The commodities boom is poised to continue in the wake of Russia’s invasion of Ukraine as sanctions against the Kremlin are expected to boost prices, in particular platinum group metals (PGMs) and aluminium.
And that bodes well for SA's fiscus as the higher prices translate into greater tax revenue from buoyant profits at the mining companies.
Speaking at Anglo American’s results presentation on Thursday, barely hours after Russian forces moved into Ukraine, CEO Mark Cutifani said Anglo was still forming a view on the conflict. “We think it may take a little while for things to unfold, until we understand what the actual situation is and what sanctions may be taken.”
But analysts are pencilling in higher prices, while cautioning about volatility.
Mark du Toit, founding member of OysterCatcher Investments, expects metals prices to escalate and SA, the world’s largest producer of platinum group metals (PGMs) including palladium and rhodium, to benefit as a result.
Chantal Marx, head of investment research at FNB Wealth and Investments, said gold and PGMs could benefit from an extended stress scenario.
Russia's share of primary
palladium supply
— 44%
“Gold will benefit as a safe-haven asset. PGM supply is basically limited to SA, Zimbabwe and Russia. Sanctions on Russian PGMs will be very supportive of pricing and demand for SA PGMs specifically,” she said.
Peter Little, global fund manager at Anchor Capital, said Anglo American Platinum (Amplats), Impala Platinum, Northam Platinum, and Sibanye-Stillwater could all benefit from higher PGM prices since Russia accounts for 14% of primary platinum supply and 44% of primary palladium supply.
“Russian supply of PGMs, particularly palladium, which remains in a deficit, could drive those metals further into deficits in the short term,” Little said.
He added that South32, which generates more than 50% of its revenue and operating profit from bauxite, alumina, and aluminium, will probably also benefit from the conflict.
For SA the gains in prices could yield another boon for government coffers. National Treasury figures in this week’s national budget estimate that tax revenue for 2021/2022 will be R181.9bn higher than the 2021 budget projection, while gross tax revenue will reach R1.598-trillion in 2022/2023.
Anglo American, the majority owner of Kumba Iron Ore and Amplats, reported a record profit in the financial year ended December 2021 and responded by distributing more than R100bn in cash to shareholders.
Gold will benefit as a safe-haven asset. PGM supply is basically limited to SA, Zimbabwe and Russia. Sanctions on Russian PGMs will be very supportive of pricing and demand for SA PGMs specifically
— Chantal Marx, head of investment research at FNB Wealth and Investments
The company paid $7bn (R107bn) in taxes and royalties including $4bn (R61.7bn) in SA, up 90% from the $3.7bn paid a year earlier, making it a huge contributor to the fiscus.
Helped by record PGM prices and strong operational performance, Amplats delivered a total full-year dividend of R80bn or R300 per share. The group paid R35bn in taxes and royalties in SA and Zimbabwe.
Kumba, which operates the Kolomela and Sishen iron ore mines in the Northern Cape, delivered cash dividends of R43.5bn, up from R26bn in 2020, and paid R21.2bn in taxes and mineral royalties.
Anglo American Group CFO Stephen Pearce said the company’s $7bn in taxes and royalties is a reflection of working tax systems.
“The good news is that tax systems are working exactly as they should — as we make more profits, we pay more taxes. Often I think governments perhaps underestimate the strength and the tax payments that follow commodity prices,” he said this week.
Du Toit said mining companies are in a “sweet spot” of pent up demand, supply chain disruptions and low stocks as a result of the coronavirus pandemic.
He said metal inventories are low and need to be rebuilt, demand for metals is rising as economies around the world recover from lockdowns, and yet transport and distribution channels are clogged up with a backlog of orders.
“So these are boom times for mining companies, which means higher profits and higher taxes and royalties are paid in the countries where their mines are situated,” Du Toit said.
But the price boom is unlikely to be sustained because supply chains will be restored and inventory levels rebuilt, though “it is unknown how long this will take ... perhaps another year”.
Finance minister Enoch Godongwana emphasised this trend in his budget speech. “This positive surprise [in tax revenue] has come mainly from the mining sector due to higher commodity prices ... [but] one swallow does not a summer make,” he said. “The improved revenue performance is not a reflection of an improvement in the capacity of our economy. As such, we cannot plan permanent expenditure on the basis of short-term increases in commodity prices.”
Despite the upswing in the commodity cycle Du Toit pointed to risks for mining houses, including rising fixed costs should commodity prices fall and that could then result in some mines becoming unprofitable.
“The current opportunity is to invest in the infrastructure of the mines, rail and ports, create flexibility in mine plans, increase exploration of new areas and also pay cash to shareholders in the form of dividends,” he said.
Anglo American’s bumper 2021 probably draws a line under several challenging years for the mining house, including a debilitating five-month strike in SA’s platinum belt in 2014 and write-offs at its $8bn Minas Rio iron ore project in Brazil after delays and a weak global economy.
Cutifani, the former AngloGold Ashanti CEO, is stepping down after nine years at the helm. Duncan Wanblad will take over at the group’s AGM in April.
In an emotional farewell speech during the results presentation, Cutifani said the company had come a long way since trading at a discount to its peers in 2013.
“While that gap has been substantially closed, based on public numbers, I still think we are the best value mining company in this space,” he said.
Cutifani’s legacy includes a push for sustainable and safe mining and he led the decision to spin off Anglo’s SA thermal coal assets into Thungela Resources amid growing calls for mining houses to reduce their exposure to fossil fuels.
