Q&A

Over the past year chief executive Roy Pitchford has addressed hundreds of analysts and fund managers at conferences and in group or one-on-one briefings as part of a vigorous corporate marketing campaign. These are the key questions he was asked about Afplats by prospective investors, and his answers. 

Who owns Afplats?
It's a truly independent company, with no one shareholder owning more than 14% of the issued share capital. The major shareholders are large US and European institutions, including Fidelity, North Sound, Royce Value Fund, Rubicon, Tocqueville Gold Fund, US Global, and the privately owned CGT Management Limited. 

Black economic empowerment is a requirement of South African mining law. What is the company's status in this regard?
As part of the new mining legislation we are in the process of converting our old order prospecting rights to new order. In terms of BEE participation, Afplats has entered into a prospecting contract with the Bakwena Ba-Ga Magopa tribe regarding the Leeuwkop project. The prospecting contract, together with the prospecting permit issued by the Department of Mineral and Energy Affairs, allows us to take this project to bankable feasibility stage. Once that's completed, a joint-venture mining agreement with the tribe will be implemented. We're currently in discussion with the tribe on the terms of that agreement. The South African Mining Charter requires a BEE participation of at least 26%. 

The pre-feasibility study shows that Leeuwkop will be a deep mine. Is it technically possible to operate at the projected levels?
Leeuwkop will not be a particularly deep mine by the standards of South African mining in general and the platinum industry in particular. The total depth of our shaft system will be around 1 350 metres below surface with the main mining level at 1 260 metres. The majority of the third-generation expansion shafts on the Western Limb of the Bushveld Complex are in the same ballpark. Our neighbours Lonmin, for example, have two shafts - K4 at the Karee mine and Rowland at Western Plats - currently at around 1 350 metres. 

But isn't there a strong correlation between depth and operating costs?
That's true of conventional, labour-intensive mining operations. At Leeuwkop, the geometry of the orebody - very consistent in terms of width and dip - will enable us to use less expensive mechanised mining methods. Aquarius' Kroondal mine is probably the leader in this field, and its costs on a rand per tonne basis sit at the bottom of the curve. Leeuwkop's projected costs are slightly higher than Kroondal's, but this will be offset by its higher grade. As far as refrigeration is concerned, while the capital cost of installing the system is high - as reflected in our sizable capital estimate for the project - the cost of maintaining the ambient temperature in the stopes is not prohibitive once the appropriate infrastructure has been put in place. 

Operating costs in the mining industry have generally been increasing at levels above the inflation rate. How sensitive is Leeuwkop to escalations in operating expenses?
The mechanised operation will reduce our exposure to rising labour costs but we will be affected by other market factors such as fuel and steel prices. The project IRR is most sensitive to the platinum price and exchange rates with gearings of around 1.4x and 2.1x respectively. Our gearing to opex is around 1.2%. By way of example, operating costs will need to increase by around 25% to reduce the project returns to single figures. 

Some analysts believe we're nearing the end of the long bull run in commodities. Assuming this is true, Afplats could begin production in a bear market with a strong rand. What economic parameters have you used to ensure long term robust returns?
To mitigate the cyclicality of the market we have been conservative in our projections for both the metal price and the exchange rate. Our long-term PGM basket price, for example, is US$607 which in dollar terms is 30% below the current price. Perhaps more important, our rand basket price is some 20% lower than current levels. The key issue in planning for a bear market is to make sure that you are operating at the lower half of the cost curve, and we have designed the operation to achieve this. 

How should investors value Afplats?
Like most mining operations with a big resource base, Afplats is quite difficult to value because of the long life of the project. The market currently rates Afplats at around parity to the first-phase project value but this only represents a portion of the current Leeuwkop resource and an even smaller bit of the potential resource. The Imbasa and Inkosi projects that have not yet been proved up, for example, are adjacent to Leeuwkop and have the potential to double our Bushveld Complex resource base to around 100 million 4E ounces. The prefeasibility study was the first step in proving Afplats's true worth. As we move through the bankable feasibility to development, the underlying value of the company will continue to be unwrapped. 

Mechanised mining requires a more skilled workforce than conventional operations. How will Afplats source and train its labour?
Skilled labour is a critical issue and we have already begun this planning process. As part of the process we'll be undertaking a census in the local community, where we'll be sourcing the labour, to determine current skills levels and availability, plus unskilled people with the requisite aptitude to operate the equipment. We'll then set up a training centre in collaboration with the mining equipment manufacturers to address any deficiencies. We'll be using the relatively long lead time on the project to ensure that we have the right workforce and that full production can be achieved on schedule. 

What value are you attributing to the prospects outside South Africa?
We look at those as blue sky. It is early stage and we have a lot of work to do. We are currently putting together a detailed exploration programme to focus on these prospects. However, I must emphasise that developing Leeuwkop is our main focus now and for the foreseeable future. 

Why should we invest now? Wouldn't it be better to wait for the outcome of the bankable feasibility study?
As we prove up the current resource base and continue eliminating the risk associated with any greenfield project, Afplats will inevitably move up the value curve. The earlier investors get in, the more they will participate in the value accretion. But we understand that each institution has its own investment policy and for those who prefer to wait, we'll be going to the market for a substantial amount of equity funding next year if the board gives the go-ahead on the development of Leeuwkop. 

Leeuwkop has a capex bill and a resource base generally associated with the major producers. What are the chances of one of them taking it out?
We're well aware that Leeuwkop is a world-class asset and as such it's obviously going to interest current producers as well as other resource companies looking to get a foothold in the platinum industry. We're fortunate to have a blue-chip shareholder base which has indicated solid support for the project and we're going all out to make Leeuwkop a success. But whatever happens, it's our job to create the maximum value for our shareholders, whether it's through operational development or through merger and acquisition activity. 

How about a merger with another junior?
Again, we'll consider any transaction that is value-accretive for our shareholders. Putting together a company that has current cashflow but relatively short life-of-mine operations with one that will still be producing in 50 years' time is clearly attractive: the challenge is to find a business that will have this kind of fit with Afplats. 

Assuming Leeuwkop goes ahead, how long until you're in production, and how will you fund yourself until then?
We currently plan to have revenue in the fourth year of development but we're doing everything in our power to bring that forward. In the meantime, we have sufficent cash on hand for our needs until the project finance has been raised.