Has South Africa dropped the platinum Ball?

23 January 2011 | 03:23 Code : 20434 Geoscience events
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One conclusion that could be reached based on a recent detailed report by RBC Capita....

One conclusion that could be reached based on a recent detailed report by RBC Capital Markets is that South Africa’s platinum group metal (PGM) sector could be on the brink of paralysis. This would seem ironic, given that the country is home to the majority of global reserves of PGM metals: it supplies about 75% of the world’s platinum demand, some 40% of palladium demand, and about 85% of rhodium demand.Any disruption in supply from this base, argues RBCCM, "would have an impact on metal prices". Rampantly rising costs are key to the analysis. Cash costs (alone) are fast approaching almost USD 1,000/oz for the South African PGM industry, says RBCCM, "and with current capital expenditures seemingly pegged at some USD 300/oz, on average, for the majors, the cash break-even basket price is about USD 1,300/oz".At this level the return on capital is negative and profitability in terms of cash flow generation is roughly zero: "but day-to-day activity continues". The prevailing "basket metal price" is just above USD 1,450/oz. The "break-even" basket price of USD 1,300/oz needs to increase, argues RBCCM, to at least USD 1,700/oz "to even start to justify capital investment".However, at current exchange rates, continues RBCCM, "this level pretty much approaches our current metal price forecast, peaking at USD 1,850/oz or ZAR 13,000/oz. ... Houston, we may have an even bigger problem".Looking at the global canvas, RBCCM believes the PGM market "is lining up for an exceptional three years as far as potential for higher metal prices are concerned".RBCCM continues to see big problems developing in the South African supply base - "driven off low levels of profitability (due to extreme cost pressures from labour and electricity, compounded by a strong currency) that severely limit free cash flow for expansion".The inability to expand meaningfully is seen as "further compounded" by the high probability of an electricity shortage over the next three years, and high capital required just to maintain current output as mines go deeper on the Western Limb of the Bushveld Complex. This requires refrigeration, which adds at least 30% to the unit cost per ton.RBCCM finds that some 40% of the current South African PGM production base could be cash-flow negative at current (very high) spot metal prices: "Even in a rather uninspiring demand scenario, one would have to assume that such a squeeze on profitability and the likelihood of further mine closures would more than likely see the metal prices move higher, sooner rather than later".RBCCM sees the global auto market continuing to improve (on the assumption that Asia does not "trip up" and that at least some growth returns to Western economies) while the Chinese, in particular, are expected to continue spending ever larger amounts on PGM jewelry. In particular, RBCCM does not see investment demand coming off in the face of the problems in the South African supply base.RBCCM also expects to see "market interference by either China or the West". The assumption is based on the potential that problems in South Africa, plus an improving global auto market, could lead to a shortage of metal (palladium, in particular) and that the need to secure supply (regardless of price) could well see different auto production camps start to look at stockpiling some metal.It has been noted that General Motors signed a metal offtake contract with Stillwater Mining in late December 2010, securing specific amounts of palladium, without locking in a price. This is seen as being "all about security of supply".RBCCM concludes with the recommendation "Buy Palladium And Buy Outside South Africa". Stillwater Mining and NA Palladium are seen as offering the best exposure "without most of the risk associated with the large production base in South Africa".


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