By Stuart Murray
Non-Executive Chairman and Director, Sylvania Platinum Limited

This is a transcription of the speech which Stuart Murray delivered at the LBMA Conference in Lima on 11 November, 2014.

Mogalakwena platinum mine in South Africa

I’m going to give you a flavour of the situation that the gold and platinum miners face in South Africa. It might be a little bit depressing. I’d argue that we have a crisis of leadership both in the country, in labour and in the corporates themselves, which is reflected in the title of my presentation – The Good, The Bad and The Ugly – and I’ve categorised the issues around the title.

It’s also a presentation within a presentation. I’ll add some references to gold since we are a precious metals conference and, on top of that, inserted in here is a little bit of a PGM presentation towards the end.

South Africa is probably the world’s greatest treasure chest of minerals; however, it does appear that wealth in the ground does not equal wealth in the nation. I think the gold industry is an example of an industry that has taken a beating over the last 20 years, with South African output sliding from being the premier producer in the world to sixth position now, having lost its crown around 2005/2006. That said, you know, if these resources were husbanded better, with better law, confidence and investment, maybe South Africa could get its premium rating back in the mineral sector.

I get a sense with our government over the last five or 10 years meddling with the law that they see the industry as a never-ending font of money, which is no longer the case. And as an industry that is down just now, it continues to be kicked, and I hope not kicked to death by the politicians. South Africa is a good place to mine. It’s a world leader in many mining technologies, and it’s a world leader in depth, with apologies to Dr Spock, for South African gold miners have gone places where no one else on the planet has ever gone, and depth is not necessarily a working cost issue – it’s a CAPEX issue. And you know all credit to the likes of Goldfields for continuing to invest in the new deep level mine at South Deep – it clearly believes that you can have world-class mining operations, albeit at great depth.

I think that South African corporates seem to be eyeing opportunities offshore. This is more so than perhaps eyeing the opportunities onshore in the name of diversification, risk, etc. I think there’s a responsibility on the part of South African corporates to re-examine and look for the opportunities within South Africa rather than abroad.

Those of you who’ve been to South Africa know that it’s a great place to mine, or it should be. I mean, there’s no such thing as remoteness. The infrastructure is pretty exceptional – you can land in Johannesburg and you can be in the world’s greatest platinum belt in an hour and a half by car – that’s not remote by any stretch of the imagination.

However, there are problems and here is a photo of my three amigos. We have the boss of the National Union of Mineworkers, the oldest liberation union in mining, and I would argue, now a shop-soiled trade union that’s been in a very cosy relationship with the governing party for some 20 odd years, and which I think has basically lost its way and its moral compass. Into that vacuum, we have Joseph Mathunjwa, the President of the Association of Mine Workers and Construction Union. This man is a radical, he’s self-interested, and he split away from the NUM several years ago. The trade union movement in South Africa is a licence to print money. You clip between 1% and 2% of every worker’s pay cheque every month and so the battle for membership often becomes brutal, violent and intimidatory, and this man is a master at it.

Aided and abetted by our friend, Julius Malema, a rebel rouser, opportunistic ex-ANC politician who’s gone on to establish his own party. Those of you who were in Montreal will remember that this is the man who three years ago said that the mining industry must share some of this ‘delicious cake’ with him. I don’t know quite how he meant to share, but I assume it was for his back pocket.

In three years, he’s gone on to be expelled from the ANC, and get tied up in the AMCU and the platinum strikes and whatever earlier this year. But was sworn in as a Member of Parliament in our new parliament in February this year, and he dressed himself in an unusual fashion to make a point. Right now, he is under a disciplinary inquiry and suspended from parliament for failing to comply with amongst other things, the dress code!

I think there are a number of real issues in South Africa, not only the costs, but people are well aware of what’s happened with cost pressures in South Africa. I’d argue again, costs – and there are a lot of ‘administered’ costs but the rampant labour cost runaway that we’ve seen of the last 20 years has in part something to do with the management being unable to reign in the trade unions. The result has, as everyone knows, seen the decline of the gold industry. I believe if we don’t take urgent action in South Africa, the platinum industry will continue to decline in much the same way as the gold industry has.

Productivity is a key problem in South Africa. When I joined the industry, the working week was 11 days in every fortnight and there were very few public holidays. The shift cycle meant that companies having invested all these billions could actually operate their mines for an excess of 300 to 310 days, maybe as much as 320 days a year. Due to negotiation between management and unions, and government regulations being imposed on the industry, we have a very fine sort of European-style low-hour working week and, as a result, the number of productive shifts has now fallen to the order of 230 days a year. That is a significant de-rating of the South African industry for the same amount of capital input, and I believe it has to be reversed in one way or the other.

