RWC’s Keeling: Why these ‘guardians of scarce resources’ could increase many-fold
Platinum miners are one of the most attractive opportunities across global equity markets in 2018, according to Louise Keeling, head of global equities at RWC Partners.
Keeling, manager of the $1.6bn RWC Global Horizon strategy, said the tough operating environment has forced positive changes at platinum miners in particular, which now look set to bear fruit.
“We believe that the industry is showing signs of being more rational and that returns on invested capital are set to improve. We draw parallels with the steel industry which went through a similar process,” she says.
“We are beginning to see firms dumping the failed rulebook of maximising volumes to try to manage high fixed costs as this has caused dramatic oversupply and poor returns on capital”.
“A period of strikes in 2012-2014, coupled with the lower platinum price, has also forced the companies to reassess their behaviour from both a production perspective but also their approach to labour relations.”
Ownership of the world’s platinum resources remains highly concentrated across a few companies and regions around the globe (Anglo American Platinum, Impala Platinum and Lonmin accounted for 86% of platinum production in 2016). This market structure is being enhanced further by Sibanye Stillwater buying Lonmin, resulting in 3 rational players dominating the market.
“Now is the time for the platinum producers to show that they can be disciplined in their production,” Keeling says.
“There are signs that this is occurring as primary supply (i.e. mined rather than recycled ounces) is gradually coming down, with existing mines increasingly being shut or placed under care and maintenance as they are uneconomical to mine under current metal prices.”
Keeling, who is a long-term investor in companies, employs a unique investment process with greater focus on the supply side of industries, capital allocation, and management alignment.
The process focuses on how capital moves in and out of sectors (a reduction in capacity is often a precursor to improving Returns On Invested Capital) and whether management teams allocate firms’ scarce resources wisely.
To this end, Keeling and the team assess how senior management are incentivised and whether they are aligned with shareholders on generating enduring returns.
“We are owners of businesses not renters. We want management to make the right strategic decisions for the long-run.”
Amplats (Anglo American Platinum) is one company which has been allocating capital more sensibly to account for the environment it operates in. Since 2012, it has been focused on right sizing its cost base and only mining profitable ounces. Consequently, they have repositioned their mine portfolio and either disposed of, or placed under care and maintenance (i.e. mothballed), the high cost mines.
“At the same time, Amplats has been working on improving labour relations and working conditions. For example, they have invested in family housing near the mines so that employees can live with their families.”
Meanwhile, Impala Platinum, which announced last year a comprehensive strategic review of its main mine, is now also focusing on managing costs and production volumes down to improve the mine’s profitability.
“The company is also currently reviewing its executive remuneration policy. We are encouraging them to incentivise a rational competitive environment by only mining profitable ounces. For their long-term plan, we would like to see Return On Capital Employed over 3 years as a key metric. This would encourage appropriate capital investment i.e. neither over investment nor excessive cost cutting which could lead to unintended downtime or have a negative impact on the safety of the working environment.” Keeling said.
While both Anglo American Platinum and Impala Platinum trade at a small fraction of the market price, using current platinum prices, in a more rational competitive market it is hard to imagine that these assets wouldn’t trade closer to their asset backed valuation, according to Keeling.
Additional pressure has suppressed investor interest in the platinum sector as enthusiasm for electric vehicles is rampant. However, a more rational supply-side can adjust to lower demand. Furthermore, hybrid vehicles need the same amount of platinum as a combustion engine.
“We believe that the intrinsic value of these guardians of scarce resources is many folds higher than their current share prices,” Keeling said.
Utilising a truly long-term investment style, the RWC Global Horizon fund has outperformed its peer group over the last four and a half years. Since launching in November 2013, the RWC Global Horizon fund has returned 50.65%, versus the MSCI AC World Daily return of 40.51%.
 According to the RWC Global Horizon’s factsheet dated 28/02/18, the B USD share class has returned 50.65% versus the 40.51% achieved by the MSCI AC World Daily index.