they will be reopened in the foreseeable future‚ because of the company's desire to focus on lower-cost‚ long-term projects.
"Smaller miners that decide to shutter unprofitable mines might be more willing to reopen them if gold or platinum prices rose enough to make the operations profitable again‚" Fitch concluded.