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Some platinum fundamentals

|Includes: ETFS Physical Platinum Shares ETF (PPLT)

Dear investors,

Since the surprising election results in MA, the drama over Greek debt, a bit of tightening by Chinese banks, talk from the Fed of ending one component of an aggressively loose monetary policy (QE),  and continued weakness in the employment stats, the markets have commenced a mirror image reversal of the pattern from last March.

Now,
the dollar is advancing,
stocks, metals, oil, and other commodities are retreating.

Against this potential inflection point in the markets, I am using a rifle with a telescopic sight to zoom in on the investment potential in platinum bullion. 

The platinum investment case has three components:
A) Protection against a seemingly mathematically inevitable devaluation of the US currency.
B) Buying an asset at today's prices which is subject to above inflation production cost increases, i.e. like buying a zero coupon bond.
C) Buying an asset whose production is subject to political risk, and hence a higher price should be required to compensate producers for taking this risk.

Developments in these categories:
A)  3.6 T US federal budget, of which 1.6T is unfunded.  To fund 1.6T  requires either that the government borrow the money or print it.  To borrow it from US citizens requires that individuals increase their holding by approx $5,000 per person per year.  For the average family facing reduction in income, higher taxes and insurance, this is a ridiculous proposition.  So the money must come from abroad or be printed.  So far, the govt. seems to be able to get Japan to borrow more, but China is starting to wield their participation in Treasury auctions as a political weapon.  If any of the friction points in the relationship; the value of the yuan, tariffs, merchandise trade deficits, exporting of manufacturing jobs, Taiwan, arms and technology sales to Iran, stealing of intellectual property, etc. escalate, then one can expect China to exercise influence via participation in Treasury auctions.
Thus, inevitably, IMO, the Fed will have to buy the unsold debt.

B)  Eskom, the S. African state electricity monopoly has proposed 35%/year increases in the price of electricity for the next 4 years.  Labor rate increases, sheltered by a pro-union government, have been running at 120 to 150% of inflation.  The depletion of a finite resource is showing up in ore grade decreases.  This means that more material must by processed for the same output.
Anlgo Plat, which produces 40% of the world's platinum just announced results for 2009.  Profits declined 97% from year earlier levels.  Debt rose 60%, as they went ahead with the capital expenditures necessary to replace mines that are playing out.  Cash costs of production: $1500/oz., Depreciation: $240/oz.
These numbers don't jive with making a profit at an average 2009 price of 1250-1300/oz., but those are the reported numbers.  The detailed annual report should be available in a month or two.

C) Zimbabwe took a step towards partial nationalization of the platinum mining industry.
See: http://www.miningmx.com/news/markets/Zimbabwe-lays-out-51pct-ownership-law.htm

The junior miner labor union is SA has stepped up rhetoric calling for nationalization of SA mines.  So far, the govt. is ignoring this.  But is it a trial balloon?
Is there a degree of coordination between the SA and Zimbabwe govt. on extracting additional govt. benefits from the platinum industry?  I guess that if you control over 80% of the world's production you are in a position to do this.  Why doesn't anyone think this is possible or likely?

The cost of a new mine and concentrator facility in SA is about 800 million US.  Expected life: 40 years.  What is the chance the govt. will take the mine, with or without compensation, during that 40years?  Company leaders and investors are whistling past the graveyard to continue ignoring this, in my opinion.
All the annual reports talk about expanding production, nobody mentions the risk of appropriation.
When the details on 2009 results are available additional data will be analyzed.

In short I have painted a picture of an investment, that even if one is wrong about in the short-run, it seems with all the things working one's way, one will likely be right in the long run.


Disclosure: Long PPLT