Commentary

Introduction

The Implats Group has delivered a strong safety and operational performance for the half-year ended 31 December 2018. Good progress was made on implementing key outcomes of the Impala Rustenburg strategic review. The performance, together with a higher PGM rand basket price, which was boosted by significant increases in palladium, rhodium and nickel, and further aided by a weaker US$ exchange rate, resulted in a significantly improved Group financial performance.

This was characterised by positive cash flow contributions from all Group operations, yielding a headline profit of R2.23 billion compared to losses of some R150 million in the previous comparable period. Consequently, Group cash balances increased significantly to R6.36 billion, reducing net debt (before leases) from R5.33 billion at the start of the reporting period to R976 million by financial half-year-end.

Regrettably, Implats mourns the loss of an employee through a work-related incident during the period under review. The board and management are encouraged, however, by the significant improvement in safety performance achieved in the reporting period, with improvements in lost time injuries and a record low fatal injury frequency rate (FIFR) for the Group.

Tonnes milled from managed operations (Impala Rustenburg, Zimplats and Marula) increased 2.9% to 10.24 million tonnes. Together with contributions from our joint ventures (JVs) at Mimosa and Two Rivers, this sustained mine-to-market platinum production in concentrate at 678 000 ounces (H1 FY2018: 678 000 ounces). Gross platinum in concentrate reduced by 10.7% to 775 000 ounces, largely due to a large once-off toll-refining contract concluded in the prior comparable period. Gross refined platinum production for the six months improved by 10.1% to 799 800 ounces (H1 FY2018: 726 700 ounces) as processing availability increased following scheduled maintenance, which resulted in the build in inventory in the previous comparable period.

Sales volumes for platinum and palladium increased by 19.2% and 31.3% respectively, as sales in the comparable period were impacted by both scheduled furnace maintenance and the required return of metal to the tolling customer. Improved sales volumes, together with higher received rand basket pricing saw revenue improve by R6.24 billion to R23.52 billion (H1 FY2018: R17.28 billion). Despite a 21% increase in cost of sales to R20.29 billion for the period (H1 FY2018: R16.72 billion), this was in line with increased production and sales volumes and the impact of stronger pricing on the cost of metals purchased in concentrate at IRS. As a result, gross profit improved by R2.68 billion to R3.23 billion and headline earnings per share rose to 310 cents versus the 21 cent loss in the comparable six months.

Group safety review

The safety and health of our employees remains our most critical priority.

Regrettably, one employee at Impala Rustenburg 16 Shaft suffered fatal injuries in September 2018. The Implats board and management team express their sincere condolences to Mr Semoko Mokhethi’s families and friends, and will continue to provide support to the Mokhethi family.

Notwithstanding this tragic incident, the Group has effected a step change in safety performance, which was maintained during the reporting period. Fatal injuries reduced from six in the prior comparable six-month period, to one in the period under review. The recent incident followed a seven-month continuous fatality-free work period, which was an all-time record for the Group. The improvement also resulted in the organisation recording the lowest fatal injury frequency rate (FIFR) of our peer group for the 2018 calendar year.

Many individual business units across the Group continue to deliver exceptional safety performances, setting a number of new records. Currently, 11 of 15 Group operations have achieved ‘millionaire’ or ‘multi-millionaire’ status in terms of fatality-free shifts (units which have operated more than a million shifts without a fatality). The FIFR of 0.019 per million man hours worked is an all-time low for the Group, and the lost-time injury frequency rate (LTIFR) has also improved 14.8% over the six months to 5.12 per million man hours worked.

We believe collaboration with our key stakeholders will continue to drive further improvements in safety through awareness, education, and by implementing appropriate systems and best practice.

Group operational review

The Group achieved encouraging period-on-period operational improvements in key areas over the past six months.

Tonnes milled from managed operations (Impala Rustenburg, Zimplats and Marula) increased 2.9% to 10.24 million tonnes (H1 FY2018: 9.94 million tonnes), which together with contributions from our JVs at Mimosa and Two Rivers sustained mine-to-market platinum production in concentrate at 678 000 ounces. Notwithstanding, gross platinum in concentrate production reduced by 10.7% to 775 000 ounces, principally as a result of a 49.1% reduction in third-party receipts, in line with market guidance, and as a result of a large once-off toll-refining contract concluded in the prior comparable period.

