[miningmx.com] – DON’T look now but South Africa’s platinum sector may have just put its worst behind it.
That’s the view of market experts who point to the recent direction of important platinum shares such as Anglo American Platinum (Amplats) and Impala Platinum (Implats). Sibanye Gold’s recent R4bn bid for Aquarius Platinum is another signal.
“Sibanye may have … rung the bell at the bottom of the commodity cycle,” said John Biccard, a portfolio manager for Investec Asset Management. Biccard, who was defending his company’s view that Sibanye’s offer was opportunistic, said: “Shareholders should be careful not to give away Aquarius at the bottom of the cycle.
“Investors should not be looking at the 100% premium to the 12-month low being offered [by Sibanye], but rather focus on the fact that Sibanye is buying two quality assets at 4% of their 10-year high valuation”.
Other corporate action including the sale of the Everest mine by Aquarius to Northam Platinum, and Sibanye’s R4.5bn offer for the Rustenburg mines of Amplats also pointed towards a bottoming out of the market, said Kane Slutzkin, an analyst for UBS.
“The recent increase in M&A activity could signal a ‘bottom’ for the PGM [platinum group metal] industry,” he said. “The recent fall in the PGM basket would suggest prices are close to a trough,” said Slutzkin.
“However, despite unsustainably low prices, we calculate the stocks continue to discount materially higher prices – $300 to $400 per ounce above spot – which will likely take some time longer to materalise,” he added.
Platinum shares have been on the retreat for at least five years. Shares in Amplats are 59% lower over that time whilst Implats is 76% lower, far in excess of the actual platinum price which is some 45% lower since the beginning of 2011.
In terms of stock selections, UBS said it preferred Implats following its R3bn share placement programme which eased pressure on the firm’s balance sheet and also created some certainty on future production levels as funding for project completion had been secured. Royal Bafokeng Platinum (RBPlat) was another stock the bank recommended to investors.
Allan Cooke and Abhishek Tiwari, analysts for JP Morgan Cazenove, said in a recent report that the decline in platinum prices had made the majority of platinum production in South Africa unprofitable.
“At spot metal prices, we estimate about 65% of the platinum industry is lossmaking at an operating level. This is unsustainable in the medium to longer term, in our view, and we remain convinced that PGM prices must improve to reflect the economics of mine supply,’ they said in the report.
At the time of the report, published on October 7, the platinum price had fallen to about $900/oz, but it has since improved some $91/oz at the time of writing.
Until prices recovered, Cooke and Tiwari recommended “a cautious investment approach” in which investors sought exposure to companies that had the ability to reduce their exposure to labour cost inflation; namely, Amplats owing to its ability to mechanise the bulk of output over time.
“We expect Amplats, Northam, RBPlat and Aquarius to outperform the JSE Platinum Index and the rand PGM basket on a 12-month view,” the authors said.
Andries Rossouw, energy and mining assurance partner at PwC, said South Africa’s dominance in the platinum sector would also assist in the recovery of the market somewhat differently and perhaps even quicker than in other commodities.
“Platinum is a unique case [from among other minerals] as SA controls about 70% of world supply and means the world is more dependant on one source,” Rossouw said.
The level of platinum inventories or stock levels would also have a bearing on the speed at which the industry recovered, but Rossouw was in general agreement that the platinum sector’s problems were beginning to ease.
A number of new projects, such as those planned by Wesizwe Platinum, IvanPlats and Platinum Group Metals, a Toronto-listed firm, would also take longer to develop that perhaps first anticipated. “More production would be taken off than will be supplied,” he said.
It’s not all a one-way recovery, however.
Words of warning were issued by UBS and Goldman Sachs who said the Volkswagen scandal, in which the automaker cheated on emission standards, could negatively affect diesel engine manufacturing which would, in turn, affect the use of platinum in related autocatalysis.
Eugene King of Goldman Sachs said the bank had cut its platinum forecasts in response to the controversy. “We believe that this will accelerate the shift from diesel to gasoline – a negative for platinum,” he said.
“Although palladium could be a net beneficiary from this switch, we also reduce our palladium forecasts on lower China auto forecasts. We downgrade Amplats to sell from neutral while Impala moves from buy to neutral,” he said.
