Current Platinum Prices And Miner Economics

| About: ETFS Physical (PPLT)
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According to Mineweb and Bloomberg, South African platinum producers increased their debt by $.9 B since the end of their last reporting period. This is unsustainable, and margins have deteriorated further in the last 45 days since the 6/30 reporting date.

These South African platinum producers' share prices are down 20-75% during 2012, so any share offering will dilute shares and is the last option. Soon, loan covenants will be violated at Lonmin, especially now that it has serious problems with union violence. So either prices of platinum has got to go up, or the companies go out of business. It's a game of industrial chicken with the lowest-cost producer with the strongest balance sheet surviving, as no one wants to voluntarily shut any mining operations and add the additional fixed costs of all the downstream units and overhead to each ounce sold. So this is an opportunity to buy an asset, ETFS Physical Platinum Shares ETF (NYSEARCA:PPLT), below the full replacement cost of any producer and below the marginal cash costs of about 20% of current production. It is certainly not a time to sell, but that doesn't mean PPLT can't go lower for a period of months or even years. I estimate Anglo Plat, which produces about 35% of the world's platinum, could go 2-3 years at negative cash flow before being forced to restructure and cut production radically by closing its loss making mines. This is because in 2010 it raised $1.2 B from shareholders, which it used to pay off all the debt accumulated by its capital spending extravaganza of 2006-2008 followed by the commodity price collapse of 2008-2009. I don't think the shareholders would be willing to throw more good money after bad, so the equity option is closed to sustain its negative cash flow. The CEO has been fired (6/30/12) so a new broom with a different perspective is at the helm now. Debt in the first 6 months of the year nearly doubled, but is still at the low end at 12% of total assets and liabilities, according to the interim financial report.

Nine people have been killed in the last 5 days in violence at Lonmin's operations due to competition between unions. The violence is unbelievable by Western standards, people hacked to death with machetes for trying to go work. In breaking news Lonmin just announced the closure of all its South African mines until safety can be assured.

Against this backdrop platinum prices hit nearly their lowest level in 2012 yesterday, 8/13/12, and the platinum discount to gold ($230/oz.) hit a new record since 1985. According to the CFTC Bank Participation Report four U.S. banks (JP Morgan, et. al.) are short 14% of the total open interest in platinum futures. They have been playing the game that on any day the South Africa rand/U.S. dollar exchange rate moves in favor of the dollar, they take the platinum price down by an equal %. However on any day the rand strengthens, they prevent the platinum price from rising by selling aggressively into any rally. This has been the pattern since 8/2011. That game is reaching its logical conclusion however by the beginning of mine closures (two so far in 2012).

A bankruptcy judge in the liquidation of commodity futures firm Sentinel confirmed that Bank of NY can take "segregated customer funds" that were pledged as collateral against loans. Any money backing a long platinum futures position, or any certificates representing physical ownership of a 50 oz. bar held at a NYMEX approved depository, reported on a futures position statement, is now subject to confiscation by a bankruptcy trustee. Thus, there are fewer options for those who wish to hold platinum or a financial exposure to a long position.

ETF Securities' offering, PPLT, with audited storage in Switzerland, is one of these options.

Disclosure: I am long PPLT, PLG.