Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

PGM Deficit And A Way To Play It

|Includes:Sylvania Platinum Limited (SAPLF)

There have been quite a few articles recently about the impending platnium group metals deficit that is shaping up for 2013. It appears the cost of mining the metal is substantially higher than the current market price for quite a few platnium miners. This article highlights their plight.

A substantial reduction in primary and secondary supply is expected to move the platinum and palladium market from surplus to deficit in 2012, according to the Johnson Matthey Platinum 2012 Interim Review. Gross demand for platinum is predicted to remain firm, however, severe disruptions to platinum mining are expected to result in a 10% drop in global mine production of platinum. The report also estimates an 11% decline in supplies from recycling. Together, these factors are expected to result in an overall 10% decline in worldwide platinum supplies and a deficit of 400,000 oz. Gross demand for palladium is predicted to increase 15%. However, both mine production and recycling are expected to contract by 4% each, and stock sales by more than two thirds, resulting in a deficit of 915,000 oz.

Unlike many other metals that are found in numerous regions, the majority of platinum and palladium production is concentrated in South Africa and Russia, which combined to account for 88% of platinum production and 80% of palladium production in 2011.

Miners in South Africa have been trying to shutdown higher cost operations but have met resistance from the government and unions. In addition their is an intrcine fight going on between two mining unions that is also leading to more unrest. In Russia, the majority of the PGM's are produced as a by-product of nickel mining by Norlisk Nickel. Those operations are extremely aged and the grades are dropping. In the end the lack of supply will lead to higher prices which will bring on more production with a time lag. Yes market price signals still work. The trick is to find a low cost producer that I can use as a vehicle to capitalize on higher PGM prices.

I think I have found the ticket in LSE AIM listed Sylvania Platinum. Sylvania is not like the typical hard rock miner such as Impala or Anglogold which need huge amounts of capital and thousands of unionized workers to mine narrow veins nearly a mile underground. Sylvania is a dump processor and has low costs, a small number of employees, and is more akin to a manufacturing operation than a mining operation. Over the last decades as mining has progressed in South Africa huge tailings dumps have accumulated as a result of previous mining efforts. At current prices the dumps hold economic quantities of PGM's. Sylvania's business model is simple; spray water from monitors onto the dump, catch the runoff, transport it to a processing plant, and recover the metal. In addition to the dumps the company also processes fresh tailings from current chrome mining operations.

The company bought the operation turnkey from another company and has had to make a few capital investments to fine tune the operation. The company is looking to get production up to 60,000 ounces per year at a cash cost of below $600. The company uses a blended cost to account for the mix of palladium and platinum. The company has also committed to returning cash to shareholders if it cannot reinvest in operations that clear a minimum 20% IRR. The company is currently cashflow positive and is cheap relative to its peer group.

Downside is the fact that all the operations are in South Africa. There will be occasional labor unrest and this will affect the company when the mines supplying tailings go on strike. However, these things usually resolve themselves over time and I think the risk is worth it at least for me. Check out the company's presentation and website and by all means do your own due diligence as only you are responsible for your investment decisions.

Disclosure: I am long OTC:SAPLF.

Stocks: SAPLF