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

Platinum And Palladium Market Future Looks Robust

|Includes: Nickel Creek Platinum Corp. (NCPCF)

North American developers and producers see longer term upside on PGMs
Wellgreen PGM-Ni Project and Upper Camp.
Market turbulence is continuing into 2015 for platinum group metals, even as last year's five-month mining strike in South Africa has faded from the headlines.

Aftershocks continue to reverberate, including a one-week strike hitting Northam Platinum, and significantly lower earnings at both Anglo American (Amplats) and Impala Platinum, the world's top two producers. Impala recently advised that earnings per share may be as much as 77 per cent lower for the final six months of 2014, compared to the same period a year earlier. Amplats has forecast a 55 per cent drop in profits for 2014.

Expectations that last year's strike would push up prices in the near term have been disappointed by the strengthening U.S. dollar. The dollar has put downward pricing pressure on the precious metals complex led by gold along with the other bulk commodities. Sales from long-term stockpiles are also considered a downward factor for platinum prices.

By some accounts more than half of existing PGM mines are uneconomic in their recent trading range. Analysts note that the traditional labour-intensive, deep underground mining operations which dominate in South Africa, the world's leading supply region, are chasing lower grade material ever deeper, at increasing cost. Older mines particularly are at risk of closure - and even many mechanized underground operations are struggling.

Restructuring and even production shutdowns are likely. For example, Canada-based Eastplats sold its entire South African business to the Chinese group, Hebei Zhongbo for $225M USD in December 2014. Impala announced in late February that it will cut more than $300 million USD from planned spending for 2015-16 due to expectations of lower prices over that time. Impala also indicated it will sell mines and close shafts, and is deferring development of its Afplats project for four years.

South Africa currently accounts for more than 70 per cent of world production of platinum with about 20 per cent from Zimbabwe and Russia. South Africa and Russia together account for about 75 per cent of world palladium production. Only the weak Rand foreign exchange rate has sustained producers in South Africa. (Operational expenses are denominated in the South African Rand, while the metals are valued in the strong U.S. dollar.)

Activity with respect to exploration, development and investment in projects outside Africa has begun to show signs of increase as price-competitive players position themselves based on the macro forces confronting the traditional industry. North America is home to Stillwater, the largest producer of platinum group metals (PGMs) outside of Africa or Russia. Vale and Glencore, both large cap companies, have significant production from their Canadian projects, while North American Palladium is another smaller producer. A number of notable development stage projects also continue to advance, including Polymet's Northmet mine and Wellgreen Platinum's (TSX: WG) PGM-Nickel project. Wellgreen has potential to supplant Stillwater as the single largest platinum producer outside Africa or Russia.

Well over one million ounces of production was lost due to the strikes, in an industry that showed global refined production of just 7.2 million ounces. JP Morgan and Standard Bank both forecast the ongoing demand/supply imbalance would result in the elimination of excess platinum stockpiles within a few years. The situation is even more critical for palladium supply.

Meanwhile, demand for platinum and palladium continues to grow. This growth comes from four sectors - automotive, jewelry, industrial use including the electronics and chemical industries, and investors who perceive it as a store of value similar to gold. Mining accounts for the lion's share of supply, about 75 per cent, with auto scrap recycling and jewelry scrap providing for the rest.

The sector with the greatest upside appears to be automotive. Platinum and palladium are essential to the manufacture of catalytic convertors to reduce exhaust emissions. Modest gains in sales for electric vehicles, which account for less than one per cent of global vehicle sales, are not projected to impact overall growth for internal combustion vehicles which utilize PGM catalysts. Fuel cell vehicles may present a bigger opportunity - PGM loading is as much as ten times higher than requirements in a catalytic converter. Industry watchers note that the internal combustion engine auto market is expected to remain robust with increasing environmental standards being implemented, particularly in the developing world, boosting demand for PGMs.

In 2015, for example, Thomson Reuters forecasts a substantial bump in demand.

"Key themes we're expecting are stronger demand growth of almost seven per cent," Thomson Reuters GFMS team senior analyst Erica Rannestad said. "That's really charging forward, backed by stronger growth in autocatalyst demand.

"The primary driver behind that (growth) this year is stronger heavy-duty diesel sales," she said, noting that platinum-intensive catalysts are necessary for diesel-fueled vehicles.

