minesite article 9/4/09Platinum: Sell The Majors, Buy The...

minesite article 9/4/09
Platinum: Sell The Majors, Buy The Juniors
By Alastair Ford

“Too Far, Too Fast, Get Out!” No, not the latest Vin Deisel movie, but the strapline to RBC’s latest piece of research on the platinum sector, in which the broker’s key strategic recommendation is that investors “sell the majors and buy the juniors”. The primary reasoning behind this apparently simple advice is that, according to RBC, shares in the platinum majors already seem to be pricing in platinum prices that are 30 per cent higher than the current basket metal price. On that basis, says RBC, “we believe that all the good news has already been priced in”. In fact the broker believes that in the face of diminished demand a price ceiling in the basket metal price has already been reached, especially since there’s plenty of new production waiting in the wings.
In the longer term, the outlook remains positive, RBC continues, but adds the following telling statement: “we remain convinced that this could be played better by investing in juniors that have beaten the credit crunch”, specifically new producers with low cost operations that are fully funded. The broker cites Platmin, Platinum Australia, Platinum Group Metals, Eastern Platinum and Northam as among its favoured companies, while it’s turned bearish on the platinum ETF, which it now recommends investors sell out of. Here on Minesite we might add that we’re looking forward to hearing more about Sylvania Resources when the company next swings through town, and that the rating of Jubilee Platinum, admittedly not yet funded into production, looks very niggardly at the moment.

The switch into smaller platinum companies makes even more sense when you consider that RBC associates the following words with current trading conditions for the majors: “negative cashflows” and “bad profit delivery”. The broker also talks of “destruction of the major producer’s [sic] profitability” and argues that the share prices of the majors price in an assumed cash margin in excess of 50 per cent when real margins are likely to be closer to 15 per cent. Just to rub it in, RBC adds that the industry hasn’t seen cash margins of 50 per cent since 2006 – and the world was a very different place then.