It has been my central thesis that central bank actions around the globe have essentially locked in the long-term trend of devaluation of national currencies while at the same time assuring a long-term bull market in precious metals. Since I have begun analyzing equities and opining on stocks I have been recommending gold and silver in physical form or through one of the ETFs that tracks the price of the metals such as (GLD), (IAU) and (SLV) as I believed inflationary pressures from such action could bolster prices for precious metals. I have recently opined that silver could outperform gold in the next few years, and have laid out the bullish case for silver.
While gold and silver are the most popular precious metals, one of the world's top precious metals is often ignored. Platinum, which is rarer than gold and silver and also has many applications beyond being a precious metal as it is used in the industrial sectors is actually in a deficit now due to the recent South African mining strikes. It is estimated that platinum production in South Africa will be diminished by about 350,000 to 400,000 ounces for 2012. Platinum is a high-demand metal, and thus a deficit should be a tailwind for the price as supply will be limited to meet a higher demand.
Platinum and platinum group metals are utilized in many everyday items such as:
- Automobiles and machinery; used in catalytic converters, spark plugs and sensors
- Chemical processing; can serve as a general catalyst to speed reactions
- Electrical/electronics; found in high-temperature and non-corrosive wires and contacts
- Petroleum/oil refining; serves as a catalyst for crude oil cracking
- Jewelry; often used as a substitute for gold
- Dental/Medical equipment
- Investment form; bullion and coins
Further, gold is trading at a higher price than platinum in the last decade. This is however historically rare and could mean platinum is due for a rebound above gold prices. Since the mid 1990s platinum has often cost 1.5 to 2 times as much as gold. Platinum currently trades at $1530 an ounce, whereas gold is now trading at $1663 an ounce. Given the race to debase currencies by central banks around the world, I think precious metals such as gold, silver and platinum stand to gain significantly. Thus I recommend investors consider adding it to portfolio holdings reserved for precious metals, in addition to gold and silver. As I have outlined previously with gold and silver, there are a variety of ways to invest in platinum including physical bullion and coins, ETFs that track the price of platinum, or individual mining companies.
Physical Bullion and Coins: Like gold and silver, platinum can be purchased in physical form such as bullion or coins. Like gold and silver I believe this is indeed the best way to invest in platinum. Platinum can be slightly harder to find in physical form from local dealers but can definitely be found from the major dealers online. Be sure to buy the purest form available. Do your research to find a reputable dealer online to prevent overpaying and/or delivery issues. If possible try to buy locally, as the selling fees and shipping costs from online purchases can eat into any potential return on investment in the near term. Finally, some people invest in physical metals via their IRA and do not take delivery of the physical metal themselves. I prefer investors take delivery whenever possible to prevent any potential hassles of obtaining and/or selling the assets in the future.
Platinum ETF: As with the GLD and the SLV that track gold and silver, one approach that investors should consider to gain exposure to platinum is through an ETF that attempts to track the performance of the price of platinum. The ETF that I recommend is the ETFS Physical Platinum Shares (PPLT). The investment seeks to "reflect the performance of the price of physical platinum, less the expenses of the ETF's operations. The fund is designed for investors who want a cost effective and convenient way to invest in platinum with minimal credit risk." Advantages of investing in the PPLT ETF include ease, flexibility of investment and relatively low expenses. The expense ratio of PPLT is 0.60%. Each PPLT share is backed by approximately 1/10th an ounce of physical platinum, which is stored in London and Zurich banks. According to the prospectus each platinum bar is numbered and is reported daily on the ETF's web site. Average daily trading volume is around 57,000 shares, making it the most liquid of the platinum ETFs and ETNs. PPLT is much less liquid than other precious metal ETFs such as GLD or SLV, but still adequate for investing/trading purposes. PPLT currently trades at $150.44 a share. It has a 52-week trading range of $133.00 to $171.46.
Platinum Stocks: A more indirect way to invest in platinum is through one of the mining companies, as I have also recommended considering for gold and silver exposure. Often these mining companies are engaged in mining platinum group metals that encompass not only platinum, but other rare earths such as palladium and rhodium.
My top pick in the platinum mining space is Stillwater Mining Company (SWC). In operation since 1992, SWC engages in "developing, extracting, processing, smelting, refining, and marketing palladium, platinum and platinum group metals." The company conducts its mining operations at the Stillwater mine located near Nye, Montana, and at the East Boulder mine located near Big Timber, Montana. It is also involved in developing Marathon, a platinum group metal and copper property located in Ontario, Canada. It is also exploring the Altar site, a copper and gold property located in San Juan, Argentina. In addition the company operates a smelter and base metal refinery located in Columbus, Montana. Further, it recycles spent catalyst material to recover palladium, platinum, and rhodium at its smelter and base metal refinery. As of December 31, 2011, the company had proven and probable ore reserves of approximately 42.5 million tons at its Montana operations, and approximately 91.4 million tons at the Marathon development project. The company recently released a report where it detailed that demand for palladium and platinum is intensifying worldwide. This demand should support higher prices and feed into the bottom line.