Thomson Reuters GFMS sees increasingly stringent emission standards for heavy-duty vehicles as positive for platinum demand in the years ahead. Meanwhile the demand for palladium also looks strong because of its higher use in the robustly growing gasoline passenger vehicle market.

"South African miners haven't been making any profit for years now," Rannestad noted. "They're not investing in any new projects, so supply from South Africa is not expected to grow in the long term, even 15 years out."

Rannestad added that tightening of auto emission standards in China, in response to pressing air quality issues in urban areas, will be positive for both platinum and palladium demand.

"China is growing in importance as a user of PGMs," observed Jeffrey Christian, managing partner of CPM Group, a commodities research and consulting company spun off in 1986 from Goldman Sachs commodities research group. CPM advises producers, consumers, investors, mints, governments and others on PGM markets.

"The most important implication for North America is that potential additional source of demand for PGMs - if we can produce them. There are not any major known PGM deposits being exploited in China at present, nor any on the immediate horizon, so China is likely to be an importer and buyer of PGMs."

Meanwhile, Christian added, there is "a great deal of concern" in the market about long-term PGM supplies from South Africa, Zimbabwe, and Russia, particularly among auto manufacturers, other users of PGMs, and semi-fabricators.

"Short-term price weakness is masking the concern for some investors. Some investors take long-term views of the markets, especially those involved in investing in exploration and development opportunities.

"These (latter) investors have been focusing on PGM mining investments. Given the scarcity of good PGM properties…those investors who pay attention to PGM markets are more keenly interested in highly prospective properties, such as Wellgreen Platinum's project."

Wellgreen's project in Canada's Yukon is projected to produce over 200,000 oz. of platinum group metals annually, based on just 30% of its known resource according to the results of a 2015 economic study. Those results also indicate significant expansion potential which is currently being quantified as part of a more detailed technical report expected in March. Despite that promise, the protracted bear market in the commodities space has valued the company at just $60 million. That valuation is in spite of a post-tax net present project value in excess of $1 billion and expected annual cash flow of over $300 million, once in production.

"If you look in the news over the last six months, there have been a series of announcements by Chinese entities that are going down to South Africa and buying assets, some of which are not economic at today's metal prices for PGMs," Wellgreen Platinum President and CEO Greg Johnson said.

"It makes you wonder whether they're concerned about being able to secure sources of supply regardless of price, or if they realize that China, in particular, is going to need to address its pollution issue and that prices will likely rise, possibly significantly, with the increased demand from China. A lot of people are speculating that new standards will be imposed for autos, particularly Chinese-built autos, and that's why we're seeing acquisitions that might not make sense at today's prices."

Johnson, a co-founder of NovaGold Resources, leads a veteran technical team now at Wellgreen Platinum that has rapidly advanced its project in Canada's Yukon Territory to stand out as one of the top PGM and nickel development assets globally. What makes it unique is that there are so few deposits of this type and size outside of South Africa or Russia. Geologically, PGM deposits are more rare than gold, Johnson noted.

"Members of the Wellgreen team have spent their careers working for major mining companies like Xstrata and Vale, and for mid-size developers and producers with specific experience on these types of PGM nickel deposits."

There are almost 800 drill holes that make up the Wellgreen resource, which Johnson describes as a well defined system, with both historic production and decades of exploration work behind it.

"At this point, although we believe we are probably going to continue to discover new ounces of PGMs and pounds of nickel, the main focus is on refining our understanding of the operation costs and the potential cash flow generation."

"This project is similar to some of the large deposits in Russia and South Africa, but because they occur right at surface rather than at kilometres of depth, it gives us the advantage of mining it with open pit methods, and the opportunity to use the economy of scale and low cost structure that you can get from those kinds of projects."

Estimated initial capital cost for the mine is $586 million (NYSEARCA:CAD), which includes $100 million added for contingency. This year, Wellgreen will go into prefeasibility work, with a feasibility work anticipated by 2016.

"The timeline should fit well into PGM market fundamentals," Johnson said.

"The annual demand this year for both metals is projected to outstrip supply by about a million ounces and that's in an eight- to 10-million ounce total market for those two metals. So it's about a 10 or 15 per cent supply deficit. Continuation of that trend could set up conditions for a near perfect storm for higher PGM prices eventually."