Gross refined platinum production for the six months improved by 10.1% to 799 800 ounces, compared to 726 700 last year assisted by the drawdown of some processing inventory during the period, compared to a build-up following scheduled furnace maintenance in the comparable period a year ago. Group operating costs were well controlled during the reporting period with unit costs per tonne milled to concentrate flat at R1 049 per tonne, and unit costs per platinum ounce refined, on a stockadjusted basis, reducing by 0.7% to R22 715 per ounce. Unit cost per platinum ounce refined, discounting the change in processing inventories, benefited from the increased refined metal production, and retraced by 23.4% to R21 298 per ounce (H1 FY2018: R27 818 per ounce), as the previous comparable period was impacted by a pipeline stock build-up.

Capital expenditure at our managed operations reduced from R1.90 billion in the previous comparable period to R1.71 billion, in line with market guidance.

Managed operations

Impala

A vastly improved safety performance at the Impala Rustenburg operations facilitated a stable and productive operating period. Tonnes milled increased by 5.3% to 5.97 million tonnes (H1 FY2018: 5.67 million tonnes), with higher production from eight of the shafts, including the development shafts. These improvements more than offset the loss of production from 4 Shaft, which closed in January 2018, lower volumes from 1 Shaft (where a planned ramp-down in production is underway) and 11 Shaft (where poor geology impacted volumes in the period).

The PGE mill head grade deteriorated by 1.5% to 3.98g/t (6E) (H1 FY2018: 4.05g/t), and was impacted by lower grade in the areas mined, but platinum production in concentrate increased by 2.9% to 358 000 ounces (H1 FY2018: 348 000 ounces) as a result of the higher milled throughput. Refined platinum production increased by a significant 49.0% to 405 000 ounces (H1 FY2018: 272 000 ounces), bolstered by a release of pipeline stock during the reporting period, and as a result of a stock build-up, which impacted refined metal volumes in the prior period.

The improved production, coupled with strict cost containment, resulted in the stock-adjusted cost per ounce remaining flat at R23 519 per platinum ounce refined (H1 FY2018: R23 354). Capital expenditure decreased by 29.5% to R1.02 billion (H1 FY2018: R1.44 billion), of which R207 million was spent on the two major replacement shafts, 16 and 20 Shafts. An improved rand basket price further boosted financial performance, leading to a significant improvement in profitability compared to the previous period, with free cash flow further augmented by a R1.06 billion forward sale of excess inventory.

Execution of the Impala Rustenburg strategic review

The Group continued to make strides towards eliminating loss-making production, which culminated in the decision to restructure Impala Rustenburg.

The implementation of the Impala Rustenburg plan is being phased in over two years to ensure the transition occurs in a socially responsible way. The key outcomes of the restructuring, which is expected to be concluded by the end of the 2021 financial year, include: a reduced mining ‘footprint’ from 11 to six operating shafts as operations cease at end-of-life and uneconomical shafts; production reducing from 750 000 platinum ounces to 520 000 platinum ounces a year; and a total labour complement (employees and contractors) of 27 000 from 2021.

This plan is expected to deliver a safer and more profitable Impala Rustenburg centred on assets accessing a higher quality, long-life orebody with lower operating costs and capital intensity.

The implementation of the restructuring is governed by the overriding imperative to ensure forced job losses are minimised through various avoidance measures. These include the transfer of employees to vacant positions at the 16 and 20 growth Shafts, natural attrition, reskilling, voluntary separation, business improvement initiatives and exploring commercial options to exit shafts that do not fit the long-term portfolio.

By the end of January 2019, the own employee headcount at Impala Rustenburg decreased by approximately 1 500 people – with forced retrenchments affecting only 110 employees. A disposal and outsourcing process has been initiated on 1 Shaft through solicitation of expressions of interest and is expected to conclude in June 2019.

A multitude of stakeholder engagements were undertaken during the reporting period, all of which were constructive. We continue to engage with the union, government and community leadership to safeguard employment opportunities as far as possible through the restructuring process.

Impala Refining Services (IRS)

IRS once again contributed significantly to the Group’s bottom line, despite higher concentrate receipts in the previous comparable period. Platinum receipts from mine-to-market operations (Zimplats, Marula, Two Rivers and Mimosa) remained essentially flat at 313 900 ounces (H1 FY2018: 318 300 ounces), while third-party receipts decreased 49.1% to 96 800 ounces, due to the once-off toll treatment of third-party material in the previous interim period.

