Northam Platinum reckons the metal will boom again

South Africa’s mines will produce perhaps 4 million ounces (moz) of platinum in total this year compared with a peak output of 5.5m oz in 2006 and will produce less than 4moz in 2017 according to Northam Platinum CEO Paul Dunne.

Answering questions after his presentation of Northam’s results for the year to end-June in Johannesburg today Dunne said not enough analyst attention was being paid to the mine supply side of the platinum demand/supply equation.

He commented, “the demand side has been analysed ad nauseum. The reports that have been produced are encyclopedic. We contend there is no corresponding level of analysis on mine supply.

“ That’s where we are focused and that’s where we think the crunch is going to come because there is an inexorable declining trend in production which is going to continue although I must point out not everybody agrees with us.”

Dunne attributed that declining trend to the underinvestment in replacement and new platinum mining capacity in South Africa over the past decade and the rising level of technical difficulty and costs involved in mining platinum at greater and greater depths.

“There is a qualitative overlay on the orebodies because we did not mine the hardest stuff first.   A lot of the Merensky reef has been mined out and the remaining UG2 reef – particularly on the Western Limb (of the Bushveld Complex) – is of poor quality.

“ You cannot make the assumption that all of those ounces remaining in the orebodies can be mined profitably even though the grades are homogenous. Unlike the gold mines – you cannot high-grade a platinum mine.

“In our analysis  this implies a much lower primary production from South Africa going forward unless there is capital put into new areas of orebodies. As you know a lot of those new projects are on hold at the moment.

“So they would have to be financed and restarted and that takes time.   A new deep-level shaft is going to cost around R15bn and take 10 years to develop.

“We think there is going to be a large fundamental gap by 2025 between platinum demand and primary platinum supply out of Southern Africa which holds 80% of the world’s total platinum orebody.

“Supply is going to fall a long way short. The only other areas the platinum can be sourced from are the recycle loop – which is very price sensitive and actually declined over the last year – and secondly from the rest of the world which means Russia and North America and they are small producers. “

Dunne added that if current rand platinum group metal (pgm) basket prices remained in force then there would inevitably be more merger and acquisition (M&A) activity in the South African platinum industry which would further decrease total industry platinum production.

“That M&A activity will be forced on the industry through economic necessity and there will inevitably be downsizing as a result,” he commented.

Dunne’s bottom-line assessment is that the good times for the platinum miners will return when the platinum price inevitably responds the industry’s underlying fundamentals.

The history of platinum mining has been marked by a series of severe boom/bust cycles with the mines now caught in the trough of the latest major bust. According to Dunne this bust could easily be followed by a major boom.

“When these prices move they will move quickly and very aggressively. I have seen it three times already in my career,” he commented

6 COMMENTS

  1. The market appears to be ignoring the views regarding supply voiced by Paul Dunne. It is my view that Northam has invested in extensive research regarding the supply side of platinum group metals, which forms the basis of that view. The group’s assets (vast minerals resource – well over 100mozs 4E) and stated strategy, not to mention its (rare in the sector) strong balance sheet place it in a strong position to grow into market tightening. The short-lead, low financial exposure and low operating cost nature of its projects place it, in my view, underpin this. Perhaps if the market dedicated a little more time to future cash flow and a little less to (meaningless) IFRS accounting, it would recognise more clearly the value in Northam’s shares.

    As for M&A, here too Northam is at an advantage by dint of its strong BEE credentials and debt-free balance sheet – not to mention its strong cash generation potential, in my view.

    Were I still a platinum analyst, I’d be “banging the table” on this one. Please note that I DO NOT OWN any Northam shares as I write this. I may well do soon, though.

    Finally I would respectfully suggest that my ex-colleagues in the analyst community “wake up and smell the roses”!

    Steve Shepherd

  2. Paul Dunne’s assertions are indeed worrisome because they are based on ‘nothing’ except ‘hope’ that the metal prices will boom again. I repeat, as long we are Price TAKERS and not MARKERS, we will forever be chasing our tails. Operating our mines with ‘hope’ that the world will set the metal price higher in their near future is like searching for a needle in a haystack.
    It is unfortunate that Paul views the demand side analysis as ‘ad nauseum’ and admits that many does not agree with them. Maybe it is time to be open minded and hear other views. Another worrisome assertion is that the prices will move quickly and very aggressively and Paul says he has seen this 3 times in his career. But let us be honest, the mining industry has not been stagnant and global interdependence has never been forgiving especially for the developing countries due to many factors. It is time CoM, the state and all stakeholders sit and think deep about the future of mining in South Africa. We have been Price Takers for long, we have paid the price and we continue to pay the price with the lives of people. For how long are we going to depend on the ‘WORLD’ to dictate to us the price of metals if we hold 80% of the world’s total platinum? From Moleko

  3. Its an argument that holds water on paper – but why then has the Gold-Platinum premium remained at 200points when the extraction cost for platinum is substantially higher. When this ratio reduces then perhaps so. Platinum has been one of the ruling parties honey pots and therefore no serious investor will want to get involved in capex funding as this will be an invite for greedy BEE’s to suck more cash from the new investor.
    Northam,through Lazarus Zim, is operated as semi state priveleged BEE and therefore has a major and unfair comparative advantage. The industry can not recover until land ownership disputes are resolved and with Zuma and traditional leaders still calling the shots in Limpopo there is no end in sight.
    You reep what you sow.

  4. Steve, you are no longer getting paid for this type of promo. By all means fill your boots…
    I repeat, Northam is staking it all on Booysendal but that ground is diputed as belonging to local communities who are NOT included in the government backed BEE consortium. This whole mess is slowly unravelling and with the weakening of the ANC in municipalities, transparency will ultimately come to the fore.
    Furthermore, rand strength will persist so in fact the rand denominated basket can be expected to plateau for some time…so where is the valuation play?

    • You are quite right, I’m not getting paid by anybody for the view I expressed. Let’s see how this one pans out. By the way, I sincerely hope your call on the rand is correct…

      In any event, I’ve nailed my colours to the mast – and have not kept my identity to myself.

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