By Leo Liu, MBA, CFA
Leo Liu is a private investor and currently holds the position of Investor Relations Officer with Prophecy Coal Corp. (OTCQX:PRPCF) and Prophecy Platinum Corp. (TSX.V: NKL).
Platinum undersupply expected, price to rally to high level
Bloomberg News point recently pointed out that this month platinum prices rallied to their highest level since February amidst violent labour conflicts at South Africa's Lonmin Plc's (LON) Marikana mine - which accounts for about 10 percent of global output - and the U.S. central bank's announcement of a third (and perpetual) round of quantitative easing. And now, per the Globe and Mail, "the industrial strife hitting South Africa's mining industry has spread to AngloGold Ashanti, the world's third-largest bullion producer by sales."
Figure 1. One year platinum spot price
Because of the upheaval associated with the industry's wildcat strikes and the increasing demand for platinum, there are now fears of undersupply where surpluses had been predicted. Analysts expect the platinum market to go into a deficit in 2013 and platinum prices are forecasted to rise to over US$2,000 per ounce by 2015, potentially higher if South Africa deteriorates further. In the long run, the market is expected to remain in deficit and such supply-side constraints would only lead to further tightening, according to KPMG Platinum Insight.
Figure 2. Platinum market balance and consensus price
Inflation hedge drives the Investment demand for platinum
Investors have accumulated record holdings of platinum assets as they seek to protect their wealth against the threat of inflation with a metal that is highly vulnerable to supply disruptions as a result of the fact that the overwhelming volume of global production comes from South Africa and other volatile jurisdictions. Platinum ETF holdings have grown considerably since the first ETFs were launched in 2007.
Figure 3. Platinum ETFs Total Metal Holdings ('000 oz)
Source: Mitsui and Co. Precious Metals, Inc.
From the macroeconomic perspective, the now well-established global trend of loose monetary policy has become very apparent. The U.S. Federal Reserve on Sept. 13 announced a third round of quantitative easing (QE3) in an effort to stimulate growth - with an unlimited horizon of both time and amount. Further, the European Union is set to fire up the printing press in an effort to avoid a debt crisis, the Japanese government suddenly announced an injection of 10 trillion yen to stimulate the economy, and China has launched an infrastructure stimulus plan of 1 trillion yuan. Such policies may temporarily stimulate an economy, but will dramatically accelerate global inflation and corresponding value of currencies.
Historical records show that every time the Fed introduced quantitative easing policy, it was always a boost for precious metals. In the period that the fed issued the first round of quantitative easing policy (QE1), gold went from $820 / ounce up to $1131 / ounce; a 37.9% increase. Following the second round of quantitative easing policy (QE2) gold topped $1920 / ounce; an increase of 42.43%.
With scarcity and increasing liquidity, platinum, like gold, can keep up with inflation and should see its price rise in a similar fashion.
Auto catalyst demand will increase lead by light duty vehicle production
Auto catalyst demand recovered in 2011, and in fact grew by 1% to 3.1 million ounces, according to Johnson Matthey. Pent-up demand for large trucks stimulated an increase in purchases of platinum for heavy duty diesel emissions control. This was partly offset by greater substitution of platinum with palladium in light duty autocatalysts as well as lower output by Japanese manufacturers.
Figure 4. Global auto catalyst demand for platinum
Source: Thomson Reuters GFMS, IHS Automotive
Current data shows the vehicle sales growth rate in China and Europe is stabilizing.
Figure 5. Global vehicle sale growth rate (%)
With close association to economic recovery and future growth, global vehicle production is expected to increase moving forward and platinum group metals (PGM) demand will be in line with such upward trend.
Figure 6.The global vehicle production and PGM demand forecast
Supply at risk
High-risk jurisdictions dominated global platinum supply
- When production of a commodity is concentrated in just few countries, supply risk may increase. And that is exacerbated when those countries are susceptible to political, economic and labour issues. South Africa, Russia and Zimbabwe occupy 93% of platinum supply, according to Johnson Matthey.
Figure 7. Platinum supply breakdown by regions
Source: Johnson Matthey Platinum 2012
- The socio-political situations and risk in South Africa are getting worse. A violent six-week strike at Implats early this year sliced 21 percent off its full-year production and contributed to a drastic cut in its dividend. Industry officials are worried the Marikana labour strife could spread around the South Africa and, as noted above with respect to AngloGold Ashanti, these fears are becoming manifest reality. Since September 2011, platinum production in South Africa has dropped heavily. For the near-term future, the world will continue to be largely dependent on South Africa for platinum, but high supply risks due to mine safety, violent protests and rising costs should be factored into long-term investment strategies.
Figure 8. South Africa platinum group metal production index
Source: Data stream
- In terms of the government policy for mining and exploration, Zimbabwe and Russia are considered high-risk jurisdictions as well. According to the Fraser Institute's Survey of Mining Policy Index Ranking (2011-2012), South Africa ranks 53th out of 93 districts, Russia 71/93, Zimbabwe 74/93. Primary concerns are Zimbabwe's nationalization of mining industry mines; in Russia, it is flat production due to less mineral potential and environmental issues.
South African PGM industry is incurring loss due to high cash costs
Despite the benefit of a strong rise in platinum price in the middle of September, over half of platinum production is still not recovering all-in cost (cash cost + capex). This fact will likely slow mine expansions and commissioning of new mines and may even lead to further curbing of production.
Figure 9. World platinum equivalent Total Cash cost and All in Cost 2011
Source: Thomson Reuters GFMS (Platinum & Palladium Survey 2012)
A substantial proportion of the South African PGM industry is incurring loss due to high cash costs and sustaining capital expenditure. As KPMG point out:
- Labour costs constitute one of the biggest challenges for miners and, as the platinum mining in South Africa is considered to have higher risk, it requires higher payouts. The striking miners at a Lonmin-owned platinum mine in South Africa demanded a wage increase of up to 22%, as a pre-condition for returning to work.
- Another cost pressure comes from power, with Eskom (South Africa's power utility) increasing prices at an average of 27 percent in the last four years in order to finance new power stations and alleviate chronic power shortages. In addition to power, water shortages are also becoming pervasive in South Africa.
- Inflation in the global reserve currency and corresponding strengthening of the ZAR has also contributed to reducing the margins of miners who receive payment in US dollars.
Canadian mining properties becoming a very attractive opportunity
The need for geo-political diversification among major platinum / PGM producers has become critical.
It is clear that the time to dedicate resources to explore for new platinum mines and deposits outside South Africa has come. Canada represents a new and exciting opportunity for global platinum miners to invest in. U.S. Geological 2012 Survey revealed that Canada ranks fourth out of the world's platinum reserve base. Unlike the miners in South Africa who are increasingly faced with geopolitical risk and hyper-inflationary cost challenges, North America is a mining-friendly jurisdiction, moderate inflation and a strong base of skilled labour, as noted by Christopher F. Davis of Seeking Alpha.
Stillwater Mining (SWC) and North American Palladium (PAL) are the North American primary PGM (Platinum Group Metals) producers. Most of the platinum group metals produced in Canada are by-products of nickel mining. The Sudbury Basin in central Ontario has the largest number of PGM-producing mines, while Yukon and Quebec also have huge PGM resources. Located in Canada's Yukon Territory, ranked in the Top 10 of global mining jurisdictions by the Fraser Institute, the Wellgreen Nickel-Copper-PGM deposit owned by Prophecy Platinum (PNIKF.PK) is an excellent example of project in a safe jurisdiction with blue sky potential that international platinum investors and producers alike should and will come to take notice of in the coming months and years. (Declare: I do not have any stocks for Stillwater mining, 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.