Refined platinum production was 13.2% lower at 395 000 ounces (H1 FY2018: 455 000 ounces).

Zimplats

Zimplats sustained its operational performance for the period under review and achieved a safety milestone of 9.75 million fatality-free shifts, working for over five and a half years without a fatal incident.

Tonnes milled of 3.31 million tonnes was consistent with the prior period, (H1 FY2018: 3.33 million tonnes), with all mining units delivering to plan. Notwithstanding a marginally lower PGE head grade of 3.48g/t (H1 FY2018: 3.49g/t), platinum in matte production was sustained at 135 400 ounces (H1 FY2018: 136 200 ounces).

Unit costs decreased by 3.2% in dollar terms to US$1 293 per platinum ounce in matte (H1 FY2018: US$1 336 per platinum ounce in matte), on strong cost controls and sustained volumes.

Capital expenditure increased 43.8% to US$46 million, mainly to fund the redevelopment of the Bimha Mine, which has returned to full production, and additional spend on the development of Mupani Mine (the replacement for Ngwarati and Rukodzi mines), which remains ahead of schedule.

The current political and economic challenges in the country are being monitored closely with the intention of minimising any impact on the operations, employees, and their ability to operate at a sustained profit margin.

Implats supports and shares Zimbabwe’s aspirations to grow and diversify its PGM industry and continues to actively engage with the government of Zimbabwe regarding its plans.

Marula

Marula continues to deliver an improved operational performance after business restructuring and ongoing efforts to sustain operational continuity.

Tonnes milled increased by 1.5% to 955 000 tonnes (H1 FY2018: 941 000 tonnes), while the PGE head grade improved marginally to 4.37g/t (H1 FY2018: 4.36 g/t). Consequently, platinum in concentrate production improved to 44 900 ounces (H1 FY2018: 43 200 ounces).

Unit costs increased below inflation to R25 657 per platinum ounce in concentrate (H1 FY2018: R24 954 per platinum ounce), while capital expenditure was well below budget at some R33 million (H1 FY2018: R29 million) with spend expected to accelerate in the second half of FY2019 on the planned tailings storage expansion.

The benefit of a stable and improved operational performance, good cost controls and an improved basket price allowed Marula to deliver a strong cash contribution to the Group during the reporting period.

Non-managed operations

Mimosa

Mimosa sustained a strong production performance in line with its design capacity.

Tonnes milled were maintained at 1.41 million tonnes. The PGE head grade declined marginally to 3.83g/t (H1 FY2018: 3.85 g/t) due to planned mining in lower-grade areas, which resulted in platinum in concentrate dipping slightly to 61 700 ounces (H1 FY2018: 63 000 ounces).

Inflationary pressures and slightly lower production volumes saw unit costs rise 7.0% to US$ 1 582 per platinum ounce in concentrate (H1 FY2018: US$ 1 479). Capital expenditure increased 25.0% to US$25 million to fund scheduled fleet replacement and development into the Mtshingwe block to sustain mining flexibility.

Mimosa continues to consult with the government of Zimbabwe on a range of important investment and regulatory considerations and remains confident that mutually beneficial outcomes can be secured.

Two Rivers

Two Rivers’ mill grade continued to be impacted by mining low-grade split-reef areas. However, production and mill grade was also impacted during the review period by community disruptions. This necessitated a draw-down of ore stockpiles to ensure continued plant operations and resulted in slower milling rates and lower-grade feed.

Tonnes milled during the first half decreased 2.7% to 1.67 million tonnes (H1 FY2018: 1.71 million tonnes). The treatment of lower-grade stockpiled material as a result of community disruptions and mining in split-reef areas resulted in a 4.6% drop in the PGE head grade to 3.53g/t (H1 FY2018: 3.70 g/t). Consequently, platinum in concentrate production declined 9.4% to 75 600 ounces (H1 FY2018: 83 400 ounces).

Lower volumes impacted unit costs, which increased 12.0% to R16 455 per platinum ounce in concentrate (H1 FY2018: R14 688).

Due to limited flexibility, lower-grade mining is expected to persist for the next two to three years, with an alternative mining cut being trialled in the worst affected area to maintain platinum production, while development into higher grade future mining areas continues.

Key projects

Due to their important future contribution to sustain profitability at Impala Rustenburg, progress on the 16 and 20 Shaft replacement projects remains critical. During the strategic review, the capital programmes for these shafts were revised and optimised. This has resulted in the earlier forecast completion dates and a reduction in estimated cost to complete 20 Shaft.

