Platinum hernia digs in Investors in platinum stocks on chicken legs as the metal price flies like a rat off a sinking schooner.
Author: Barry Sergeant Posted: Tuesday , 19 Feb 2008
JOHANNESBURG -
Investors are having a wiggy time with platinum stocks in the face of a metal price that has gone exponential in the past fortnight, mainly on a supply crunch following electricity problems in South Africa. The thing is this: the average listed platinum stock is trading nearly a third lower than the highest point it has reached in the past 12 months, which is inevitably a record level. Something doesn't add up.
South Africa normally supplies at least 70% of the world's platinum group metals (PGMs), headlined by platinum, palladium and rhodium. Platinum and rhodium markets were already headed for a deficit before parastatal Eskom delivered crippling cuts in power supplies on January 24, forcing most mines in the country to halt work for five days. Mines are now expected to use 10% less power than before, for an unknown period, but one which could stretch out for five years.
The ongoing Eskom event has pushed platinum and rhodium prices to record levels for the wrong reasons. Palladium has moved more modestly, given still unknown stockpiles at Russia's Norilsk (NILSY US, $281.90 a share), the world's single biggest producer of the metal. Given the increasing use of PGMs, used mainly in vehicle exhaust catalytic systems, the longer term graph shows a platinum price that's increased from around $400 an ounce in 2000 to more than $2,100 today.
The major platinum producers have long maintained the informal wish to support a platinum price that rises modestly over the longer term, at a rate sufficiently competitive to reward stakeholders in the sector. Producers have always been charmed by the use of platinum in jewellery, which is seen as a "swing factor" for the price: when industrial demand for the metal wanes, prices tend to soften, encouraging demand for jewellery use and putting a floor of sorts on prices.
Those were the good old days, when nobody had the vaguest sense of how haywire the story would go. As Impala Platinum (IMP SJ, R316.04) put it recently, the platinum market registered "a considerable deficit" during 2007 thanks to falling South African supply, and strong demand underpinned by another increase in diesel vehicle penetration. While jewellery demand declined, Impala was impressed that "it proved remarkably resilient particularly in the light of the higher prices, with Chinese consumption at similar levels to the previous year". The platinum price moved up by 35% during the course of 2007 as a whole. This year, it's already up by more than $600 an ounce, and getting close to double the level of a year ago.
What on earth does the mythical wise investor do, when a metal price is rushing up like a crazed moth? So far, investors have answered mainly with chicken legs, fearing the chances of being caught rushing into waxy-feeling platinum stocks. The sudden New Age in South Africa has drummed up a kind of confusion that may make history. Making money out of this story is not going to be easy; lots of work, study and luck are needed to slice and dice the trimmings for this cocktail.
In recent research, analysts at Royal Bank of Canada singled out a number of platinum names with low(er) electricity demand (shallow), high grades or high margins (to cope with cost increases), bottom quartile costs (shallow with high grades), good ore (in the case of the PGM companies, sought after high sulphide ore) and finally, having the potential to expand, even in a constrained electricity environment.
The most likely stock picks based on these criteria are Tier II and developer stocks. The major stocks carry the burden of running power-hungry smelters and refineries, which also process under offtake agreements concentrated ores from Tier II and developers. There is also a rising demand for Merensky reef, which can be processed at lower temperatures, over UG2 reef.
Stock
Price Competitive edge
Aquarius £7.93 Shallow UG2 with offtake at Anglo Platinum
Eastplats C$3.47 Shallow UG2 with offtake at Impala
Anooraq C$3.45 Medium depth Merensky with offtake at Anglo Platinum
Platmin C$7.85 Open pit UG2 with offtake at Northam
Wesizwe R9.85 Medium depth Merensky with no offtake agreement yet
Pt Australia A$2.67 Shallow, but different orebody (not Bushveld)
PGM C$3.69 Shallow Merensky with offtake at Anglo Platinum
Ridge £1.17 Shallow high sulphide ore with Impala offtake
* 12-month high
While investors continue to trawl through markets trying to conceal all manner of Pandora's boxes, sorting out the platinum names is going to see lots of bloodletting. So far, the smart money is sticking to a selection of stocks that signals volumes of dramatic price moves in the months ahead.
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