Northam’s Dunne says platinum recovery imminent in most bullish outlook yet

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Paul Dunne, CEO, Northam Platinum

THE long-awaited turnaround in the platinum price – which has been depressed for nearly a decade – is getting closer, according to Northam Platinum CEO, Paul Dunne, who said he was “getting excited” by recent developments in the platinum markets.

Dunne has been consistently optimistic about the future of platinum in recent years and Northam has invested heavily in production expansions both through the organic growth of its existing operations as well as through merger and acquisition activity.

Speaking to financial media in Johannesburg today, Dunne repeated his optimistic assessment of platinum’s future made in August – when Northam released its 2017 annual results – and added he was seeing real evidence of improvements taking place in the markets although he qualified this adding “… current market conditions will persist for a little bit longer”.

Specifically, Dunne pointed to growing real – as opposed to investment – demand for platinum coming from China in particular as well as the rising prices of two of the three key platinum group metals (pgm) – palladium and rhodium.

“We have said for a number of years from various public platforms that you would see a phased recovery with palladium running first, then rhodium, and finally platinum. “Palladium has been off to the races over the past year and the rhodium price has now started to move in recent months rising around 50%.”

Dunne said that those metals could not “run away together” and leave platinum behind because of the substitution linkage between them, but he added “… having said that, platinum is still limping along – for now”.

Dunne said the demand fundamentals for platinum were slowly re-asserting themselves after a series of blows in the market caused by the hype surrounding battery-powered electric vehicles (EVs) and the “demonisation” of diesel engines.

“There’s been a lot of hype around battery-powered EVs, but these will not replace the internal combustion engine for a number of reasons. Battery technology is not new and it has inherent limitations.

“Likewise, diesel is not going to go away while it seems fuel cells are finally finding a viable market in particular for commercial vehicles such as busses.”

Turning to the supply side, Dunne repeated his assessment made in August that South African platinum production – which accounts for 80% of world supply – would fall below four million ounces for 2017 compared with peak output of 5.3 million oz in 2006.

Asked for his estimate on South African output in 2018, Dunne replied: “The country’s production is still shrinking. You will see further production surprises”.

He added that over the past decade the country’s platinum producers had concentrated on mining their existing reserves and had not put sufficient investment into the development work needed to convert more of their resource base into mineable reserves because of financial constraints. “Many platinum companies cannot afford to pay for their own future,” he said.

7 COMMENTS

  1. What Paul knows very well but chooses not to mention is that, South Africa holds the largest reserves of PGMs in the world and produces +70% of world Platinum BUT still remains a price-taker.

    South African Platinum Industry will forever be chasing their tails and being at the mercy of their customers to determine the price of their output.

    • Dear Moleko,

      I wish to share my thoughts , but will require your indulgence in this regard. Being a price taker in a commodity business DOES NOT necessarily make for bad business. I wish to refer you to the Gold Mining Industry. It is the inherent supply/demand & SCALE dynamics of the specific commodity that determines this phenomena. Despite what PGM bugs will tell you, there is JUST PLENTIFUL PGM out there. For example, in peak of PGM boom in 2011, Angloplats alone had R+R = 857Moz 4E for the then total market demand of 12-13 Moz/yr. This makes for lousy price control dynamics , if you are a major producer given the limitation imposed by market size relative to your bounty. You just cannot push product volume through to various customers for various uses, given the ever present substitution threat. Unlike other precious metals, PGM’s have few industrial/consumptive use, therefore are unlikely to exhibit the economics that favours producers. ASK THE ALUMINIUM CHAPS!

      Given the aforesaid, lets dwell into what bedevils the RSA PGM miners. I wish to focus on the integrated (mine-to-market) miners namely AngloPlat, Implats , Lonmin & partly Northam. I refer you to their growth plans as announced in 2006, just prior to takeoff BUT with signs of such price lift-off apparent. ALL of the projects in their books then have been built , with exception of Styldrift Ph2. I mean ALL. Thats total baseload/Installed mine production capacity of some ± 20Moz/yr PGM, excluding the other rats & mice non-integrated PGM miners. So when the market turned, they discovered that they have plenty of this PGM stuff and NO takers.They committed a sin of letting the customers know it. Amplats can flick a switch tomorrow on some 0,5Koz Pt in Twickenham & Der Brochen.