16 Shaft

During the period under review, the impact of a fatality in August 2018 saw the 16 Shaft project fall marginally behind the revised capital plan due to slower than planned progress on the C ore pass rehabilitation programme, which remains critically important to reach full production. Notwithstanding, mining flexibility has improved, production levels have been restored and raise lines were holed on target. This provides reasonable assurance that enough panels will be established to accommodate the planned increase in production crews scheduled over the rest of the financial year.

20 Shaft

The 20 Shaft ramp-up is still being hampered by geological complexities. No further teams will be mobilised to 20 Shaft during the remainder of the year, while recently improved development is converted into mineable face length. Additional technical and management resources have been mobilised to the shaft to oversee the planned ore ramp up programme.

Progress on the capital build programme is better than planned as the completion of the monorail, electrical/instrumentation installation and settler are well ahead of schedule. The full capital infrastructure installation is expected to be completed during the second half of the financial year. Rehabilitation of some of the level ore passes require imminent attention, but are not included in the current capital plan.

Mupani Mine

The development of Mupani Mine (the replacement for Ngwarati and Rukodzi mines) is running well, targeting ore contact three months ahead of schedule by August 2019, and full production in August 2025. A total of US$51 million had been spent as at 31 December 2018 against planned expenditure of US$53 million and a total project budget of US$264 million. The project was 22% complete at the end of the reporting period.

Waterberg project

As reported previously, Implats purchased a 15% participation in the Waterberg project for US$30 million and is now actively participating with the other JV partners in a definitive feasibility study (DFS). All geological information from the exploration phase is now available in a resource model and the team is completing the mine design and scheduling.

The JV has applied for a mining right while power and water resources are being secured. All the work done on the study to date has confirmed our confidence in the project and supported the rationale for the investment. The DFS study will be SAMREC and NI43-101 compliant and is expected to be complete before calendar year-end, after which Implats has the option to increase the 15% stake to 50.01%, alternatively maintain or sell the current 15% interest, or enter into a concentrate offtake agreement only.

Mineral Resources and Mineral Reserves

There has been no material change to the technical assumptions, assessment criteria, and information relating to the Group’s Mineral Resource and Mineral Reserve estimates, as disclosed in the integrated report for the financial year ended 30 June 2018. The revised Implats Mineral Resource and Mineral Reserve statement, as at 30 June 2019, will provide the detailed updated estimates.

Financial review

Revenue at R23.52 billion was R6.24 billion or 36.1% higher than the comparative six months as a result of:

  • Sales volumes resulted in an increase of 17.5% or R3.02 billion as a result of the release of material locked-up during the comparable period due to the scheduled No 5 furnace rebuild
  • Overall, the improvement in dollar metal prices increased revenue by 11.5% or R2.00 billion. The increase in dollar metal prices was due to higher rhodium, palladium, ruthenium, nickel and iridium prices, partially offset by a lower platinum price. Dollar revenue per platinum ounce sold was 9.8% higher at US$2 124 (H1 FY2018: US$1 935)
  • The average exchange rate achieved of R14.18 was 5.7% weaker than the R13.42 achieved for the comparable period increasing revenue by R1.23 billion

The resultant rand revenue per platinum ounce increased by 16.0% to R30 118 from R25 968.

Cost of sales at R20.29 billion increased by R3.57 billion from the comparable six months. The main contributors to this increase were:

  • A R2.70 billion lower credit to cost of sales arising from the movement in inventory in the comparative period, costs of R2.90 billion were deferred into inventory on the balance sheet as a result of the significant stock build-up following the scheduled rebuild of the No 5 furnace at Impala Rustenburg. In the current period, the increase in inventory only resulted in a R202 million credit to cost of sales
  • An increase of R503 million in the cost of IRS metal purchases due primarily to higher rand metal prices

As a result of the above, the Group generated gross profit for the period of R3.23 billion compared to R556 million gross profit in the previous period. The gross profit for the comparable period was restated and reduced by R 177 million following the change in classification of certain items to cost of sales. This change in classification has been discussed in note 16 in the interim financial statements.

The R3.35 billion profit before tax was an improvement from the comparable period’s pre-tax profit of R193 million, due primarily to the increase in gross profit of R2.70 billion, an increase in other income of R519 million, a decrease in other expenses of R417 million, all of which were partially offset by an increase in foreign exchange losses of R414 million.