The company was a bit oversold after issuing a $300 million debt offering and reporting a mixed third quarter. For the quarter, SWC missed on revenue and beat expectations on earnings per share. Compared with the prior-year quarter, revenue dropped significantly and earnings per share contracted significantly. Margins shrank across the board. SWC booked revenue of $181.0 million. Estimates called for revenue of $208.1 million on the same basis. Reported sales were 29% lower than the prior-year quarter's $253.7 million. Earnings per share came in at $0.11. Earnings estimates forecast $0.05 per share, but were 70% lower than the prior-year quarter's $0.37 per share. The stock has come back strongly, adding nearly 20% after dropping significantly following the sell-off after earnings. The stock currently trades at $12.35 on average daily volume of 2.8 million shares exchanging hands daily. It trades at a p/e ratio of 24.5 with a PEG ratio of 1.8. The 52-week range of the company is $7.47 to $15.24.
Another stock I like in the space that is currently speculative but I believe has a bright future over the long term is North American Palladium (PAL). PAL engages in the exploration, mining and production of precious metal properties in Canada. The company explores for palladium, platinum, gold and other metals at its mining sites. Its principal property includes the Lac des Iles palladium mine located northwest of Thunder Bay, Ontario. While the company is not primarily platinum oriented it is poised to do well from rising prices of platinum and related group metals. Unlike some of the miners that operate in South Africa, which are increasingly faced with geopolitical risk and hyper-inflationary cost challenges, PAL operates in a mining friendly jurisdiction with lower political risk, stable government policies, moderate cost inflation and available labor. The company has moderate debt levels and maintains an ability to finance working capital to support funding exploration and development investment activities. The stock currently trades at $1.23 on average daily volume of 1.5 million shares. The company is currently not profitable on an EPS basis as it continues to expand and develop. The stock has a 52-week range of $1.15-$3.31.
My current final recommendation in the platinum stock space is Platinum Group Metals (PLG). PLG is a relatively speculative company in the platinum and platinum group metals space. PLG is engaged in the acquisition, exploration and development of platinum properties with interests in the western and northern limbs of the Bushveld Complex in South Africa and in Ontario, Canada. PLG's primary focus is getting its Project 1 platinum mine into full production. Project 1 is located in the Western Bushveld Complex of South Africa. Projects 1 and 3 of the Western Bushveld Complex include activities at War Springs and Tweespalk, North Limb, Sable Joint Venture and Waterberg Venture all in South Africa. The other operations take place in Lac Des Iles, Ontario, Canada, and the Northwest Territories in Canada.
One of the reasons this company represents a potentially fantastic stock is that it is attempting to expand its interests in and ownership of platinum and related metal property sites. In February 2011 PLG announced it acquired a right to earn up to a 75% interest in Benton Resources Corp's (OTC:BNRJF) Bark Lake platinum and palladium project. In September of 2011 PLG announced an acquisition of 100% ownership in the Providence Lake nickel, copper, and platinum property in the Northwest Territories of Canada from Arctic Star Exploration Corporation. The company continues to explore and expand its property holdings and progress has been made at its project sites in the last year.
In its third-quarter report PLG gave investors a summary of its last nine months of progress. Speculative stocks of this nature tend to trade off of news, progress and new finds. Over the last three quarters (Q3 ended May 31, 2012) PLG incurred a net loss of $7.03 million. This loss is less than what was lost in the prior fiscal year's first three quarters ending May 31, 2011, which was a net loss of $9.24 million. Loss per share for the first three quarters was $0.04 per share compared with a loss of $0.06 per share for the comparative period of fiscal 2011. Total expenditures by PLG for development and purchases of property and equipment for Project 1 during the period totaled $24.34 million. The Waterberg project's development costs were approximately $3.29 million and the Sable joint-venture project costs were $0.48 million.
In the last quarter and in the annual report, things improved but the company is still losing money as it continues to develop and explore. PLG's cash position at August 31, 2012, was $48.17 million, including $30.51 million in restricted cash. On September 4, 2012, PLG announced an initial 6.6 million ounce inferred mineral resource estimate at the Waterberg project. Then on November 5, 2012, PLG announced new drill intercepts approximately doubling the strike length of the Waterberg discovery to a total of 5.5 kilometers up to the northern boundary of the current joint venture project. Progress continues to be made at all sites. During the year ended August 31, 2012, the PLG incurred a net loss of $10.59 million. PLG's objectives for the year ahead are to complete the senior loan facility and other financing and move into a safe and efficient Phase 2 construction of Project 1, to further the geological understanding of the near surface Waterberg platinum, palladium and gold deposit and to further explore the new northern portion of the Bushveld Complex discovered by the company.
Progress is coming along at all sites and the stock will continue to trade off of news releases relative to continued developments of these projects in addition to fluctuating with the price of platinum.
Currently the stock trades at $0.82 per share. The stock trades on average daily volume of 117,000 shares a day and has a 52-week trading range of $0.75-$1.72. I expect platinum to approach $2000 over the next few years year and PLG's stock price should rise in tandem over the long term.
Bottom Line: Frequently, platinum is overlooked in favor of gold and silver. While I highly recommend gold and silver for the long-term investor, as well as the companies that mine these metals, I also believe that platinum and platinum companies should be considered. Should platinum return to its historic trading ratio with gold, it suggests a large upside for platinum relative to gold. With prices of precious metals set to rise long-term stemming from increasing demand, geopolitical tension, risk of inflation and central bank balance sheet expansion, investors should consider mixing platinum exposure into their precious metal portfolio allocations along with gold and silver.