South African wage deal will drain Anglo American’s cost savings: Moody’s

1 July 2014 (Last Updated July 1st, 2014 18:30)

The wage agreement signed by Anglo American and platinum workers will allow the company to restart production at mines in South Africa but will increase its permanent cost base, according to credit rating agency Moody's.

The wage agreement signed by Anglo American and platinum workers will allow the company to restart production at mines in South Africa but will increase its permanent cost base, according to credit rating agency Moody's.

The recent wage hike agreed with the striking workers will result in average annual costs of 8.4% and will permanently increase the cost base of the company's platinum business, Amplats, above the South African inflation rate of 5.3%.

The payment of hiked salaries in the first year alone will result in a huge drain from the ZAR1.9bn ($185m) permanent cost savings Amplats earned through restructuring in 2013.

"Payment of hiked salaries in the first year alone will result in a huge drain from the $185m permanent cost savings Amplats earned through restructuring in 2013."

Labour costs form 55% to 60% of Amplats' annual production expenditure, according to the Moody's report. The agency has retained Anglo American's current credit rating but said that it will closely monitor the platinum business' effect on the overall performance of the company.

Anglo American signed a deal with striking platinum mine workers in South Africa last month agreeing to increase their wages by at least ZAR1,000 ($94) a month. The five-month strike affected nearly 40% of the company's daily platinum production.

According to Moody's, Anglo American may be forced to undertake further restructuring to meet its target of a 15% return on capital employed by 2016, but this move will result in labour unrest.

External factors such as the recovery of platinum prices and large depreciation of the Rand against the US dollar may, however, help the company in recovering the labour costs.

Earlier media reports have said that Anglo American is planning to sell its under-performing assets, including platinum properties in South Africa, to raise around $4bn.

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