By Peter @Newton Bell, 12 December 2016

As part of a short article on Ucore's recent announcement that they are working on platinum recycling, I did some reading on the global platinum markets. What I found was exciting:  Platinum has been developing a constructive macro backdrop for years, but it has recently showed more signs of life with significant acquisition activity. Could platinum be in play today? 

To begin, the annual total production of platinum is ~8M ounces, which is worth approximately $8B USD. There are fairly liquid futures markets and many sources of demand, as described by this excerpt from the World Platinum Investment Council infographic.

You can see that over 50% of platinum is used in automotive and industrial applications. This includes things like catalytic converters to reduce vehicle emissions and improving the chemical processes involved in cracking oil. There is also a large amount of platinum used in jewelry, which is apparently very popular in China. There is a relatively small amount of platinum used for investment purposes, but this component of demand is so influential that platinum is generally categorized as a precious metal rather than industrial one.

The demand side of the platinum is pretty straightforward: it is an essential metal for modern society that is used for diverse purposes. The supply side of platinum is more subtle, but presents a very interesting setup that is already encouraging major players to make aggressive acquisitions. See my notes of Sibanye below for more info there.

The first thing to know about the supply side of platinum is that it swung to a deficit in 2012 and has been there ever since. 

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The world has been consuming more platinum than has been produced for years. At it's peak in 2014, the difference was nearly 10% of total production. This was possible because of relatively large "above ground stocks", which are stockpiles of past production. These stocks have now declined by half, from 4M ounces in 2011 to 2M ounces in 2016. As you might expect, prices have had a similar move over the same time period: prices moved from a high of $1,720USD per ounce in 2011 down to approximately $1,000 in 2016. These falling prices discourage production from existing assets, but simultaneously encourage demand. Hence, the deficit in production.

With annual consumption of 8M ounces per year and stocks at 2M ounces, things could get interesting.

The supply side of platinum has some very important features that appear when you break it down regionally. Global platinum production is 8M ounces per year, with ~6M coming from mines and ~2M from recycling. Of that 6M ounces of mine production, 4M comes from South Africa alone.

To have over 70% of global mine production coming from one country is reason for pause at the best of times. It deserves special consideration here because mining is a highly political issue in South Africa. There is potential for South African politics to disrupt the economics of the platinum industry there, which could have some surprising follow-on effects on the global platinum industry.

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The potential for disruptions in South Africa are not new and my impression is that the mining companies there are working hard to do better by the people. There is a lot riding on the continuation of the industry and the potential for politically-driven disruption of the platinum mining industry in South Africa is a wildcard that will be tough to predict.  

Russian production of platinum is also important, as the second largest region of production in the world. In their Q3 2016 report here, the Platinum Council reports that "Russia is predicted to recover to 740 koz (+10%), after a temporary dip in 2016 as a reorganisation of processing facilities was carried out, while supply from all other regions should hold steady at 585 koz." While a 10% increase in Russian production is significant, I would point out that amounts to only 1% increase in global production.  

Broadly speaking, there is potential for tightness in the platinum market. Low levels of stocks to uses, potential instability in the major source of supply, and growing demand can create a perfect storm that could profoundly affect platinum markets.

If the platinum market does get tight, then it will be important to have alternative sources of supply. Ucore would likely play a small role in that story, but that story could be a big deal for Ucore. Ucore has already picked the PGM as the first metals that they will produce using MRT.  Just imagine if they were to bring this production capacity online into a new bull market in PGMs -- I imagine that would get the market's attention and show that Ucore is able to be in the right place at the right time.

The opportunity in platinum markets is not lost on the miners, either. For example, Northam Platinum Limited called 2016 "A year of consolidation", saying that "Northam is moving into a growth phase". Northam's own forecasts suggest that the tightness in platinum markets could be here to stay: Northam is forecasting a natural depletion of South Africa's platinum mines that will see production decline by half to 2M ounces per year in 2030, as global platinum demand grows in line with global GDP to 9M ounces by 2025.  

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In passing, I will note that there was an interesting deal between Northam and Anglo American Platinum recently.

Anglo American Platinum, known as Amplats, is the largest platinum producer in the world and they had rights on land adjacent to one of Northam's mines, Zondereinde. That particular property seems to be critical for the long-term development plan of Zondereinde and I suspect that Amplats bought that land as a signal to Northam that they wanted to acquire the entire mine someday. 

In a turn of fate, Northam actually bought the land from Amplats recently! I suspect this may turn out to be yet another example of a smaller company picking up something of great value from a larger miner at the bottom of a market cycle. The majors seem to provide consistent contrary indicators with some of their acquisitions and asset sales in resource markets, and that makes me wonder if the bottom is in for platinum markets.

In early 2016, platinum prices reached the lows set back in Global Financial Crisis. Prices have rallied since, along with many other asset classes.  In particular, platinum is highly correlated to gold. 

I won't complain about the correlation between platinum and gold, but I will admit that it puzzles me to some degree. I would have thought that platinum is priced more as a base metal since over 50% is used in automotive and industrial applications; I guess I have more to learn about the pricing of platinum. 

