SHARES in South African platinum companies were punished from August last year after it became apparent the dollar price of platinum wasn’t going to support the optimism of earlier in 2016 when investing were piling in.
As Goldman Sachs, and many other analysts maintained at the time, the market fundamentals of supply and demand for platinum group metals (PGMs) could not meet the expectations that improved share prices had been factoring in.
Since the end of December, however, platinum shares have been staging a recovery. Amplats is 38% stronger at the time of writing since December 29 having lost nearly 50% from August. Similarly, Impala Platinum is 32% higher from mid-December.
Part of the reason for the share price recoveries is the strength in chrome which miners of UG2 produce as a by-product. Another ‘PGM’ miner, Tharisa, has benefited from the improvement in chrome: it was the among the best performing mining stocks on the Johannesburg Stock Exchange last year.
But it’s Amplats that may benefit most, according to a recent report by Investec Securities. It said the commissioning of Anglo American Platinum’s (Amplats’) Amandelbult chrome plant last year, in which it has a 76% stake, had been “very timely”.
The chrome price has increased from low of $79/t last year to a spot price of about $390/t. This type of improvement would be enough to boost Amplats’ 2017 earnings by as much as 30% assuming chrome remains at current spot, and there are no other negative surprises for Amplats.
The commissioning of the smelter will increase Amplats’ chrome production to up to 990,000 tonnes in its 2018 financial year from about 300,000 to 350,000 tonnes currently.
“We estimate chrome earnings before interest and tax of R693m and R692m in Amplats 2017 and 2018 financial years respectively, based on an average UG2 chrome ore price of $178/t and $172/t in 2017 and 2018 financial years respectively,” said Investec in its report. “Following a material Amplats share price drop our expected total return has increased to 30% implying a Buy,” said Investec.