Other income increased due to the refund of customs’ duties penalties to Zimplats of R136 million, receipt of export incentives by Zimplats which were R342 million higher in the current period, and proceeds of R150 million in respect of the interim payments on the insurance claim on the No 5 furnace in Rustenburg. Other expenses decreased mainly due to a reallocation of fair-value adjustments on purchased metal which had been hedged and included in cost of sales in the current period, and which were reflected as a loss of R296 million in other expenses in the comparable period.

The R414 million increase in foreign exchange losses, was due mainly to the impact of the weaker rand on the conversion of the US$ bond and the revaluation of certain foreign currency balances.

The increased tax charge of R895 million (H1 FY2018: R357 million) was largely due to the improved profitability of the operations, partially offset by lower tax charges from Zimplats following the conversion from a Special Mining Lease (SML) to two Mining Leases (ML). Despite the higher statutory tax rate, the additional profits tax associated with the SML is no longer payable under the ML.

Basic earnings were up to R2.31 billion from a loss of R163 million in the comparable period. The major adjustments in headline earnings for the year compared to the previous six months was an after-tax profit on the sale of property plant and equipment of R35 million and the after-tax impact of R43 million relating to the asset damage portion of the insurance claim on No 5 furnace.

Net cash from operating activities increased by R7.16 billion, from a cash outflow of R1.14 billion during the comparable period to a cash inflow of R6.02 billion. The improved cash flow was due to improved earnings for the current period, and the R1.12 billion impact of positive working capital movements which comprised a decrease in inventories of R264 million (H1 FY2018: outflow of R2.96 billion) and an increase in net movement of payables and receivables to R1.38 billion, which included the receipt of R1.06 billion from a forward sale of excess metal inventory in the current period.

During the past six months, metal inventories increased by R151 million from June 2018 and by R628 million since December 2017.

The R151 million increase in inventory since June 2018 is due to the following movements:

  • Increase in inventory of R1.31 billion largely due to the higher rand cost of metals purchased, particularly palladium and rhodium, by Impala’s IRS business
  • Increase of R389 million (H1 FY2018: R431 million) due to changes in engineering estimates
  • A R272 million increase in metal inventories arising from a change in estimate following the reclassification of nickel from a by-product to a main product and consequently, adopting a different cost allocation method among the main products, as discussed in note 7 of the interim financial results
  • All of which were largely offset by lower stock quantities in the pipeline, which resulted in a reduction in the value of inventory by R1.47 billion

Capital expenditure, amounted to R1.71 billion (H1 FY2018: R1.90 billion), of which R207 million (H1 FY2018: R345 million) was spent on 16 and 20 Shafts and R151 million and R183 million spent on Bimha and Mupani respectively.

Cash and cash equivalents the end of the period under review amounted to R6.36 billion after repayment of R1.86 billion (H1 FY2018: R341 million) of borrowings. Net debt excluding finance leases of R1.19 billion, after taking into consideration the Cross Currency Interest Rate Swap asset of R213 million, amounted to R976 million at 31 December 2018 (June 2018: R5.33 billion).

The balance sheet remains strong with unutilised revolving credit facilities of R4.00 billion, available until 7 June 2021. Therefore, at 31 December 2018, the group had liquidity headroom of R10.36 billion, comprising cash of R6.36 billion (30 June 2018: R3.71 billion) and undrawn banking facilities of R4.00 billion (30 June 2018: R2.49 billion), compared to the R6.20 billion available at the end of June 2018.

In addition, at 31 December 2018, R941 million was available on the metal prepayment facility. Therefore, the Group has access to sufficient liquidity and flexibility to address upcoming debt maturities, as well as to fund the ongoing needs of the business.

Given the volatility in the local and global economy, as well as the continued implementation of the Rustenburg review, the board has resolved not to declare an interim dividend for the six months to 31 December 2018.

Market review (calendar years unless otherwise stated)

The platinum market recorded a surplus of 580 000 ounces during 2018, with the palladium market experiencing a fundamental deficit of 270 000 ounces. Expectations for palladium demand continue to be revised upwards as tightening emission standards result in increasing and sustained fundamental deficits.

While the near term for platinum remains uncertain, strong industrial demand, coupled with the introduction of heavy-duty legislation in both India and China and growth from the nascent fuel cell sector, indicate a tightening market in the medium term.

