Peak Platinum In Real-Time, Implications For Physical Platinum ETF (PPLT)

Includes: AGPPY, PPLT
by: Davis Waldo

I just reviewed AngloPlat's (OTCPK:AGPPY) operating results for 2012, a period that includes the strikes in Q4. AngloPlat produces about 40% of the world's mine production of Pt, so they can be used as a proxy for the entire producer set. For the year cash operating costs (per equivalent refined Pt oz) rose 20%, while realized Pt prices, in USD, fell 10%. As a result they are planning on reducing production by 15% on a permanent basis. This will increase the burden of overhead per ounce produced, so profits, cash flow, and capital spending will remain under pressure.

Across all operations grade (grams of (Pt + Pa + Rh + Au) /ton ore mined), decreased by 1%, and 2% at the operations targeted for closure. The deep mines affected by the labor strife in Q4 and now targeted for closure have a higher ratio of Pt/Pd than surface mining operations. As a result Pt mined as ore (which precedes Pt produced as refined metal by up to 6 months) decreased 8% for 2012 while Pd mined as ore decreased by 6%. This shift will be permanent and ongoing.

The concept of Peak production, analyzed extensively for petroleum as Peak Oil, but heretofore largely ignored for platinum, is the concept that finite resources are subject to a sigmoidal distribution of production values. At first production rises rapidly, then peaks (perhaps in a long plateau), then declines. The year in which global production of a particular finite commodity peaks, for the history of the world, is know as Peak (Oil, Platinum, Gold, etc.). Peak Platinum occurred in 2006, in my opinion.

So the factors that create Peak Platinum are being documented in real time, particularly as the 2006 Peak stands out more clearly in the rear view mirror. Higher energy costs (also a finite resource), higher labor costs, more competition to control a declining resource base (nationalization, royalties, and taxes), lower grade (more energy inputs per unit of output) are all working together to cause producers to have to cut back operations in the face of stagnant prices. In the case of oil, constantly rising prices have given producers the cash flow to continue with ever higher capital spending to extract marginal resources. In the case of Pt, prices have been stagnant for 5 years, so all the higher costs have gone into reducing available cash flow of the producers. At first management convinced shareholders to subsidize operating costs with infusions of capital, but that window has closed. To conserve cash, management must drastically reduce capital spending, which affects production in years 2 to 10 going forward, and now, to retrench the scale of operations. With every retrenchment, unit overhead burden rises, creating a downward spiral of production.

What does this mean for prices going forward?

If the world wants Pt at current production levels, prices must rise in pace with costs, increases in cost can no longer be borne by the producers, they will simply run out of cash.

There may be a one-time step up in the price level as these economics work through the system.

Just taking the last year's 20% increase in cash cost/unit of Pt output, and starting from AngloPlat's 2012 average realized prices of 1,532 $/oz gives a target average price for 2013 of 1850/oz. For prices to average this, starting from 1,510 $/oz, they would have to hit about 2,000 $/oz. by Q4 2012.

Relating this to the ETF Securities Physical Platinum ETF (NYSEARCA:PPLT), which holds physical platinum in vaults in Switzerland and London, if this forecast is realized, the price could rise from the current value of 166 to 197 by Q4 2013, which would be an increase of 18%.

Disclosure: I am long PPLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here