Recent updates from cash-strapped utility provider Eskom paint a worrying picture for SA’s platinum group metals (PGM) miners who depend on the country’s municipal power supply, says Northam Platinum.
In its latest interim results, Northam warned that the business’ sustainability continued to be threatened by its dependence on the national grid, with supply disruptions and above inflation electricity tariff hikes likely to persist this year.
While the sustained absence of load-shedding last year provided some relief, SA’s electricity supply remained a concern for the group, and “updates by Eskom on the integrity of the electrical grid infrastructure means that this situation is likely to continue into the medium-term”, it said.
Of all the group’s costs, electricity had increased the most in this and the previous financial year, due to ongoing above-inflation tariff increases which it said “will likely continue in light of Eskom’s financial struggles”.
“The energy supply risk is elevated for the group and we continually monitor and assess power requirements, together with developments at Eskom. This is to ensure that the necessary contingency plans are in place,” the company said.
As Eskom’s money woes and deteriorated grid threaten Northam’s production capability and profitability this year, SA’s water supply is also set to become increasingly strained as the impact of climate change is compounded by the country’s ageing public infrastructure.
“During the past year, a number of mining companies were disrupted by water supply interruptions which is likely to continue into the future without partnered interventions by local and provincial governments and private companies,” said the miner.
Northam CEO Paul Dunne said the mining industry was picking up the government’s slack.
He emphasised the “profound” socioeconomic impact mining companies have in SA, saying “the social and environmental programmes of mining companies are making lasting positive change, and in many instances are providing services that should be delivered by local and provincial government”.
The group said it spends more than R250m on social upliftment programmes each year, including on water and electricity infrastructure to supply the communities surrounding its mines, and employs more than 22,000 people across some of SA’s least economically developed areas.
It has installed additional generator capacity at all its operations to cater for load curtailment up to level 4, and in October it finalised a power purchase agreement for the development of an 80MW solar power plant at its Zondereinde operation.
It now aims to minimise its reliance on third parties supplying bulk and potable water from natural sources through increased water re-use and recycling and by diversifying its water supply to include more on-site boreholes and surface water sources.
However, mining cost inflation and persistently low PGM prices continue to weigh on the group’s balance sheet. The group cited a 3.3% decrease in the 4E rand basket price as primarily responsible for its weaker financial performance last year.
Pressure from low metal prices saw Northam’s headline earnings in the previous comparable period cut nearly in half in the six months to end-December, with headline earnings per share down 49.7% year on year at 61.1c.
This came as sales revenue declined by 3.1% year on year to R14.53bn during the period under review, resulting in a 55% decrease in operating profit and a 45% drop in earnings before interest, tax, depreciation and amortisation.
The significant drop in earnings will result in some pain for Northam shareholders, with the group declaring an interim dividend of 15c per share, compared to 100c a year earlier.
Northam, which operates three mines in SA, and is valued at about R41bn on the JSE, said in its interim results that as a largely fixed cost business, its best defence against persistently low PGM prices was to shift down the industry cost curve by efficiently raising production.
Despite the dip in profit, equivalent refined metal production from the group’s PGM operations was up 3.7%, with all mines recording a strong operational performance. Chrome output was also 7.5% higher year on year.
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