Platinum ended 2018 at US$788 per ounce, 15% weaker than the opening LBMA trade price, and on average traded at US$880 per ounce over the year, 7% lower than the previous year (2017: US$948 per ounce). Investor sentiment was weak, with rising short speculative positioning and ETF outflows. The rand softened, as did the gold price, adding further negative price pressure. Western European diesel market share continued to fall and Chinese jewellery demand was also lower. Industrial demand was robust, however, and debate on the likely reintroduction of platinum into gasoline autocatalysts gained momentum.

In contrast, palladium ended the year at US$1 270 per ounce, 19% higher than the opening LBMA trade price, and on average traded at US$1 031 per ounce over the year, 19% higher than the previous year (2017: US$870 per ounce). Exchange traded funds (ETFs) continued to release metal to the market as the implications of tighter Chinese legislation increased demand from a rising European gasoline market share and the advent of ‘real driving’ testing regimes all combined to support demand, sentiment and pricing for palladium.

The rhodium price increased by US$745 per ounce in 2018 closing the year at US$2 460 per ounce and registering a gain of 43% over the year. The metal traded at US$2 219 per ounce, double the average price of the year before (2017: US$1 109 per ounce). Tightening nitrogen oxide (NOx) standards have driven a step-change in anticipated rhodium requirements in China, while palladium’s price strengthened and relative ‘value in use’ was also supportive of steady, but persistent rhodium price gains.

Automotive

2018 was a mixed year for the automotive industry. Geopolitical uncertainties, including the potential impact of Brexit and US-China trade tensions, have led to a cautious view on prospects for volume growth in 2019. Global light-duty vehicle sales are estimated to have reached 94.8 million units in 2018, down 0.5% from 2017, with the Chinese market contracting by 3.1% and Western European sales slipping 0.7%. Modest growth was recorded in both the US and Japanese markets with sales volumes increasing by 0.6% and 0.8% respectively.

Western European light-duty vehicle sales of 14.2 million units were marginally lower in 2018, with a particularly weak fourth quarter (8% lower than in the fourth quarter of 2017) weighing on annual metrics. Sales in the United Kingdom fell 6.8% during 2018 and offset the impact of growth in France and Spain and reasonably stable volumes in Germany. The introduction of the new emissions-testing regime disrupted the availability of new vehicles and the outlook for diesel continued to weigh on consumer sentiment and fleet sales. Gasoline market share of 57% (2017: 50%) increased at the expense of diesel, which experienced a further decline in market share to 36% in 2018 (2017: 44%). While headline battery electric vehicle growth figures were impressive, rising 48% from 2017, at c.201 000 units, these ‘catalyst free’ vehicles comprised 1.3% of the sales mix and we expect the carbon dioxide (CO2) average of the Western European fleet to have increased for the second consecutive year as a result.

Chinese light-duty vehicle sales fell 3.1% year-onyear in 2018 to 27.7 million units. However, the impact on PGM demand was more than offset by the impact of higher loadings to meet tightening emissions standards with the nationwide implementation of ‘China 5’ for both gasoline and diesel vehicles. Japanese sales grew for a second consecutive year, rising 0.8% to 5.2 million units.

As fabricators and OEMs finalise catalyst formulations to meet upcoming legislation changes in China, Europe and India, expectations for loadings have increased resulting in tighter forecast markets for both palladium and rhodium. Availability of supply and price differentials between the three major PGMs has highlighted the need to reconsider the mix of metals used to meet expected gasoline derived demand.

We expect research and development efforts to increase in pace and assume switching of platinum for palladium in both diesel and gasoline catalysts to become an imperative in the medium term.

Jewellery

Demand for platinum from the jewellery sector was mixed, with continued, albeit slowing weakness in the key Chinese market, where changing consumer tastes and the resultant shrinking in sales of generic products have yet to be compensated by growth in sales of higher-margin branded collections. In India, a recovery in demand following the impact of demonetisation and the jewellers strike is likely to have led to growth in the mid-teens, while the US market has also enjoyed strong growth due to opportunities created by healthy consumer confidence, competitive metal prices and several initiatives spearheaded by the Platinum Guild International (PGI).

In Japan, platinum remains the ‘white metal of choice’, however, total sales have been impacted by the current fashion dominance of yellow gold and a modest retreat in sales is expected. Overall, both platinum jewellery retail sales and net metal demanded by manufacturers is expected to have recorded modest declines in 2018.

