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Is it too late to buy platinum stocks? Posted: Mon, 17 Mar 2008 [miningmx.com] -- With the platinum stocks up 30% since the start of January 2008, and the metal trading at above $2,000 an ounce, is it still sensible to buy shares in the sector? World equity markets are going through volatile times, so can anyone seriously suggest buying anything right now? As long term theme investors, we are attracted to stock opportunities which are associated with emerging, hopefully enduring, global trends. In this case, it is the growing commitment to preserving the environment, which in turn is driving world demand for a rare, very useful and largely irreplaceable industrial metal, platinum. Playing the big trends in investment increases your chances of long term success, since most of the future surprises should be positive. Fifty percent of platinum is used in automotive catalytic converters. After many years of research by the auto industry, they remain committed to ongoing use of PGMs (platinum group metals) in this application. World car and commercial vehicle sales are increasing by over 5% per annum, and emission standards are tightening. Another quarter of global platinum demand is taken up by industrial users, notably in the oil refining business and in the fabrication of LCD flat screen displays. This demand looks set to rise, if anything. Jewellery demand may soften, but investment holdings and hydrogen fuel cells are two new potential demand sources. Total global demand is around eight million ounces per year. Current production is below that level, because of shortages of electricity in SA, mine closures due to safety problems, flooding and regulatory uncertainty. Sufficient untapped resources do exist in SA, so the majors have aggressive expansion plans, and a number of junior mining companies have come to the fore with new mine projects. However, these developments take time and lots of money to bring into production. In the light of the above supply/demand imbalances, we expect PGM prices to remain at elevated levels for many years to come. So which one to buy? Our preferred entry point is Impala, the number two producer in the world, with about 12% of current world output. It has a current market value of over R200 billion, annual sales of more than R16 billion and overall margins above 30%. They have old mines, new mines, undeveloped resources and a full smelting and refining operation. This is a well-established company with a solid history and a liquid share price, which is a pre-requisite for our general recommendation to clients. We have a high regard for the Impala management team. Forty-five year old CEO David Brown was previously the CFO, and has been with the company for ten years. Marketing executive Derek Engelbrecht has good relationships with all of Impala’s long term automotive and other customers. Operational executives Shadwick Bessit and Les Paton are respected managers. Impala owns 87% of Zimplats, its operating subsidiary in Zimbabwe. Less than ten percent of Impala’s current output comes from its operations in Zimbabwe, but nearly half of its 218 million ounces of reserves and resources are up there. Of course, the country is an economic quagmire, and uncertainty continues about Government policy with respect to local ownership, despite special deals that Zimplats concluded with the Mugabe government in the past. We take the long view on this issue: Comrade Bob can’t stay in power for ever, and a new administration will surely adopt more investment friendly policies. We do not especially mind buying stocks at “high” prices. Good companies in good sectors are those which already enjoy positive news flow, have high returns on invested capital, high margins and growing earnings. Their positive prospects are not a secret. What we are bargaining on is that the future will be a bit more favourable than the market currently thinks that it will be. We are confident that the current realised selling prices for PGMs , which are about sixty percent higher than in 2007, have not yet been fully discounted by the price of the share. Earnings for Impala to June 2009 will likely exceed expectations. If you do not already own some of these shares, we suggest that you get started now.
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