Costs are up. Electricity, which people are well aware has been a problem in South Africa. You’re looking at the fact that Eskom has, I believe, grossly mismanaged the power situation. We are looking at the return of load- shedding power cuts, shortages of power for new businesses to open in South Africa, but above all, you’re looking at the fact that the power price has gone from 2 to 8 US cents in under a decade; and this has been particularly hard on power-intensive industries such as gold and platinum mining. The Department of Minerals and Energy as it used to be called, now it’s the Department of Mineral Regulation, has tampered with the law, introducing lots of complexity and bureaucracy. The impact of this has been that many foreign miners and foreign investors in the country have seen the difficulties of trying to permit and license and prospect in South Africa, and in many cases have actually gone elsewhere. It is complicated by the Black Economic Empowerment Legislation that you have to consider for a major new mine; you’ll probably have to ‘free carry’ your Black Economic Empowerment Partner for 26% of the entire cost of your project. That just raises the hurdles for investment.

I’ll give you examples that have just happened in the Press in the last two weeks. Ivanplats, a Canadian outfit wanting to invest somewhere upwards of $2 billion in the platinum industry, finally out of frustration at not getting its mining licence, announced on 22 October that it’s putting its project on hold and sacking 325 people. That’s what it came to in order to get the government to actually grant it the mining permit that was months overdue. And low and behold, on 5 November, the said permit was granted!

“The amendments to the Mineral and Petroleum Development Resources Act have been stalled three times this year due to inter-party/inter- government wrangling.”

Aquarius Platinum had been trying to sell a mothballed mine to a Chinese group for about 18 months, but after nine extensions to the conditions precedent to the transaction, it gave up and the deal was cancelled, and it (AQP) publicly blamed the government for it.

When we start talking about the operating environment, the issue of corruption crops up. South Africa is probably not different to many other developing countries when it comes to battling the scourge of corruption. However, it doesn’t help itself; it writes bad law. The amendments to the Mineral and Petroleum Development Resources Act have been stalled three times this year due to inter-party/inter- government wrangling. This law will result in even more discretion for the Minister and his or her officials. It will give the government the ability to deem certain commodities strategic, and therefore companies will have to sell them at under the market price, again at the discretion of the Minister. This is bad law – it feeds corruption. The bureaucracy I talked about earlier – inevitably I believe, feeds corruption because the temptation to expedite your project, your permits or whatever, it has to be there, the temptation of the brown envelope – and anecdotally, it does occur in South Africa. I think, of course, in looking at all this, people talk about the ‘fish rots from the head’, and our President was apparently oblivious to the fact that taxpayers had spent some 246 million Rand on security upgrades for his house in the village of Nkandla. It’s mind-boggling to believe that somebody could be this insensitive.

As you are well aware, we have some very serious problems with labour. Communities are becoming antagonistic towards mining largely because of unfulfilled promises or unfulfilled expectations that were created by the ruling party and not followed through. I think there’s a belief that mining is a never-ending golden goose that can lay the eggs, and carry on laying the eggs, but the reality is big investment goes in before returns come out, and this is something that is hard to explain to a financially illiterate mass of people.

Coupled with that, you’ve still got issues like the festering sore of the Marikana horror. Our Deputy President describes Marikana as a collective responsibility; as a nation we should dip our heads in shame and accept that we’ve all failed. Hang on; this guy represented the Black Empowerment Group that owns 18% of the company at which this horror happened! With the sort of double standards and hypocrisy that goes on, the decks have to be cleared. We have a new Minister of Mines. He’s described by a prominent University of Cape Town law professor as a “...clumsy politician to the right of the ANC, a nationalist and outspoken critic of the constitution. This will result in a difficult time for the mines and international investment and confidence in the country.” Surely, we can get better leadership in the state and the state can, with its relationship with the trade unions, exercise and put some pressure on to help achieve this.

We are also dealing with the fact that a five- month platinum strike this year, where the workforce were promised pay increases upwards of a 100% – they ended up getting 12%! They lost five months of pay. People died, there were lots of injuries, intimidation occurred; mining is hard, it’s dirty, it’s dangerous in some cases, but does that mean that a mine worker has to be paid twice what a nurse, a teacher or a police constable earns in South Africa? And it’s this kind of thuggery that has somehow to be brought to an end.