      The market will turn, as it has always done. So Mr Dunne’s views are just inanity NOT to be mistaken for prescience. However, there is an opportunity for them ( intergrated miners) to consolidate districts and extract efficiencies. Angloplats has a strong cornerstone shareholder, who consider them core. Implats has liquidity of some >R6Bn , so will weather any reasonable storm. Northam seems to be cash flow neutral ( due to Chrome) and thus can hunker down until dawn. Lonmin seems to have been caught-out and are really making a mess of things. They are lost and adrift without any coherent survival strategy. Only if they had taken my advise ( free of charge!) issued 6x months ago of : (a) Decrease Operating Leverage to lower absolute costs (in R’M) at K3, Rowland and 4B shafts ; (b) Manage for Cash all Generation1 shafts(with Hossy on C &M) with unit costs <R600/t and ensure mining efficiencies= 400m2/crew at Generation 2 shafts to prevent over-complement ; (d) Defer all Growth CAPEX (including CEO’s fantasies about new PGM processes); (e) Monetise the excessive mining flexibility ( 20 months ) to something sensible ( 10 months) given the debased new production targets.

      From above suggestions, Lonmin will be cash flow positive by now. As any banker will tell you, it is easier to restructure/renegociate covenants when the business id generating cash THAN when its burning cash!

      There are PGM mining industry positives which are as follows :

      1. The producer cost-curves are flattening, and this bodes well for PGM prices, should a new demand emerge.
      2. There is mining costs disinflation in RSA, which is helping the savvy miners to improve installed capacity utilisations without margin losses or prohibitive CapEx.
      3. EU economies are on the mend. This should boost diesel vehicle sales thus PGM demand. Old habits die hard, so i don't expect Germans to start converting delivery vehicles to Lithium batteries. The incentive is non-existent.
      4. Pray for a Cash-for-Scrap vehicle programme in the EU to boost vehicles sales.
      5. I am extremely concerned about PGM recycling market. In numbers, it increased by 7% y/y in 2016. But its trite, that this is a function of PGMs price. If its limited, then we should just await the inevitable dawn of PGM price recovery.

      Finally, PGM miners are dogs with fleas at the moment, but its an opportunity to commence accumulating positions on strong ones ( my pick are Implats & AngloPlats). Avoid Lonmin until there has been a change of management & business strategy adjustment.

      .

  2. The disconnect between the real outside world and delusions of an industry unable to adapt to a rapidly changing technological world has never been more aptly revealed by the comments made by Dunne. His views about the internal combustion engine reveal total ignorance of developments in the real world. There have been major advances in Li battery technology – maybe he should check his cell phone, laptop etc.
    Battery powered vehicles are the future – not liquid fuel driven vehicles.

    Yes there will still a limited demand for PGM’s , dependent on the price, for use in the future.

    The smart money is funding exploration for Li, Co and graphite.

    Suggest required reading is “The Economist”

  3. In the short and medium term, you’re probably right, Moleko. But in the end, if the price of platinum in particular remains substantially below the investment inducement price, mineable reserves will become depleted and there will be no replacement ounces coming to the market. If the market for platinum remains the same size then after about 10 years of underinvestment (and we’re almost at that point now) the price of the metal has to move upwards until supply responds to higher prices and the market comes back into balance. I think you will agree, that’s basic common sense – nothing clever there.

    The problem is, mining new metal is not like flicking a light switch. Lead times are extremely long on new mining capacity and the mining companies will only respond to higher prices if their boards of directors are convinced prices have moved sustainably higher. Fingers have been badly burnt during this current, long, downcycle.

    So what does this all suggest? It is my view that the next upcycle, when it comes – and it is definitely when, not if – will be a violent one that will take the market by surprise and, take its breath away. There’s an old adage: The deeper the valley, the higher the mountain. If past PGM cycles are anything to go by, investors may like to consider buying a few platinum shares now – preferably the ones that have solid balance sheets, genuine growth prospects and sensible management. In my view such stocks may include: Royal Bafokeng Platinum, Northam Platinum and for real gearing to metal prices, Implats (higher risk). It may be best to avoid companies that have vulnerable finances or high cost operations since timing the next upcycle cannot be an exact science. Equally, companies with “iffy” BBBEE credentials may be best avoided, particularly if their ownership is dominated by overseas investors, in my view.

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