Amplats FY numbers

A set of results that we missed yesterday, Anglo American Platinum, reported full year numbers. Headline earnings per share, well telegraphed, fell 29 percent to 1365 cents. But, as the release says: "Headline earnings per ordinary share excluding the once-off accounting charge for the broad-based community economic empowerment transaction (R1.07 billion), the US$10 million donation to the Tongogara district community in Zimbabwe and other once-off costs increased by 8% to R20.94 from R19.35 in 2010." So, we would be closer to 21 Rand worth of earnings. Still, is that enough to justify a 548 ZAR share price? The forecasts suggest earnings will top 30 ZAR a share this year, and be perhaps as much as 50 ZAR a share in 2013. So, that is why the share price trades at these levels.

For me there are a few issues, production levels are not what they should be. They have missed targets time after time. But management have acted accordingly, and although in a country where there is a high unemployment rate job losses are always ugly, this makes for better reading for shareholders: "We reduced our labour force from over 85,000 employees and contractors in 2008 to 58,000 in 2011, an appropriate level for our production base." However, the opposite would be true too, if costs were contained, there would be more people employed on all of our mines. So, I think the call from President Jacob Zuma last week in the State of the Nation to Eskom to keep electricity costs lower than anticipated, that must be music to big mining's ears.

Costs are important, because in our view the platinum miners might continue to be squeezed in the same way that the gold miners have stumbled. Amplats suggest that they should be able to contain costs to between 14000 to 14500 Rands per fine ounce.

The only big difference from the gold miners is that the platinum producers are dominant. Amongst the gold miners, no major producer accounts for more than 5 percent of the whole market of global production. Anglo American Platinum accounts for nearly 40 percent of the globes production. Amazing. So, if something goes wrong with one of their mines, or that of Impala or Lonmin, then as you can imagine, the platinum price could spike. Like it did back at the beginning of 2008. There is a certain irony in that. Remember the bumper earnings on lower production with much higher platinum prices? Perhaps if we have a bitterly cold winter the same would (could) apply if Eskom creaked.

We continue to prefer the diversified commodity producers, single commodity stocks earnings are too volatile.