About Implats
Our operating
environment

The realisation of value is also dependent on successfully negotiating a challenging operating environment where various issues have important implications for our business.

MACRO-ECONOMIC FACTORS

Over the last year we have witnessed increasing political and economic uncertainty globally, evidenced by, amongst others, the Brexit vote in the UK; weaker-than-expected economic growth in the US and China; structural adjustments by commodity exporters to a long-term decline in their terms of trade; demographic and labour market adjustments; and a protracted slowdown in productivity, which in turn have fuelled protectionist policy positions and political discontent.

In South Africa, these factors were further compounded by recessionary trends, credit rating downgrades, allegations of state capture, growing unemployment, and increasing political and social tension.

Impact on value
A negative macro-economic outlook inevitably impacts GDP growth expectations and the demand for natural resources globally, including the demand for PGMs, which is closely linked to vehicle sales.

Our response
We remain wary of a near-term PGM price recovery in the face of lingering political and economic uncertainty.  To this end, we

  • actively and continuously assess conditions in the countries where we sell our metals across all the key demand sectors
  • tailor our market development activities to support key market segments and grow new areas of demand
  • align and support key institutional partners (such as WPIC, PGI, IPA)
  • grow and sustain relationships with key customers globally.

PRICES

Despite continued strong PGM demand, metal prices have remained muted for some time with increased uncertainty on near-term price recovery and longer-term price expectations. Negative sentiment related to anticipated weaker supply/demand fundamentals has been largely informed by the recent Volkswagen diesel scandal, which has impacted diesel vehicle growth expectations and the projected rate with which the vehicle fleet could be electrified, slowing jewellery sales in China and the view that substantial above-ground metal stocks remain available to cap any near-term price recovery.

Impact on value
Low metal prices have a direct impact on profitability, the generation of shareholder returns and our ability to fund and grow the business into the future.

Our response
Implats began positioning itself for a “lower-for-longer’ price environment in 2015 through targeted cost containment measures, focused productivity enhancement initiatives, rationalising and prioritising capital allocation, and maintaining a strong balance sheet.

We continue to critically review strategic cost containment and cash preservation measures. To this end, we successfully issued a new R6.5 billion five year convertible bond in May 2017 to re-finance the bonds that were due for repayment in February 2018 and we maintain unutilised debt facilities of R4 billion available to 2021.

We are focuses on fostering closer relations with key customers globally to build a common understanding of medium- to longer-term pricing scenarios to enhance accuracy for planning purposes, strategic decision-making and optionality.

SUPPLY/DEMAND FUNDAMENTALS

While sentiment towards has weakened over the past five years, palladium fundamentals have strengthened significantly.   Palladium is principally used to clean exhaust emissions in gasoline vehicles, which experienced strong sales growth over the period.  Platinum, on the other hand, has lost market share to palladium in this key application, based on a lower palladium price and more diversified global supply.  Platinum also experienced lower jewellery demand recently from the key Chinese market.

Impact on value
Supply/demand fundamentals have a direct impact on metal prices and market sentiment, which has resulted in platinum prices remaining relatively subdued over the past five years, with palladium prices growing strongly over the same period, particularly more recently. The potential for prolonged, relatively flat platinum prices remains strong, while palladium, already in an unsustainable deficit, should continue to receive strong price support, ultimately incentivising a switch back to platinum use in the auto sector.

Flat prices will result in further postponement of capital investment in the mining sector in the short term, ultimately impacting platinum and palladium primary supply globally. The socio-political environment in southern Africa is likely to further constrain primary supply growth.  Allied to this, we have also seen secondary supply struggling to maintain projected growth, necessitating a drawdown from available above-ground inventories, which is anticipated to become even more pronounced in future.

Both platinum and palladium will continue to receive demand support from increasing emission regulations and growth in the global vehicle fleet in the short to medium-term.

Our response
Implats will focus on:

  • using conservative price forecasts, given muted platinum sentiment and global risk factors
  • improving our market intelligence and market development initiatives
  • maintaining focus on cash conservation and balance sheet strength
  • continuing to invest through the cycle as prudently as possible, given positive longer-term fundamentals.

LIQUID SURFACE STOCKS

Despite a lack of verifiable evidence, excessive liquid surface stocks of PGMs, whether in vaults or customer works or held by mining companies themselves, continue to limit market disruption and positive price reaction. We estimate that by the end of 2017, supply deficits experienced since 2012 will have consumed approximately four million ounces of platinum from above-ground stocks. However, significant liquidations in the ETF funds (approximately one million ounces of platinum and one and a half million ounces of palladium over the last 36 months) have supplemented available surface stocks.

