LONDON/JOHANNESBURG If Anglo American (AAL.L) pushes ahead to divest underperforming platinum assets, a sale to a small South African company that specializes in squeezing profit out of mines nearing the end of their lives is seen as the most likely option.
Anglo's platinum unit Amplats (AMSJ.J) and its rivals are battling an almost 13-week-old mining strike in South Africa over wages, which has slashed about 40 percent of global production of the precious metal.
Anglo, the world's No.5 diversified mining company by market value, signaled this month it could dispose of at least some of its deep, high-cost platinum mines - and South African gold miner Sibanye Gold (SGLJ.J) expressed interest in buying them.
Sibanye is seeking to diversify into platinum and its experience in extracting metal from deep, high-cost gold mines near the end of their lives could make it a good fit for at least six of Amplats' platinum mines - five at Rustenburg and one at Union.
Those mines accounted for about 30 percent of Amplats' output last year but have only about 5-10 years left of service, according to analysts, and their operating margins lag younger mines.
Analysts said they could be worth $1-2 billion altogether.
Industry sources and analysts said a sale to Sibanye was the most likely option because it would serve the interests of both companies and should also be well received by the government as it would help to preserve jobs.
"Sibanye is definitely a serious option," said South Africa-based Investec analyst Albert Minassian. "They are used to make profit out of mines that the others don't want. So maybe they can do this in platinum too."
Anglo American Chief Executive Mark Cutifani told shareholders on Thursday the firm was evaluating all options to restructure its struggling platinum business and it would make its recommendation to the board of Amplats (Anglo American Platinum) within a few months.
As well as the labor unrest, political uncertainty, rising costs and weaker prices have made mining platinum in South Africa an increasingly tough business.
So Sibanye, a Gold Fields (GFIJ.J) spin-off created last year, could be the only bidder for these underperforming assets.
Yet a sale, even if not at a very high price, could be beneficial for Anglo, offering it an exit strategy from difficult mines. It would save it from having to shut down operations and cut jobs in a very sensitive social context.
"Anglo would be better off without Rustenburg," Nomura analyst Tyler Broda said. "Deep-level underground mining in South Africa economically is not likely to be able to achieve Anglo's return on capital targets."
Anglo is targeting reaching a return on capital employed (ROCE) of at least 15 percent by 2016. In 2013 the company posted a 11 percent ROCE while Amplats' was 2.7 percent.
The Union mine, one of Amplats' worst-performing mines, had an operating margin of 1.4 percent in 2013 compared with 36 percent margin for the firm's newer Mogalakwena mine.
Amplats, 80 percent-owned by Anglo American, is the world's top platinum producer, but it contributed only about 7 percent to the group's earnings in 2013 and turned a loss in 2012, hit by violent mining strikes. The latest strike started on January 26.
Alternatives to selling the unwanted assets include spinning them off from Amplats and listing them separately; demerging the whole of Amplats; or a share swap with another company, industry sources said.
"Given the current state of the market I'd say divesting platinum would be a positive catalyst because you have a business that takes up capital but is contributing very little to the bottom line," said analyst Jeff Largey at Macquarie.
"So there is a case to be made at this point that platinum is not benefiting Anglo shareholders overall."
An initial public offering in South Africa however could be difficult given the worsening investment climate in the country, bankers said. The hardening perception is that the returns in mines are too low and the risks too high.
A way around those risks would be to demerge the platinum division and distribute shares to Anglo's existing shareholders.
"With a demerger you can differentiate people who want to hold the platinum story from people who want less exposure to south Africa in their Anglo stock," said a London-based banker.
"South Africa is not popular within the mining investment community at the moment. People are a bit more circumspect, more than they used to be. That's an issue."
Anglo could also consider swapping shares in Amplats for additional shares in its more profitable South African iron ore subsidiary Kumba (KIOJ.J), a company source said, but to do so it has to find firms interested in the swap.
An outright sale would be the cleanest option but there is one problem: few companies want to buy. Indeed, industry sources and analysts see just one realistic bidder for now, Sibanye.
The gold miner could potentially fund the purchase by tapping cheap Chinese sources of finance given its connection to Chinese investors.
Sibanye's Chief Executive Neal Froneman formerly ran Gold One where he oversaw its acquisition by a Chinese consortium, and Sibanye itself is in the process of acquiring Gold One's Cooke operations in an all-share deal that will see it issue new shares worth 17 percent of its total stock to the Chinese group known as the BCX Consortium.
Chinese financing could also come at a competitive price.
The Chinese Development Bank, for example, has provided a $650 million loan for Beijing's acquisition of a stake in platinum mine developer Wesizwe Platinum (WEZJ.J), at around 4 percent - far less than the 8 percent or more South African companies would normally expect to pay.
Sibanye's Froneman has said he aims to make a material acquisition in platinum by the end of this year, to build a South African precious metal champion.
(Additional reporting by Clara Denina; Editing by Pravin Char)