Industrial, physical, ETF and paper

Industrial demand for PGMs continues to be robust, with platinum benefiting from growth in estimates for non-road mobile machinery, the nascent fuel cell industry and continued demand from the chemical and electrical sectors. Platinum is also likely to benefit at the margin from changes in alloys used in the glass industry, where rhodium is being thrifted as the price is driven higher by increased automotive demand.

While physical investment in small platinum bars and coins saw positive growth in 2018, the impact of this was largely offset by redemptions from ETF funds, which continued to return platinum, palladium and rhodium to the market during the year.

Platinum ETFs contracted by 260 000 ounces, driven by lower prices and a rotation by South African investors into equities, while palladium ETFs liquidated some 565 000 ounces as record prices prompted profit taking and high lease rates created opportunities in the lending market. Low residual palladium ETF stocks are now considered entirely insufficient to meet expected market deficits.

Paper markets (NYMEX/TOCOM) for platinum and palladium charted different courses in 2018. While gross open interest in platinum remained elevated, the market was net-short for the first time in 15 years. In palladium, open interest contracted substantially as forward hedging activities declined on rising prices and the market remained in backwardation – a situation in which the spot or cash price of a commodity is higher than the forward price.

At year-end, net paper length in platinum had declined by 373 000 ounces, to 1.24 million ounces as long positions were trimmed. In palladium, a reduction of 1.18 million ounces saw closing net length of 1.4 million ounces as long positions were cut by 1.2 million ounces.

Fundamentals

The market fundamentals for palladium and rhodium strengthened in 2018 and are expected to remain robust in 2019 and beyond as emerging markets apply stricter legislation and the impact of real-world driving test regimes is felt on auto demand. Conversely platinum continues to face near-term challenges including the residual level of light-duty diesel market share and the re-basing of the Chinese jewellery market.

In the medium term, an increasing focus on the need to add platinum to gasoline autocatalyst formulations, together with expected demand growth from impending heavy-duty diesel legislation in China and India, offer opportunities for meaningful structural growth.

We expect the platinum market to remain in surplus in 2019 before tightening thereafter. Fundamental deficits in palladium are expected to persist and expand, while increasing rhodium use should drive a narrowing of the market balance.

Prospects and outlook

The headwinds facing the South African PGM industry are expected to remain largely unchanged in 2019: rand volatility, wage negotiations, national elections, along with the operational and financial crisis at Eskom are all well-recognised challenges for the domestic producers. While the near-term outlook for platinum remains suppressed, the medium-term outlook has improved. The current strength in both palladium and rhodium fundamentals are expected to persist for the foreseeable future.

Robust iridium and ruthenium pricing, due to growing industrial demand, has also resulted in pricing tailwinds. The Group believes we are in a combined 3E PGM deficit and, more recently, industry discussions and debates have shifted from the need for supply rationalisation to potential areas of growth.

As such, we expect dollar metal prices to remain well supported for palladium, rhodium and the minor metals, while the near-term outlook for platinum remains more muted. Despite an improved market outlook, we remain committed to our long-term strategic intent to favour value over volume. We will therefore proceed with the steps outlined in our strategic review, premised on producing safely, productively and profitably from our key assets, while taking account of the changes in our operating environment.

The full-year refined production for the Group is maintained and is estimated at 1.5 to 1.6 million platinum ounces. Given the scheduled refurbishment of furnaces at Impala Rustenburg and Zimplats later in this financial year, limited inventory is expected to be released through the refinery during the second half of FY2019, with the reminder to be released across the group during FY2020.

The Group’s operating cost is expected to be between R23 900 and R24 800 per platinum ounce on a stock-adjusted basis for the full financial year, with Group capital expenditure forecast at R4.1 billion to R4.3 billion.

Full-year production estimates for the operational entities are as follows:

  • Impala Rustenburg 650 000 to 690 000 platinum ounces in concentrate
  • Zimplats 270 000 to 280 000 platinum ounces in concentrate
  • Two Rivers 160 000 to 170 000 platinum ounces in concentrate
  • Mimosa 115 000 to 125 000 platinum ounces in concentrate
  • Marula 80 000 to 90 000 platinum ounces in concentrate
  • IRS (third party) 170 000 to 180 000 platinum ounces in concentrate

The financial information on which this outlook is based has not been reviewed and reported on by Implats’ external auditors.