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Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & Exchange Commission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital.

Figure 1 shows PGM mining companies ranked by potential 12-month returns, based on our TPs.

We increase our earnings forecasts and TPs for the PGM miners (as shown in Figure 1), as we incorporate higher PGM basket price forecasts. Detailed commodity price revisions are contained on page 3.

The biggest increases to our TPs are: Impala Platinum +29% to ZAR45, SibanyeStillwater +23% to ZAR11.1, Lonmin +17% to ZAR7.0 and Anglo American Platinum +15% to ZAR540.

Figure 1: Summary sector ratings and TPs (ranked by total potential 12M return, including estimated dividends)*

*Price as at market close 08 January 2019

Source: Thomson Reuters Datastream, Renaissance Capital estimates

PGM mining companies are trading around 72% above their 12-month lows in rand terms.

Figure 2: PGM company share price compared with 12-month lows

Note: Priced as at market close on 8 January 2019.

Source: Thomson Reuters

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The table below shows changes to our PGM prices and currency forecasts. We mark-to- market our near-term commodity price forecasts, resulting in a 4% increase to our PGM basket price. Our long-term commodity price forecasts are around the 90th percentile of industry cash costs. We increase our long-term 3PGM basket price by 5%, as we incorporate a higher rhodium price to reflect our expectations of rising cost support on the back of high industry inflation.

Figure 3: RenCap’s commodity price forecast revisions

Source: Renaissance Capital estimates

The cost curve below shows total quality-adjusted cash costs plus sustaining capex, net of by-product credits. We calculate “all-in” quality adjusted cash cost as follows: 1) we divide EBITDA in dollar terms by 3PGM sales volumes to get EBITDA per 3PGM ounce; 2) we then subtract EBITDA per 3PGM ounce from the 3PGM benchmark price and add sustaining capex per 3PGM ounce; 3) the result is quality-adjusted “all-in” unit costs plus sustaining capex, which takes product premiums or discounts into account.

*Priced as at market close on 8 January 2019.

Source: Bloomberg, Company data, Renaissance Capital estimates

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10 January 2019

Metals & Mining

Figure 9: Lonmin – consensus 12M forward earnings vs share price

Source: Company data, Thomson Reuters DataStream, Bloomberg, Renaissance Capital estimates

Figure 10: Northam – consensus 12M forward earnings vs share price

Source: Company data, Thomson Reuters DataStream, Bloomberg, Renaissance Capital estimates

Figure 11: RBPlats – consensus 12M forward earnings vs share price

Source: Company data, Thomson Reuters DataStream, Bloomberg, Renaissance Capital estimates

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Weak economic outlook could weigh on industrial demand

We believe increasing geopolitical uncertainty and escalating fears of a global slowdown could weigh on industrial demand for PGMs. The chart below highlights the recent declining trend in global vehicle sales, with sales contracting the most since the global financial crisis.

Figure 14: Global vehicle sales growth, YoY

Source: Bloomberg

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10 January 2019

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Cost inflation through mining complexity and wage inflation

Western Limb mines are some of the more mature platinum mines in SA; they suffer from increasing mining complexity as they go deeper, and grade declines, given their finite lives. Miners generally need either to spend more capex to maintain volumes as mining complexity increases or achieve major technological advances that could offset increasing mining complexity in deep-level, labour-intensive mines. Neither of these events have occurred on the Western Limb over the past decade, resulting in production falling by around 25% over the period due to lower tonnes milled and falling grades.

The SA platinum sector has historically suffered from very high wage inflation (2008-2017 CAGR of 10.2%) relative to SA CPI (5.5% over the same period). We believe we could be underestimating the impact of wage inflation, given the historical precedents and improved profitability. Most PGM miners are expected to enter wage negotiations during 2019.

Figure 17: Average wages in the SA platinum sector (LHS) relative to wage and CPI CAGR, 2008-2017

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…but yields still uncompelling.

We calculate that most of the PGM miners still screen poorly on near-term FCF yields, due to their high capex commitments, poor cost position or elevated share prices. We believe that in a world where growth expectations are fading due to trade wars, high debt levels and rising interest rates, investors may target companies that screen well on nearterm valuation metrics.

Figure 20: Miners ranked by CY19E FCF yields

*Priced at market close on 8 January 2019.

Source: Bloomberg, Company data, Renaissance Capital estimates

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Capital allocation risk on the increase

Improving returns, healthy balance sheets and a lack of commitment to dividends could increase the risk of poor capital allocation, in our view.

We restate the PGM miners’ balance sheets to reflect the replacement cost of productive assets. This eliminates accounting distortions and anomalies such as impairments, revaluations or fully depreciated assets. It also removes capital efficiency discrepancies among companies, as we assume they all pay the same for productive capacity. We forecast returns turning positive in 2018 and recovering back to c. 4% in 2019 (close to their long-term average) on the back of recovering margins. While our long-term returns are still below WACC, we believe rising returns could result in new projects being approved, given the industry’s willingness to invest at value-destructive returns in the hope that PGM prices will recover strongly in the medium-to-long term.

-2.2%

-5.0%

*Five SA PGM miners under coverage.

Source: Company data, Renaissance Capital estimates

We believe investors tend to steer clear of companies with low payout ratios, as this could suggest: 1) management’s desire to spend shareholder cash on potentially low-return acquisitions or projects; and/or 2) a lack of confidence in profitability. Higher dividends reduce the risk of value-destruction through poor capital allocation, in our view

Figure 22: JSE-listed companies ranked by 12M forward consensus dividend yields*

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