Platinum has, like every metal, been in the wars.
But the travails of platinum mining companies have been even greater.
Rising costs; mines that have become cash-drains; lay-offs and labour disputes leading to violence; and, in one case, an ill-advised purchase of a copper company at the top of the market.
In short, they’re in a bad way.
But is this reflected in the price? Is it time to put on our contrarian’s hat and go looking to buy into the sector again?
Let’s have a look…
In the heady days of early 2008 the platinum price hit $2,286 an ounce, then collapsed to a low of $752 an ounce the same year. It then rebounded along with all commodities to flirt with $2,000 again by autumn 2011, but the test failed and the price fell.
Over the last 18 months or so, it has been stuck in a range between about $1,350 and $1,750. Just as gold capitulated last month, so did platinum, falling from $1,600 to $1,375 in just a few days.
The chart below shows the platinum price over the last ten years. I have identified the current support and resistance lines with a red band and blue line, respectively.
Platinum now sits at about $1,500 – considered just a little more valuable than gold, which is $50 or so cheaper per ounce.
This might seem odd. Platinum occupies a much more precious place than gold in the Western mind-set. A platinum credit card is superior to a gold card; platinum membership more desirable than gold; platinum record sales are better than gold – and so on.
But actually, the metals have frequently spent long periods trading on a ratio of just over 1:1, although that is the lower end of range, as the chart below from Nick Laird of www.sharelynx.com shows.
The blue line in the lower body of the chart represents the ratio of gold to platinum. In other words, it’s what you get if you divide the platinum price by the gold price. (For reference, the yellow line in the upper chart is the gold price, the black line platinum).
About 70% of the world’s platinum supply comes from South Africa, and most of that comes from the Bushveld region, just north of Johannesburg, near Rustenberg.
According to Johnson Matthey, about 5.8 million ounces of platinum were produced in 2012, a fall of about 10% on 2011. Almost 75% of that – 4.25 million ounces – was mined in South Africa.
Russia accounted for another 0.8 million ounces (mostly via Norilsk Nickel), Zimbabwe 0.36 million, and North America 0.34 million.
Total demand, however, has been pretty constant since around 2005, at eight million ounces. So demand is outstripping supply, with the shortfall being met by recycling. In 2011 there was a tiny surplus, but in 2012 this slipped into a deficit.
Not only has mining supply fallen, but so has recycling supply from vehicle catalysts (by 9%) and scrap jewellery by 19%.
And that deficit looks set to grow this year, because the South African mining industry is caught between a rock and a hard place.
On the one hand, falling metal prices have hit profits; on the other, the cost of equipment, energy (electricity in particular) and taxes is still rising, while unions have gone on strike demanding higher wages.
Just now, the eyes of the platinum world are on Anglo-American Platinum (Amplats). The company is in talks with the government and unions about restructuring plans, which may involve mothballing two mines and slashing as many as 14,000 jobs. The outcome is expected this week.
Rumours are that Amplats will scale down the cuts, but there are also rumours that the more militant of the unions – AMCU – will reject even a scaled-down version of Amplats’ plans.
Meanwhile, Impala, the world’s second-largest producer, may have to make its own cuts, as shafts have become uneconomic.
So without wishing to sound too grim, I have to say that I struggle to find one South African platinum company I’d want invest in. There are too many social, infrastructural, and political problems in South Africa for me to want to risk significant capital there, without the offset of a bubbling underlying metal price.
For a variety of reasons, Russian mining companies also sit in my file marked, ‘avoid’. And North America’s sole platinum producer, Stillwater, has its own problems, which include boardroom conflict, after it overpaid for Peregrine, a copper company in Argentina, at the top of the market in 2011. These are still not resolved to my satisfaction, despite a boardroom shuffle last week.
The lack of producers leaves explorers and developers, which are in a whole bear market of their own.
In short, if you’re interested in platinum – and in the longer run, I think you should be – the best bet is to buy the metal, not the miners. The metal is subject to the vagaries of the broader commodity markets, but there seems to be a floor under the price at about $1,350 an ounce.
And if platinum mining continues to be dogged with problems as it is now, and supply continues to be cut, the price will have to move higher, though it may take a while for it to do so.
Dominic Frisby
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in MoneyWeek
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