To help bring me up to speed on the technicals in the platinum market, I reached out to @Goldfinger, one of the leading technical analysts on CEO.CA.  He provided the chart below and commented that:

"Platinum is struggling to hold above the $900 support level, it needs to regain the $950 support/resistance level to turn modestly bullish. Next big levels of potential resistance near $1025 and $1090. Over $1200 and we can proclaim a new bull cycle is underway."

Although it has retraced much of the move up in 2016 over the last few months, the upturn in platinum prices earlier in the year coincided with renewed interest in the metal. One example, in particular, shows how important platinum can be to a company's success: Sibanye Resources.

Sibanye is South Africa's largest gold producer and has recently pivoted aggressively towards platinum. So aggressively that the company is now one of the world's top five producers in platinum and palladium. And the market clearly rewarded Sibanye for their efforts!

Despite the massive run in Sibanye's shares, which has retraced significantly since September, the shares were still cheap relative to peers. The discount in Sibanye's valuations may be due to the fact that the company's production is concentrated in South Africa. As such, the company's shares may earn a significant re-rating as they diversify into PGM production in the USA.

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Sibanye's most recent acquisition in the PGM space is Stillwater, a US-based company with a flagship mine in Montana and a pipeline of other projects. The deal hasn't closed yet, but Stillwater offers significant production of +300,000 ounces of platinum and palladium (2E PGM) with cash margins of approximately 30% and a substantial mine life of +25 years that will help Sibanye expand into this new region of the world. 

There is a lot of good commentary on the deal out there, including some coverage on CEO.CA. One fact that surprised me was: the J-M Reef at the Stillwater mine is the world's highest-grade PGM deposit. I had no idea the highest-grade PGM deposit in the world was located in Montana and it makes me curious about PGM exploration in the Canadian Rockies!

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It is interesting to note that Stillwater contains a significant PGM recycling operation. In fact, it has the world’s largest auto catalyst recycler, which the CEO of Sibanye says will “gives us a very stable cash-flow base and a bigger voice in the marketplace.” Apparently the PGM recycling industry is alive and well in the USA.

In passing, I would point out that the margins on Stillwater's PGM recycling operation appear to be very tight. According to the financials reported by Sibanye above, the total revenues from PGM recycling were $310M in 2015 versus total costs of $301M. That seems like a profit margin of only 3%, which intrigues me; I am curious what all goes into the reported "total costs" and whether that is an appropriate benchmark for the profitability of PGM recycling in general.

Regardless, Sibanye is getting into the platinum market in a big way. Sibanye's total production is approaching 1M ounces per year and the Stillwater mines rank at the lowest cost mines in the industry! This is a big deal because most of the PGM mines seem to be trading dollars with costs at or above the selling prices for their particular PGM basket.

An industry cost curve like the one above is the kind of thing that causes problems on supply side of a metals market. Prices are low enough to encourage producers to take some large mines out of production, in hopes of higher prices in the future, but that has a second order effect on exploration: it is more difficult to rationalize investment in exploration when you know there is a large amount of production capacity waiting to come back online as prices rise! And all the while, demand is steadily depleting the global stocks and known deposits. 

A situation like this can be maintained for a while, but ultimately leads to big changes.

The Sibanye acquisition of Stillwater sends a clear signal to me that platinum is in play for sophisticated global investors. This sort of large acquisition of a PGM mine in the USA by a legendary Africa gold mining company doesn’t come around every day. It was proposed last week at a premium to market and it's not yet clear if will close -- could other bidders come in? What would that do to PGM markets?

Join in the conversation around platinum on CEO.CA to sharpen your thoughts on what may be coming next.  

Some of the most actively-discussed companies in the platinum space on CEO.CA are:

There are many more other juniors with platinum interests that don't get as much attention on CEO.CA but could offer you some compelling opportunities, such as: 

  • North American Palladium $PDL, which is operating a profitable palladium mine.
  • Wellgreen Platinum $WG, which is developing a large open pit, polymetallic deposit in the Yukon.
  • PolyMet Mining Corp $POM, which is a cashed-up mine developer.
  • Midland Exploration $MD, which is a prospect generator properties with several PGM projects with good partners in Quebec.
  • Transition Metals $XTM, which is a prospect generator that has some PGM-related properties.
  • Clean Commodities $CLE, which is a small-cap explorer that has several projects including one adjacent to Northern Shield.
  • Group Ten Metals $PGE, which is a nano-cap explorer with three PGM properties in the Yukon and an additional properties in BC, Ontario, and Alaska.
  • Ucore $UCU, which is a new entrant to the platinum space based on their plans to launch commercial production using a proprietary separation technology for the recycling of platinum in the USA.

It was my pleasure to prepare this material on the platinum markets for you. My impression is that platinum has a constructive backdrop with recent deficits drawing down stocks, limited increases to production capacity in near term, and new signs of life with recent acquisitions.  I think it's clear that platinum is in play today and I will stay tuned to bring you more information that supports or challenges this perspective.  Regards, from Peter Bell.