By Leo Liu, MBA, CFA
Leo Liu is a private investor and currently holds the position of Investor Relations Officer with Prophecy Platinum Corp. (TSX.V: NKL).
New platinum projects in Canada patiently await notice in looming deficit market
On demand side, the global economic recession caused platinum demand in the car and jewelry sectors to enter a cyclical downturn. However, a substantial supply reduction due to the labor strike in South Africa moved the platinum market from surplus to deficit over the course of 2012. The writing is on the wall: new supplies from stable jurisdictions like Canada are necessary and, as the trend toward their development and acquisition begins to develop, these new suppliers and potential suppliers will arouse increasing attention from investors.
Steady performance in autocatalyst demand as falling vehicle production in Europe will be offset by growth elsewhere
Europe remains by far the largest market for diesel cars, accounting for roughly 27% of total global demand. Weighed down by recession, spending cuts and high unemployment, the automotive market continuing to slip in the Eurozone. The European Automobile Manufacturer's Association is forecasting a 17-year low for full-year sales in 2012; a more severe contraction of 8 - 10 percent versus the 7 percent drop it projected earlier.
Weakness in Europe has been largely offset by the increase in platinum purchasing by Japanese manufacturers as output improves following last year's natural disasters, according to Johnson Matthey (a British multinational chemicals and precious metals company). Greater demand is also expected from the light duty diesel sector in India, where sales have grown strongly in 2012.
Figure 1. Gross platinum autocatalyst demand
Source: Johnson Matthey
Strong performance in the jewellery sector in China and India
Johnson Matthey notes that demand for platinum in the jewellery sector is expected to reach a three-year high of 2.73 million ounces.
The bright spot remains China, the world's largest platinum jewellery market. In the first eight months of 2012, China's platinum demand rebound was driven by lower average platinum prices and an increase in the manufacturing of platinum jewellery to stock new retail stores in second and third tier cities. Gross demand for the jewelry in China is expected to increase by 14% overall in 2012, according to Johnson Matthey. Meanwhile, consumer demand for platinum jewellery in India has continued to grow, prompting an expansion of platinum jewellery manufacturing and retailing.
Figure 2. Estimated monthly purchasing of platinum by the Chinese jewellery industry
Source: Johnson Matthey
Holding of Platinum Exchange Traded Funds (ETFs) has largely followed the price
Periods of rising prices tend to attract heavy net ETF investment. Platinum ETF holdings jumped 21.32koz to 1603.92koz in 2012, levels last seen in September 2011. Most of the inflows were recorded on the 7th of September this year.
Figure 3. Total ETF holding reaching new record high
Source: Johnson Matthey
South African platinum supply to fall to lowest level since 2001
Anglo American Platinum, Impala Platinum and Lonmin are South Africa's largest three platinum producers, combining to account for 64% of global platinum production and 89% of South Africa production.
Violent labour unrest in the South Africa mining industry intensified this year, starting in January with a stoppage by workers at Impala Platinum, the world's second-largest platinum producer, followed by illegal six-week strike that began August at Lonmin Plc's (OTC:LNMIF) Marikana platinum mine. The world's largest platinum producer, Anglo American (OTCPK:AAUKY), saw labor stoppages shut down its Rustenburg mine in Oct.
Months of unrest have decimated South African platinum output. Stillwater (NYSE:SWC), one of the few major platinum producers outside South Africa, concludes that this year's strikes at Impala, Lonmin and Amplats could reduce 2012 global PGM (Platinum Group Metals) production by up to an estimated 1.2 million oz. - 650,000 oz. of platinum, 170 oz. of palladium and 80,000 oz. of rhodium. This corresponds to a 9% drop worldwide and a 13% drop for South Africa. This estimate is confirmed by Johnson Matthey in its latest Platinum 2012 Interim Review, which points out platinum supplies from South Africa are forecast to fall by 12% year-on-year to 4.25 million oz., an eleven-year low.
Higher cash costs expected due to wage and electricity cost inflation
Lonmin and Impala raised workers' salary 20% to settle illegal strikes, while strikes at Anglo American are still continuing. If workers' appeals there get satisfied, it will increase the whole South African platinum mining manpower overhead by 20%.
Determined by South African authority in 2010, electricity prices go up more than 25% each year in three-year terms, thus meaning a predicted doubling of the average current rate in 2013.
North American platinum producers enjoy stable production without geopolitical risks
Compared to 12% production decrease in South Africa and 5% decrease in Russia, platinum production in North America will have remained stable throughout 2012.
Although the overall market share held by North American suppliers is small (only 6% in 2012), it will increase, along with improvement of its strategic significance, by providing commodity exposure without the geopolitical risks associated with South Africa and Russia, the major PGM producing countries.
Figure 4. Platinum supply breakdown
Source: Johnson Matthey
Investment opportunity for new platinum sources from stable regions like Canada
US Geological 2012 Survey revealed that Canada ranks fourth in the world's platinum reserve base. In Canada, the Sudbury Basin in central Ontario has the largest number of PGM-producing mines, where platinum is produced as a by-product of nickel mining. The two major players in this area are Xstrata (OTC:XSRAF) and Vale (NYSE:VALE). Xstrata's Sudbury operations consist of the Nickel Rim South Mine, Fraser Mine, a mill and a smelter. The Nickel Rim South mine is currently Sudbury's largest mining operation and is expected to provide high value ore feed for more than 15 years. Vale's operations in Sudbury are among the largest in the world.
North American Palladium (NYSEMKT:PAL) is the primary Canadian PGM producer. It owns the Lac des Iles Mine near Thunder Bay in western Ontario, the only existing primary source of PGM in Canada. Ore from the mine is processed to a concentrate rich in palladium, while also containing small amounts of platinum and base metals.
A number of potential new sources for the future exist in other parts of the country as well. The Yukon Territory, a well-known gold rush region, hosts one such up and comer, Prophecy Platinum (TSX.V: NKL). Highly atypical of the area, the company's flagship Wellgreen property is one of the world's largest undeveloped nickel-sulfide projects and contains a unique platinum resource that creates very compelling economics. It is an excellent example of PGM project being developed in a safe jurisdiction which could be poised, in terms of both timing and scale, to play an important role in the increasing prominence North American platinum production is expected to play in coming years.
It is clear that the time to dedicate resources to explore for new platinum mines and deposits outside South Africa has come. With a coming deficit market, new platinum projects in Canada patiently await inevitable courting by international platinum investors and producers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: I do not have any stocks of Xstrata, Vale, North American Palladium and Prophecy Platinum, and no plans to initiate any positions within the next 1 month.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Prophecy Platinum Corp. Neither Prophecy Platinum Corp. nor the author can guarantee accuracy of all information provided. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Prophecy Platinum Corp. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.