How the wheels came off for SA’s platinum group metal miners

We didn’t see it coming” are not the words investors typically want to hear. But it was a refreshingly honest take from Northam Platinum CEO Paul Dunne, when asked about the decline in platinum group metal (PGM) prices that led to his company calling off its 18-month pursuit of Royal Bafokeng Platinum (RBPlat).

Tearing up the tarmac one day, wheel-less the next. So often that’s the story of commodities. But in PGMs — a niche, yet critically important family of metals that supply the global car industry — the past three years have been quite the ride.

To be clear, Dunne’s dismay wasn’t about a market correction. That much was anticipated — rather, it was the speed and extent of that correction.

Nor was Dunne alone in his surprise. Impala Platinum (Implats) CEO Nico Muller, who successfully duelled with Dunne for control of RBPlat, also confesses to being blindsided by the plunge in PGM prices.

The story of rhodium encapsulates the rollercoaster ride. At last count, it was trading about $3,500 an ounce. Yet it was less than three years ago, in 2020, that it hit $30,000 an ounce, transforming the fortunes of its miners.

Between 2021 and 2022, income from rhodium sales contributed half of the industry’s profits, despite comprising only 7% of total PGM output. Palladium, another PGM, was also on a tear, tripling in value from 2020 to mid-2022.

Together, they generated fabulous returns for investors, especially in Anglo American Platinum (Amplats) and Implats, both of which posted record earnings and paid record dividends.

Share prices surged. Amplats’s stock rose from R266 in March 2017 to R2,675 by March last year — a five-year gain of 905%. Implats’s trajectory was even more remarkable, rocketing 1,870% from R15.61 to R309 within that same timescale.

Dunne’s Northam Platinum, which didn’t pay a cash dividend, saw its share price register a record high in 2021.

Critically, this did far more than just boost the coffers of the miners and their investors; the industry became one of the South African economy’s rare beacons in 2021.

For one thing, the PGM sector actually created jobs, even as national unemployment hit 29%. Second, PGM and iron ore firms contributed roughly two-thirds of the R78.1bn in South Africa’s annual tax take — allowing that number to more than double from the R38.6bn of the year before. In royalties alone, PGM miners paid R5.7bn in 2021, against R1.1bn the prior year.

And then the bubble burst. Having weakened to $12,000 an ounce by December, rhodium was tipped over the edge after glass manufacturer China Jushi returned R8bn in stock — about 50,000oz — to the spot market. That may seem a triflingly low volume, considering that South Africa’s primary PGM production is 7-million to 8-million ounces a year, but 80% of rhodium demand is met via long-term contracts.

As for palladium, its future was being decided even as its price flourished.

Rumours that automakers were preparing to substitute if for cheaper platinum in autocatalyst production were fairly common before it toppled from its mid-2022 record price of nearly $3,000 an ounce.

Sibanye-Stillwater boss Neal Froneman forecast palladium’s correction in 2020.

Mega write-offs

The bottom line is that while PGM miners were once in clover, they’re now among thorns.

Where Dunne spoke expansively on RBPlat’s shallow (and therefore cheap) multidecade resources in an industry hard-coded for long-term success, the talk now is of cutting marginal production and project capital.

The pressure, in other words, is on. Northam has written down the value of its Eland project by R2.7bn — a property it bought for a cut-price R175m in 2017, precisely because it exposed the company to upside in the rhodium price.

“We won’t support loss-making,” intoned Muller at the firm’s year-end results presentation a few weeks back.

Days earlier, Froneman announced that he’d warned the firm’s profit laggards to buck up. Though he was referring mainly to Sibanye-Stillwater’s nickel refinery in France, his comments were ominous for its US-based Stillwater, which mines palladium and platinum.

Implats also wrote down the value of its Canadian mine Lac des Iles, also palladium-dominant, by R7.8bn — more than half what it paid.

Nothing is off the table in terms of cost reductions – Neal Froneman, CEO, Sibanye-Stillwater.

“The sharp drop in the palladium price has had an outsize impact on the two palladium mines in the industry,” says RMB Morgan Stanley analyst, Christopher Nicholson.

For Implats, this could mean targeting higher-grade areas of Lac des Iles to keep it profitable, even if this reduces its mine life.

On Stillwater, Froneman said: “Nothing is off the table in terms of cost reductions.” He added that a number of operations in his group were “on notice”.

For PGM investors, this year has been nothing less than a rout. Shares in Northam, Implats and Amplats are 43%, 60% and 59% weaker so far this year.

The good news, however (well, the ever-so-slight hint of good news), is that there’s a whiff of recovery in the air, possibly by the fourth quarter of this year. “The market is in a far better place than prices would suggest,” says Muller.

This is because the dynamics of the industry are resetting.

What caused weakness in the palladium price, for example, was sluggish Chinese economic growth and the rerouting of sanctioned Russian metal, mostly palladium, to Asia, which led to an increase in supply. It meant customers were more cautious with new purchases while they had stocks.

That is changing; in fact, most PGMs are running at supply deficits for the year.

“With Chinese auto inventories now more normalised … we believe the destocking should subside, while the arbitrage from discounted Russian material has already played out,” says Steven Friedman, an analyst for UBS.

The not-so-tremendous news, however, is that just as stocks are being flushed out of the pipeline, a change in the overall shape of the PGM market — under way for years — is gaining impetus.

Between 2000 and 2008, metal demand was driven by Chinese growth, tightening emissions legislation, and higher consumption of cars. From 2020, the demand was driven by supply shortages.

