Zimplats gamble worth it, but future uncertain

WHEN Impala Platinum (Implats) first bought into Zimbabwe, management viewed it as a high-risk/high-reward play aimed at broadening its growth base.


The “in price” to buy control of Australian junior Zimbabwe Platinum (Zimplats)

was about R800 million, which former CEO John Smithies justified as being worth the gamble given the assets that Implats was acquiring.


The “carrot” offered through exposure to Zimbabwe was huge because the country hosts the greatest known platinum resource outside South Africa.


But the risk factor was also extremely high and is now making itself felt as Zimbabwe goes into what appears to be the final stages of an economic and social meltdown.


Implats now controls the bulk of that resource even though it had to give up 36% of its exploration rights in 2006 and return them to the Zimbabwe government. Despite giving up that ground, the situation — as of end-June 2006 — was still that 49% of Implats’ total 182,9m oz of attributable platinum reserves and resources was owned through Zimplats.


A further 2% was held through a second Zimbabwe platinum mine — Mimosa, which is a 50/50 JV with Aquarius Platinum — meaning more than half the group’s platinum reserves and resources lay in Zimbabwe.


That level has since been diluted through the acquisition of African Platinum (Afplats), where one of the driving strategic factors was to reduce the group’s exposure to Zimbabwe.


Implats executive director Les Paton says: “It was naïve to think we could sit on 80% of Zimbabwe’s total platinum resource and develop it at our own pace.”


CEO David Brown says the arrangement with the Zimbabwe government secured title to the group’s remaining rights in Zimbabwe in a proactive move aimed at coping with that country’s pending indigenisation legislation.


That turned out to be more onerous than South Africa’s black empowerment requirements. “We saw that one coming,” Brown says.


The Zimbabwe Chamber of Mines had hoped the country’s proposed legislation would follow the South African example of a 26% empowerment equity requirement to be met over a 10-year period, linked to a scorecard providing various routes to achieving the required empowerment levels.


Instead, the Indigenous & Economic Empowerment Bill which recently passed through parliament states that “at least 51% of the shares of every public company and any other business shall be owned by indigenous Zimbabweans”.


Brown estimates that the mining rights deal, combined with other factors — such as spending by Zimplats on essential infrastructure such as roads and housing along with various corporate social investment programmes — means Zimplats only needs another 15% indigenous ownership to meet the 51% target.


The obvious question — given the country’s economic meltdown and the increasingly radical actions of President Robert Mugabe — is whether the Zimbabwe government will honour that agreement.


“The use-it-or-lose-it principle has been enshrined in Zimbabwean mineral law for a long time and, as far as we are aware, has only been used twice,” says Paton.


But Implats management appears to be in a difficult position. The group wants to expand production from Zimplats but is understandably wary about committing huge amounts of capital into the project.


The solution so far has been to use Zimplats’ cash flow and foreign exchange earnings to fund the first stage of the planned expansion. This will cost about US$340 million to push platinum production from 90 000 oz/year to 160 000 oz/year through the development of two new underground mines and the construction of a 2 Mt/year concentrating plant.


But Zimplats can support a much larger operation. Previous estimates by management were that production could be pushed to 345 000 oz/year at a cost of about US$700 million.


In June, in his presentation to Deutsche Bank’s SA investment conference, Brown reconfirmed that Zimplats had the resources to push platinum production eventually to a level of 1m oz/year.


Paton says that revised estimate results from the confidence that Implats has built up on the Zimbabwe platinum deposits — which are markedly different from SA’s well-known Merensky and UG2 reefs — over the years of operations at Zimplats and Mimosa.


“Mimosa led the way. It proved that mechanised underground operations on the Great Dyke were economically viable and gave us the confidence to use them at Zimplats,” says Paton.


But those expansion phases will require what Paton calls “serious” money.


Zimplats cannot generate that level of funding on its own, meaning Implats will have to feel confident enough about Zimbabwe’s future to invest the money itself.


Management will also want to feel confident about various logistical issues in Zimbabwe such as the secure provision of the required amount of electrical power. — Financial Mail.

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