Platinum Mining - The Highs And Lows
One man’s bad news is another man’s good news. That old cliché springs to mind when you consider how platinum group metals (PGMs) have been have been faring of late. Never mind a bar of gold, a tonne of platinum is what we should have put under the bed a few years back, Erin says. We’d be laughing now.
Speculative buyers have certainly been busy after news of power cuts and flooding in South Africa rippled around the world (so much for sunny South Africa!). After all South Africa produces some 5.2 million of the 6.7 million ounces worldwide. That is about 80% of new mine production. Russia is the second biggest producer, and the remaining bits come from Zimbabwe and North America.
The result of all of this has seen platinum futures surge to record highs. Day after day the metal price kept on rising to records highs of over US$1,900/oz — that’s a skyrocketing 25% rise this year on top of 37% gains in 2007! Other platinum group metals have done pretty well too. Palladium futures, also traded, rose by nearly 6% and the metal for March delivery leapt 5.7% to over US$517 per ounce.
Platinum mining: never a dull moment
One thing that you can certainly say about the South African mining industry — there is never a dull moment. Safety issues, labour issues, unpredictable weather... Now it’s the power crisis that has conspired to hit supplies. At one of Anglo Platinum’s mines, the world’s biggest producer, 15,000 oz was lost in production on just one day as a result of the power cuts. A further 50,000 to 70,000 is going because of flooding.
At its annual results presentation this week AngloPlat joint CEO Duncan Wanblad said that in this business "you have to run extremely hard to stand still". If he wasn’t grey before, he will be soon! Aside from the ongoing challenges relating to safety and labour issues faced by AngloPlat in 2007, the electricity crisis alone is expected to knock 120,000 oz off platinum production in 2008.
AngloPlat revised forecast production for 2008 down to 2.4m ounces — not terribly good news. In 2007 it produced 2.7m ounces, and that was 12% less than anticipated. More on AngloPlat in the coming weeks!
Where miners are leaving production forecasts unchanged, capital costs are going through the roof. Platinum explorer and developer Jubilee Platinum, for example, is forking out $40m to install power generators at its Tjate project which has an inferred resource of 65m oz of PGMs and gold. That said, Jubilee’s chief executive Colin Bird recently pointed out that in most developing countries, and even in Australia, mining companies have to provide their own power. There no chance of getting onto the national grids. He even goes as far as to say that if a company can’t fund its own power, it shouldn’t be doing it.
Platinum mining onwards and upwards...
for the moment anyway
Just as well for platinum producers, demand for PGMs show little sign of abating. They really would be in trouble if this wasn’t the case. Analysts reckon that the platinum deficit could widen to as much as 400,000 ounces this year. For the moment, that is going to keep the price high. So commentators are calling a price of US$2,000 per ounce before it settles down to more realistic levels around the US$1,350 mark. Since we’re over $1,900/oz already, that’s not looking that far off.
According to Johnson Matthey’s recently released Platinum book, global demand for platinum rose by 1.2% in 2006, driven by its increased use in auto-catalysts and other industrial applications. The expansion of the European light duty diesel sector had a major impact on demand as did increasing automotive manufacture in Asia. That rise in demand offset the decline in new metal purchased by the jewellery sector which was a little put off by higher prices. Platinum is also used in consumer electronics, a market that is growing too. With the introduction of tougher green legislation in the EU and US, demand is going one way — and that is up.
So in the short term David Jollie, author of the Johnson Mathey report reckons that demand for platinum will continue to grow because of the lack of elasticity in the market. The fact of the matter is that what platinum does well (i.e. in autocatalysts) it does very well. So for car manufacturers, even at these levels, using platinum probably makes economic sense. That said research into using palladium as a substitute may eventually change this. There is also some uncertainty around whether Chinese demand for platinum in jewellery will taper off at these high prices.
Platinum mining: but volatility in stocks expected
There is platinum in the ground, and South African producers are going to want to get at it. But let’s face facts. This is going to happen at a much slower pace than was initially expected. Nobody knows how long the electricity crisis is going to last and this, together with safety and labour issues, make future production uncertain.
So the metal price might stay high for the moment, but unsurprisingly share prices have been and will continue to be volatile. Up and down is probably how this is going to be for a bit and there are probably some punters out there who might profit as a result.
So keep mining, but carefully,
Erin and Isabel
First published 13 February 2008
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