Our research reveals that the world’s three biggest platinum producers have been systematically under-selling their metals. Over ten years this amounts to a forfeiture of potential revenue of more than R15 bn. Not only is this a forfeiture of revenue to the companies and their shareholders but represents a loss in tax revenue for the state and for possible investment in SA.

Implats and Lonmin

The sum of seemingly forfeited revenues 2004-2013 amounts to the equivalent of about R1.9bn for Lonmin and about R2.8billion for Implats. We will discuss Amplats below.

It should be noted that in 2009, one year after the global financial crash, all three companies sold PGM metals above the market price. This was important for improving their results for that critical year.

Usually the difference between the achieved price and the average global market price is not very large, often just a few percentage points below or even less than one per cent. It is the scale of production, the number of years, the lower than market price for all or most of the different PGMs sold and the high price of these metals that account for the accumulated billions of forfeited Rands.

The case of Amplats

The very low prices achieved by Amplats in USD per ounce of Rhodium sold in the years 2006-2008, when the market price on Rhodium peaked, present a special case.

If we do not include Rhodium sales for the period 2006-2008, the sum of Amplats seemingly forfeited revenue from the sale of PGMs is about R1.1 billion (nickel and gold not investigated). This is essentially the same level as at Implats and Lonmin. However, the "average market prices achieved" by Amplats when selling rhodium 2006-2008 were 25-40% below the yearly average market price per ounce. For these three years alone, the company appears to have forfeited revenue of over R9.9 billion Rands.

The pattern of "selling too cheaply" appears not to be the result of so-called forward selling. Lonmin says it doesn’t engage in forward contacts for PGM metals. Amplats’ 2013 annual report states: "The ability to place forward contracts is restricted owing to the limited size of the financial markets in PGMs" (p.257). According to the Amplats’ 2007 annual report "Anglo Platinum has not entered into any forward contracts, nor contracts of a similar nature to reduce the effects of metal price volatility" (p.20).

Still, in 2007, the "average market price achieved" by Amplats was only US$4344/oz. The average 2007 price reported at London Fix is US$6076/oz. The difference is 39.9%. Indeed, during 2007 the rhodium market price was never below US$5000/oz at the London Fix. If Amplats wasn’t bound by any kind of forward contract, why would it sell rhodium at R1700/oz below the market price, seemingly forfeiting the equivalent of R4.5 billion in revenue in one single year?

Contrary to the statement in the 2007 annual report (above) and the headline "achieved market prices", the 2008 annual report (p.36) reveals that Amplats sold rhodium on a contract and not at world market prices: "Anglo Platinum successfully renegotiated the sales terms for rhodium in the first quarter of 2008. As a result of revised contract terms, the specific details of which are subject to contractual confidentiality, the sales price of rhodium moved closer towards market prices during 2008. The average price achieved on rhodium sales for the year was US$5174 per ounce."

Yet the average market price in 2008 (London Fix) was US$6457 per ounce. The difference corresponds to forfeited revenue of R3.25 billion.

Disclosure important

The three companies involved in the protracted strike with AMCU should explain to the public and to their employees the reason for their systematic practice of underselling. Together, the three companies control well over half the world market share of PGM production. They are in a position to be price makers not price takers.

It would also be important for the Cartel to reveal who their main customers are. This is necessary to assure the public that they are not selling to companies linked to themselves.

From what we can see: If the three companies had been selling PGM at about the average market price during the 2004-2013 period, the average wages for A, B and C category workers now on strike could potentially have been increased by several hundred Rands more every year on top of the wage increases reached. Had they accomplished that, the issue of R12500 in basic pay per month would already have been achieved.

Other recent research

In 2006-2008, there was a speculative boom in the PGM metals market, which collapsed in the second half of 2008. Operating margins and returns on investments are reported at 30-50% in the annual reports of platinum mining companies.

In a study by Samantha Ashman, Ben Fine and Susan Newman (2011) - "Amnesty International? The Nature, Scale and Impact of Capital Flight from South Africa" - 2007 is pointed out as a record year of capital flight, amounting to 23% of South African GDP.

In the case of the Cartel these companies earn their income in US Dollars while most of their expenses - such as wages - are in Rands. When the companies pay South African workers and their local suppliers, they first have to change their US Dollars for Rands. Foreign currency coming to the country in this way is good and necessary. This is because SA needs to pay for its substantial imports in US Dollars. If a company as a rule sells its export product below market price, the forfeited revenue in US Dollars never reaches South Africa. If a buyer enjoys a ’rebate’ compared to the prevailing market price, the buyer can capture the price difference, by immediately selling the product again at the higher market price.

Without wishing to imply that this is the case with the Cartel, it is not uncommon for transnational corporations to move profits from one jurisdiction to another, especially to take advantage of lower tax rates. This phenomena is known as transfer pricing.

Taxation, and especially mining taxation, is complicated. However, when R100mn of profits is transferred abroad without being taxed, we can say that R28mn in corporate tax revenue is lost if the corporate income tax is 28%. In addition, the remaining R72mn of the R100mn has disappeared from the wage bargaining process, and potential investments such as housing for migrant workers or in health and safety. Revenue from VAT and personal income tax is also lost to the government. Appendix on method

The study of Samantha Ashman, Ben Fine and Susan Newman (2011) was based on macro economic import and export value data and used a statistical model. We have simply used the four rules of arithmetic when comparing company reporting with market prices.

We have consulted the market places for PGM metals. The historic average monthly and/or yearly average prices in US$ per ounce are reported on websites. Market places visited: LONDON FIX, LONDON PPM and Johnson-Matthey. The two first report very similar average monthly prices. For platinum, "John-Matt" average prices often appear as 1 to 3 USD per ounce higher. We have excluded "John-Matt" from most of the comparisons. We have examined the period 2004-2013. The other sources are the companies’ annual reports and the sustainable development reports.

We have compared the market prices with the prices presented in the annual reports of Amplats, Implats and Lonmin under the headline "Average prices achieved" or "Average market prices achieved". In Lonmin’s case the rounded numbers for sold ounces per metal in the annual reports have been used to calculate the gross revenue per metal. Amplats and Implats report directly the revenues in rand from selling their most important metals. The percentage difference between the average market prices and the average achieved prices has been calculated and applied to those yearly gross revenues. The resulting total net sum of plus or minus differences between "achieved price" and market price 2004-2013 has then been approximated.

The annual averages are based on the three different financial years of the companies: Jan-Dec (Amplats), Oct-Sept (Lonmin) and July-June (Implats). The monthly average for the twelve months during those three financial years has been made into a 12 month average. In the case of Amplats, no conversion is necessary. The reporting period coincides with the calendar year used by London Fix, London PPM and "John-Matt".

We have limited the study to the PGM metals. Gold also comprises an important side-income in PGM mining. In addition, the companies sell the base metals nickel and copper and reports the "average market prices achieved" for them. We have not compared those prices with the market prices at the above markets. We encourage media to examine all listed mining companies and see if a pattern of seemingly unnecessary forfeited revenues is at hand in the industry as a whole and ought to be explained.

Work sheets in excel are available electronically to see in detail how this was done and to control for eventual errors. (follow the link below) http://aidc.org.za/media-room/publications/wage-and-profits/summary/9-wage-and-profits/32-amcu-case-spreadsheet.html