Impact on value: Readily available spot metal adds to the negative sentiment on platinum in particular and is capping the price.

Our response: In our view, both the platinum and palladium markets have remained in fundamental deficits since 2012, a situation that will persist in the medium-term, albeit at a lower level than in previous years. As surface stocks erode and near depletion, a positive price response is expected. We continue to support the World Platinum Investment Council (WPIC) and its work to prioritise and incentivise future sustained investment demand.

DIESEL DEMONISATION AND LOOMING BEVs

There is an increasing call from civil society to reduce emissions and limit public exposure to harmful gases.  Cheating scandals have done little to encourage public confidence in internal combustion engines and, together with the increasing cost of compliance with emission standards, pure battery electric vehicles (BEVs) will soon be economically attractive, despite issues with cost, range anxiety, battery disposal and fast-charging infrastructure

Impact on value: A wholesale change to other technologies will impact on the demand for our metals with consequent metal price impacts (BEV will have a larger impact, while electrification with internal combustion engines will be less significant).

Our response: In our view, BEVs will have their place but they are not a panacea. Over the next five years they will have little impact on the demand for PGMs. We expect more electrification of the powertrain with increased market share for hybrids, which require PGMs to control emissions. Beyond five years, we expect a growing hydrogen economy and the increasing adoption and advancement of fuel cell vehicles.

Diesel technology remains essential to reducing global vehicle fleet greenhouse gas emissions. Euro 6c rules will be successful in reducing real world emissions while retaining the fuel efficiency benefits. Also, heavy duty diesel will continue to be an attractive technology with large growth potential, while we are more likely to see hybrid and BEV substitution in small and urban applications over time.

We continue to support the International Platinum Association (IPA) in their engagement with and lobbying of policymakers and local and national governments in this regard.

 

CONTRACTING CHINESE JEWELLERY MARKET

The continued decline in the Chinese platinum jewellery market is an ongoing concern. In the past, jewellery purchases were mainly value-driven, however today, distinctive design, branding and emotional relevance are as important, with jewellery competing with other discretionary items.

Impact on value
This is another driver of negative sentiment around platinum, affecting price and investment decisions.

Our response
We have increased our visibility and marketing spend in China through the Platinum Guild International (PGI) focusing on platinum bridal jewellery at bridal fairs in Tier 1 cities.

MEETING STAKEHOLDER EXPECTATIONS

Platinum miners are facing heightened stakeholder expectations on a range of fronts: neighbouring communities are making increasingly vocal demands for economic opportunities and improved local service delivery; governments continue to push for rapid transformation and employment creation; labour unions exert pressure for higher wages and jostle for power; while a cautious investment community maintains its call for enhanced cost efficiencies, capital management and dividends.

Impact on value
Stakeholder expectations and our response to these can have a significant impact on our legal and social licence to operate, which in turn could impact on investment decisions and the company’s bottom line.

Our response
We are developing and implementing an effective stakeholder engagement strategy, aimed at building and maintaining value-enhancing relations with all key stakeholders, to create sustainable shared value and to secure a social license to operate.  To give effect to this strategic imperative, the organisation has developed supporting systems, processes, policies, and targeted engagement and communication plans.

UNCERTAIN REGULATORY ENVIRONMENT

Ongoing policy uncertainty and regulatory challenges exist in both South Africa and Zimbabwe, where these resource-dependent countries seek to extract greater value from resource companies in an effort to deliver on the social expectations of an increasingly frustrated electorate.

Impact on value
The uncertainty faced by the industry continues to impair the full economic potential of the mining industry and, in some instances, has had a negative impact on company valuations.

Our response
We fully support the aspirations of both countries to grow and transform their mining industries. However, meaningful value-creation and transformation requires financial security and sustained capital investment. We continue to engage and partner with industry organisations and government representatives in countries where we operate to find mutually acceptable and sustainable solutions.

SECURITY AND COST OF RESOURCES

We operate in a region afflicted by power and water shortages and an ever-increasing cost for their supply.

Impact on value
Scarcity of water and power impacts directly on our ability to operate effectively and the increasing cost of resources have a negative impact on profitability. There is also an indirect impact on our social licence to operate as these are resources we share with local communities where we operate.

Our response
As a large consumer of water and power, we accept our responsibility to work with all stakeholders to conserve these limited resources. We have instituted targeted initiatives to continuously improve our energy and water efficiencies and have increased the use of alternative sources of supply.