Platinum mining a guessing game for investors
Once a rising star in the mining sector, platinum has experienced dark days following a strike and a glut in global supply. But while multinational resources company Anglo American – once the biggest believer in the metal – moves to dispose of its Rustenburg assets, others are placing their bets on a bright future for the precious metal.
The platinum sector has been troubled by prolonged strikes that in 2012 culminated in 34 protesters dying at the hands of police at Marikana and this year, a protracted five-month strike that may have resulted in fewer deaths but larger financial losses. Possible restructuring looms on the horizon for each of the effected companies – Anglo American Platinum, Impala Platinum and Lonmin.
This time around, the distress in the industry was not offset by a high platinum price as was expected.
The reason was an oversupply of metal in the market created by the companies who forecast a higher demand for the metal, for which they increased production accordingly.
The industry thought demand would grow in response to new emissions regulations. Car component manufacturers would require more platinum, as it was expected that more metal would be needed in the manufacture of an autocatalyst to adhere to emission standards.
But automakers have so far managed to meet these standards by using the same amount of metal, if not less, and also found substitutes such as palladium. Recycling of the metal has also helped to regulate demand.
As a result, there is more than a year’s supply in excess, which keeps the price steady at $1 400 per ounce despite turmoil in South Africa, which produces almost all the world’s platinum.
Anglo is the largest producer of the metal, but in July, chief executive Mark Cutifani made the widely anticipated announcement that it would dispose of its troubled platinum mines in Rustenburg as the company tightens up its portfolio to deliver shareholder value at the bottom end of the resources cycle.
But while Anglo wants out, others want in.
Most recently, the Public Investment Corporation, which manages money on behalf of the Government Employee Pension Fund and is the largest investment manager in Africa, is also keen on platinum – and putting its money where its mouth is.
“Platinum is strategic in the long-term,” chief investment officer Daniel Matjila is quoted as saying in a Bloomberg report. “We want to hang in there … It should bounce back at some point. We are a long-term player.”
Rustenburg’s Wesizwe Platinum, funded by the China Development Bank, is developing the Bakubung Platinum Mine with nominal capital expenditure estimated at R10.69-billion, and plans to reach full production by October 2020. It forecasts increased demand for the metal.
Uptick in rhodium and palladium prices
Northam Platinum also seeks to expand its operations, with a view to become the largest platinum producer in the world. This is in expectation that “significant deficits [in platinum supply] will start manifesting” from 2018 onward, pushing metal prices skyward.
“We will look towards capitalising on any restructuring in the sector, and have put together a four-stage framework that will take account of contiguous, non-contiguous and global expansion opportunities in pursuit of reaching an aspirational target of one million ounces by 2020,” the company said in a statement on August 14.
Northam’s marketing manager Jerry White said the company’s market outlook is based on the premise that demand for platinum group metals (PGMs) is likely to show positive growth in the medium to longer term.
“Our views are premised on a broad range of industry sources, which include views from PGM researchers, broker reports, metal trading houses, industry experts, as well as buyers and consumers of metals,” said White. “We anticipate that market deficits for metal will widen on the back of more buoyant demand and the likelihood of constrictions in primary supplies.”
White said there has been a marked uptick in rhodium and palladium prices following the recent strike. “The possibility of a further reduction in supplies from a rationalised South African industry cannot be ruled out, which in turn could translate to deepening market deficits for metal, and thus higher basket prices.”
White said major global consumers of these metals including motor manufacturers in the United States, Asia and Europe will be faced with tightening emissions legislation, which will further underpin a healthy demand for these metals.
Also, “demand for platinum jewellery remains resilient and the outlook for enhancements in industrial off-take remains positive. The success of recently launched ETFs [Exchange Traded Funds] bears testimony to the positive investor sentiment towards the future of PGMs”.
But analysts remain unsure where the growth in demand and price will come from.
Michael Kavanagh, who analyses the metals and mining sector for Noah Capital Markets, said it is widely believed that companies are going to struggle to grow on the supply side.
“Margins are thin, balance sheets are stretched, there is not a lot of capital investment in the industry. So the expectation is that mine supply is not going to grow strongly, if at all,” Kavanagh said. “We are in a funny situation where virtually every company says supply [is] going to contract but ‘not us, we are going to expand’.”
There is a lot of uncertainty both on the positive and on the negative side of supply and investing in the sector entails a lot of risk, said Kavanagh, but “if things move in your favour you will do extremely well”.
There is a lot of difference in forecast when it comes to recycling, for example. “Some people think it’s going to dry up, some think for the next four or five years we could have a lot more.”
Peter Major, mining analyst at Cadiz corporate solutions, said: “I think it’s more wishful thinking than anything else. I think they think if they talk about it long enough there will be a deficit.”
Predicting commodity prices is virtually impossible and as seen in the gold industry, price is no longer a determinant of what is produced. “The environment here is so toxic for mining, it’s almost price independent,” said Major.
Of deficit in supply, he said: “The best way we are going to see that is if mines cut back; if this price falls much more they will sell and or close divisions.”