Again, the whole perception of who actually creams the money from the platinum industry. There is a reality that shareholders have actually had very little share of the pie in the last five or six years. I would argue, yes, we do have a crisis of leadership and that probably sums up where the mining industry is at the present juncture. I’ve described how the gold industry is in decline. It shouldn’t be, but it is. It’s lost as in ‘gold is lost’ and the ‘three PGM bears’, Platinum, Palladium and Rhodium – with apologies to the author of the fairy tale. We dig, dig, dig, but it’s certainly not for profit. We have a situation; let’s take yesterday. Lonmin, the world’s third-largest producer of primary PGMs, announces a $326 million loss for this year. It’s going to spend $350 million of CAPEX to ramp up production in the face of over-supply and, as a London analyst said yesterday, Lonmin has only generated sufficient cash flow in two out of the last seven years in order to fund its capital needs. So, it’s clearly not a company that’s focused on profit and certainly not looking after its shareholders’ interests.

The platinum market, I think we all know is in a mess. It is over-supplied, it doesn’t matter whose research you look at in terms of fundamental market research; however, the equity analysts continue to persist with the belief that there are a million and two million ounce deficits out there. However, there was a youngster up here on this stage a year ago called Walter De Wet from Standard Bank, who did a very good, albeit rather dry presentation, and who took the view that the world had three years of platinum above ground for industrial consumption purposes. That might be a bit extreme, so I plagiarised Will Tankard’s work here, and if I add up his bars, there’s certainly a year, maybe a bit more of platinum above the ground. So where are these deficits that the equity analysts talk about? They’re clearly not there. The equity analysts put ETF in as demand– it’s not demand, it is stock! And all that’s really happened in the platinum industry in five years is the stock has moved from the miners who used to hoard it in bad times and release it in good times, and they’ve dumped it into the financial space mainly with the ETFs and other investments.

As a result, platinum has been commoditised; the big miners are in a race to get to the bottom of the cost curve, to achieve lower unit costs; however, in the process, they gave up husbanding the revenue line, they gave up looking after the market. The end result has been an industry that well, I’ve got some figures there, it’s lost several billions of Rands in the last two years, has raised $2.8 billion in new equity since 2008 and paid $400 million of dividends. The combined market capitalisation, including the juniors, is down by over 500 billion Rand since June 2008. Tell me that the managements of these companies are husbanding shareholders’ wealth – well, that’s a myth, a complete myth!

Where does the industry go from here? We hear about selling assets, well, Aquarius failed to sell to the Chinese, Eastplats announced on 8 November that it’s going to sell the Crocodile River Mine, a mine that’s had more owners and sucked in more investment than you can shake a stick at, and it’s now going to sell it to a Chinese consortium for over $200 million.

The market does not need more metal; it needs less metal and it needs to reduce investment and cut costs. Lonmin said yesterday, “… we’re going to take two billion Rand out of the costs”. Hang on boys, labour accounts for 50% to 60% of your costs, and you’re ramping up production – you can’t cut labour, so how on earth do you take two billion Rand out of your power, chemicals, consumables and machinery. The maths just don’t add up; start facing the truth boys!

Shut shafts or shut mines? One player, Aquarius, shut mines in my time that were too small to actually have any impact on the market. We need the high marginal cost output of this industry cut, and the gap between the two has got to close, I believe, in order to get fundamental supply and demand back.

So where are we at? I think the theme of this bit of the conference was ‘when in a hole, keep digging’, and I’m afraid that is the dilemma facing the South African producers– when in a hole just keep on digging and neglect your shareholders!

With that thanks very much.

Stuart Murray, Chairman, Sylvania Platinum Limited.

Stuart Murray has over 25 years of executive experience in the Southern African platinum sector, commencing his career at Impala Platinum’s Refineries in 1984. He held a number of positions at Impala Platinum, Rhodium Reefs Ltd, Barplats Mines, and Middelburg Steel and Alloys, before joining Aquarius Platinum Limited in 2001 as Chief Executive Officer, holding that position until 2012. He is currently Chairman of Sylvania Platinum Limited, the South African pgms from chromite tailings processor and a Non-Executive Director of Talvivaara Mining Company Plc, the new technology Finnish nickel miner. He was educated in Scotland and gained a Bachelor of Science (Engineering) degree in Chemical Engineering from Imperial College, University of London in 1984.