Holding the platinum cardCRITERIONTim BorehamNovember 23,...

Holding the platinum card
CRITERION
Tim Boreham
November 23, 2006
Platina Resources (PGM) 24.5c
Platinum Australia (PLA) $1.37
THE Cinderella of the precious metals set, platinum has found its glass slippers and is having a ball. At around $US1390 an ounce, platinum has jumped 40 per cent since the start of the year. Apart from the catch-all explanation of supply tightness, the surge has been attributed to the rumoured introduction of an exchange-traded fund, which would allow investors to trade the metal without holding it. In April, silver prices surged after a similar ETF was introduced.

Despite their past poor-cousin status, platinum group metals (PGMs) are gaining respect as "clean" metals, given their role in reducing car emissions (as catalytic converter components) and in fuel cells.

PGMs (mainly platinum, palladium and rhodium) are used widely in silicone production, dental alloys, electronics, glass manufacture and surgical applications.

"It's a fantastic metal, it's a metal for the future," says Platina Resources executive chairman Robert Mosig.

While global production is dominated by five main producers in South Africa, the US and Russia, local investors can get a slice of the action through two listed stocks.

At the exploration end, Platina is seeking to find what has evaded others in the past: a viable local deposit.

There's been solid investor interest in Platina, a Helix Resources spin-off which raised $6 million at 20c apiece in its May listing. Former JB Were resources heavyweight Peter Woodford recently lifted his stake to 12.9 per cent, while legendary rock-kicker Mark Creasy also lurks on the register.

Platina's drilling efforts are being directed at Polar Bear, a 100sqkm prospect under the (usually dry) Lake Cowan near Norseman in Western Australia.

According to Mosig, platinum explorers have sought structures similar to South Africa's platinum-rich Bushveld Complex. "In Australia ... it probably doesn't exist," he says.

Platina's techniques led it to an island outcrop yielding "exceptional" results.

Platina also holds the Munni Munni tenement, near Karratha which looks to hold two million ounces of palladium. A higher palladium price - which hasn't soared in the same way as platinum - is needed.

Platina's third asset is a recently-acquired patch of turf in Greenland, called Skaergaard. The previous owners Galahad Resources claimed an inferred resource of 50 million ounces, a combination of PGMs and gold.

Given Galahad wrote off a massive $150 million on the asset, there's a few questions about the viability of the deposit.

Mosig says Skaergaard's not a spending priority and if it does firm up as a monster prospect Platina will need deep-pocketed partners. "It is certainly not something we are going to do alone."

While Platina is an "unashamed explorer", Platinum Australia is further down the track with its one million ounce Smokey Hills project, in South Africa's Bushveld Complex.

Platinum Australia has an interest of up to 80 per cent in the tenement and has been drilling since July 2005. A full bankable feasibility study, completed in the September quarter, outlined the viability of a 95,000oz a year operation with a seven-year mine life. The base case scenario, using an average "basket" price for four PGMs of only $US677 oz, pointed to cash flows of $US139 million and a payback period of 20 months.

Permits and paperwork permitting, Platinum Australia plans to start initial open-cut mining in early 2007, with underground development thereafter. The total capital cost is estimated at $US41 million ($53.2 million), funded by cash reserves of $23 million and bank debt. Platinum Australia also has a 49 per cent option on another South African project, Kamplats, slated for production in 2008-09. Some analysts see this project, which could be bigger than Smokey Hill, as providing the real potential for share price gains.

Criterion rates both Platina and Platinum Australia as SPECULATIVE BUYS. The former is a raw bet, although its modest $7.5 million market cap reflects this reality.

Qantas (QAN) $5

MESSY. That's Criterion's summary of the Macquarie Bank/private equity pitch for our national carrier. But then again, owning an airline is a logical next step for MacBank given its ownership of Sydney Airport (and others) and a global baggage trolley business.

We're sure the financial engineers at MacBank and Texas Pacific know what they're doing, which is why they pay themselves the hourly equivalent of a fleet of Airbus A380 superjets.

But pitching for Australia's high-altitude marsupial emblem? The regulatory and political hurdles would make buying even the cumbersome Coles look as routine as in in-flight safety demo.

There's the no small issue of the 25-per-cent cap for a single foreign holder. We gather Texans still count as foreigners, despite the almost familial bonds between John Howard and George W. Bush.

Although privatised, Qantas survives by the grace and favour of governments who shoo away would-be competitors such as Singapore Airlines on the trans-Pacific route.

In terms of the bidders' motivation, presumably they want more of a benefit than the ability to wear those "I own an airline" T-shirts adorned by patriotic taxpayers when Qantas was government-owned.

What about earnings stability, the prerequisite for highly-geared private equity plays? True, Qantas has enjoyed reasonably stable cash flows over the last few years, but there's been no outbreak of SARS or incidents involving short and slippery runways.

OK, how about cost-cutting potential? We're confident the cheap and cheerful Jetstar model can be extended to pilots bringing their own cut lunch, but the last time we looked, Qantas chief Geoff Dixon had $3 billion of efficiency ideas of his own.

Too many questions? Not enough answers? Indeed. Criterion has long viewed airline stocks as an efficient shareholder destruction vehicle, but we rated Qantas a BUY at $3 on June 23, as an oil price turnaround play.

We suggest holders SELL and join the elite pantheon of investors who have profited from airline shares.

Pundits yesterday speculated about an offer of $5.20 to $5.50 a share which would value Qantas at more than $10 billion, but the bid uncertainty makes us reluctant to stay aboard.

Qantas yesterday described the approach as "incomplete" and said it had discussed various joint ventures and acquisitions with other parties over the years.

Despite their long-term investment philosophy, private equity firms suffer from attention deficit disorder and will quickly turn their attention to other targets in other sectors if a friendly deal can't be hatched.

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