China's Jinchuan takes platinum
gamble By Gavin du Venage
One of China's largest mining companies
has dipped its toes into South Africa's platinum
sector, at a time when the industry is in its
worst crisis in years.
China's Gansu-based
Jinchuan Group's acquisition of Wesizwe, a South
African company that is developing one of the
richest platinum deposits in the world, opens the
possibility of further Chinese investment in a
sector that up to now has been dominated by a
handful of South African and Western commodities
companies.
South Africa has about 80% of
the globe's platinum. The commodity is ranked as a
precious metal, along with gold, and
can be used in a variety
of industrial applications - extensively in the
case of the motor industry as the primary element
of catalytic converters that turn toxic car
exhaust fumes into harmless gasses. It also has
the potential to form the basis of fuel cell
power, an experimental technology that some hope
will eventually replace the combustion engine as
the primary mode of vehicle transport.
In
the deal with Wesizwe - the name means "spear" in
a local language - Jinchuan joined up with the
China Africa Development Fund (CADFund) to create
a joint venture to manage the acquisition.
Together they paid US$227 million for a 45% stake
in the company, giving them effective control over
Wesizwe, which is listed on the South African
stock exchange.
They pledged a further
$877 million to fund the development of the
company's primary asset, a greenfield platinum
mine in the northwest of the country.
A
Jinchuan executive and mining engineer, Jianke
Gao, was appointed chief executive and with
several other Chinese nationals joining the board
of directors. The deal suggests that Chinese
mining interests are now zeroing in on the
platinum sector and are taking a long-term view to
build a future in the industry.
However,
platinum miners are currently in a crisis as they
battle to overcome rising costs. Demand has
dropped as car sales in debt-crisis hit Europe
have fallen, where tight environmental regulations
mean all fossil-fuel powered vehicles must have a
platinum-based catalytic converter.
"Most
of us were shaking our heads when this deal was
announced," said Peter Major, a mining analyst at
Cadiz, an asset management firm in Johannesburg
that specializes in Sino-Africa investments.
Not only are the market conditions the
worst they have been since before the commodities
boom began a decade ago, the commitment needed to
bring a new mine to production is substantial,
even in good times. The mine will be nearly a
kilometer underground, a technical feat unlike the
open-pit or shallow-level operations to which
Chinese operators are more accustomed.
"For a brand new group to enter this
field, and sink a shaft that deep is quite
something. They also have to build everything -
the employee village, a processing plant and all
the other elements that go with a mine of this
size," Major said.
The Jinchuan/CADFund
consortium paid a hefty premium for the
acquisition: it offered more than 23% over what
Brazil's Vale mining corporation had wanted to pay
for Wesizwe and even that was considered by many
local analysts to be excessive. When it was first
put on the market five or six years ago, the mine
failed to attract much attention from South
African interests, who dominate platinum
production.
Aquarius, an Australian
commodities producer, recently rocked the industry
when it said it was shutting down two platinum
operations in South Africa, putting thousands of
mine workers out on the street.
Labor
strife has also taken its toll on the industry.
The world's number two producer, Impala Platinum,
has struggled with work stoppages as rival unions
battle it out for dominance at their facilities.
It lost 120,000 ounces in production, or $322
million worth, following a wildcat strike this
year.
"The price of platinum has risen
from around $500 to $1,500 an ounce over the past
10 years," said Major. "But as the value of
platinum has gone up, wage settlements have
marched in lock step with them. The unions are now
faced with single-digit annual increases for the
first time in more than 10 years, and they are not
likely to accept this without a fight."
Coupled with falling demand in the West,
which is still struggling to escape the now
four-year-long global financial crisis, the
platinum industry is likely to see more closures
in the coming year.
Percy Takunda, an
analyst at Imara SP Reid, a brokerage in
Johannesburg, told South Africa's Business Report
newspaper that 70% of mines were operating with
unsustainable cost levels and that more closures
were expected. "Something has to happen to make
the platinum industry sustainable because if
something does not happen there will be severe job
losses," Takunda said.
All of which would
seem to question the logic of Jinchuan's
investment. Major suggested that in buying a
startup mine, the Chinese company is laying the
groundwork for later expansion.
"At the
moment only the Chinese are spending the kind of
money needed to start a new mine," he said.
"Nobody else has the capital to invest in the
industry."
China, the world's largest car
market and producer, and whose May domestic sales
were up 22.6% year on year, is already close to
becoming the largest consumer of platinum.
Although the country does not yet have the
rigorous environmental standards of Europe,
catalytic converters are expected to eventually
become standard in every car to roll off of a
Chinese production line, as the country tightens
up on emissions levels.
Wesizwe's CEO,
Jianke Gao, says in spite of the tough conditions
in the industry, he expects it to recover
eventually. "As with all our mining investments,
Jinchuan invested in the platinum group metals
[PGM] industry with a long term view," he notes.
"When Wesizwe produces its first PGMs we are
confident that the market will have recovered."
Indeed, the turmoil among local producers
could even work in Wesizwe's favor. The
combination of strike-led work stoppages, shaft
closures and reduced production are beginning to
impact on world platinum supplies. Last year, a
million more ounces were produced than was taken
up by industry. As the mining companies scale
back, this is expected to plunge into a deficit
within the next year, particularly as uptake in
China continues.
"For now, platinum demand
has declined, but the indications are that there
will be shortages of supply in the medium to long
term, particularly with the restructuring among
some of the larger producers which we are
currently seeing," says Mr Jianke.
In the
meantime, as Wesizwe constructs its mine, the
question of whether the company will expand beyond
its single-project status arises. Zimbabwe to the
north has substantial platinum resources and its
president, Robert Mugabe, has long pursued an
official policy known as "Look East", which favors
Chinese over traditional Western investors, in
retaliation against sanctions by the latter
against his regime's oppressive domestic policies.
It raises the possibility that as it
develops the specific know-how needed to mine and
process platinum, that Jinchuan will look further
afield for new opportunities. Mugabe has long been
at odds with South Africa's Impala Platinum, the
country's main producer, and would happily see
them escorted off their holdings to be replaced by
a Chinese investor.
For now though, says
Jianke, Wesizwe will focus on getting its existing
project up and running: "We remain focused on
delivering the Bakubung Platinum Mine in South
Africa, and Zimbabwe is therefore not something
that Jinchuan or Wesizwe is considering at this
point."
Gavin du Venage is a
business writer in South Africa, specializing in
commodity and investment analysis.
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