Today, demand is responding to the fact that the “electrification of the drive-train” — a rather grand-sounding phrase for battery electric vehicles (BEVs) — is starting to attract mass appeal.

EV revolution?

Why is this happening now, you may ask?

Well, BEVs have become better at matching their internal combustion engine (ICE) counterparts in range and performance. True, there are still infrastructure limitations (from grid supply to plug points) but some of the supply constraints regarding minerals that are required to build car batteries are being overcome.

This has been no easy feat. BEVs use six times the minerals that ICE vehicles do, but engineers have designed batteries that avoid the troublesome job of sourcing minerals with potentially dodgy provenance, such as cobalt.

“I think it’s dawning on PGM producers that BEVs are coming quicker than they thought,” says a UK-based analyst.

This is posing questions of CEOs such as whether they should delay, abandon or embark on new, long-term PGM projects or whether they ought to diversify their businesses by buying into other mining operations.

The internal combustion engine has gone unrivalled for over a century, but electric vehicles are changing the status quo – IEA executive director, Fatih Birol.

Of course, much depends on timing — a subject about which there’s scant agreement.

Wilma Swarts, director of PGM Analysis at Metals Focus, a UK metals research house, estimates BEV penetration may reach about 30% of the total car market by 2030.

The Mitsubishi Corp estimates 20%-30% BEV absorption, while a Paris-based fossil fuel organisation, the International Energy Agency (IEA), forecasts as much as 60% of all light vehicle sales will be BEVs by the end of the decade.

In other words, the numbers are all over the place. The IEA is by far the most optimistic (or pessimistic, depending on your viewpoint), saying in an April report that the rate of BEV growth was “explosive”. It forecast that sales will total 14-million units this year, 35% more than last year.

Or put another way, while BEV made up just 14% of the vehicle market by the end of last year, this is expected to hit 18% this year, it said.

“Electric vehicles are one of the driving forces in the new global energy economy that is rapidly emerging — and they are bringing about a historic transformation of the car manufacturing industry worldwide,” says IEA executive director, Fatih Birol. “The internal combustion engine has gone unrivalled for over a century, but electric vehicles are changing the status quo.”

Others remain sceptical. One doubter is René Hochreiter, an analyst for Cape Town-based Noah Capital.

Hochreiter wrote in a report in July that because an electric vehicle depreciates by 50% in its first 12 months, consumers will scrap units for replacement vehicles in three years. On this basis, he questions the carbon credentials of BEVs. “The BEV is laughable,” he concluded.

Whether you believe BEVs are a quick or a slow burn, they do at least have the weight of political sanction behind them.

The most prominent demonstration of this is the US government’s Inflation Reduction Act. Signed into law by US President Joe Biden last year, it aims to provide big incentives for companies pursuing clean energy plans.

Sibanye-Stillwater told investors in August that thanks to the act, it would receive 10% cash back for building the Rhyolite mine, Nevada’s first source of commercial lithium, a critical ingredient in BEV battery production.

It’s a move that reflects the direction of popular consciousness on energy transition — especially as extreme weather events increasingly dominate the headlines.

The case for a platinum rebound

So given these dynamics, what should PGM miners and their investors do?

At the moment, everyone is hunkering down. The mining companies say subdued market conditions are likely to persist into 2024, but beyond that, who knows — you’d be hard pushed to get more certainty than that.

It’s possible, however, to identify a few themes.

One major theme is that platinum will re-establish its position in the PGM basket as the “premium metal”, once its basic supply/demand market factors assert themselves.

According to the World Platinum Investment Council (WPIC), an organisation funded by PGM miners, platinum will register a million-ounce deficit by the end of this year as surface stocks deplete. That should push up the price.

In trying to gauge this supply balance, it’s hard to overstate the importance of above-ground PGM supplies. The rise in the palladium price came as Russian stocks — the size of which is known only to the Russians — stabilised. For years before that Gokhran, Russia’s diamonds and precious metals repository, sold surface material into any potential deficit, capping the price.

Ed Sterck, head of analysis for the WPIC, estimates current above-ground inventories of platinum will be sufficient to cover only five months of production. Furthermore, these stocks are relatively illiquid as they are held in China after a period of intense platinum imports. The assumption is that most of these stocks are unavailable to the West.

“This, combined with sustained demand growth and at-risk mine supply, strengthens the investment case for platinum,” says Sterck. “We have got a significant deficit.”

Platinum’s return will provide a timely reminder to a mining industry rule that minerals such as rhodium are byproducts — and no-one mines for byproducts alone, says Metals Focus’s Swarts.

“Short-term price spikes are ultimately value-destructive”, she says. Learning this lesson will be valuable as platinum, and other minor metals such as iridium and ruthenium, take centre stage in the development of “green hydrogen” — a vast industry, driven by the world’s decarbonisation needs and extending into a multitude of industrial sectors.

Platinum is actually the main beneficiary of green hydrogen demand, which comes mainly from fuel cell technology which is competing with BEVs. And platinum is also the desired metal in industrial-scale green hydrogen production through electrolysis, chiefly PEM electrolysers.

Short-term price spikes are ultimately value-destructive – Wilma Swarts, director of PGM Analysis, Metals Focus.

Jonathan Butler, head of business development at Mitsubishi Corp, predicts that a million ounces of PGM demand will come from the hydrogen industries by 2030. That’s sizeable, equal to roughly 12% of total demand now, though there will be cannibalisation of ICE demand by BEVs.

Besides platinum, the minor metals which are byproducts, such as ruthenium (hydrogen storage) and iridium (electrolysers), benefit in an ominous echo of the scope for substitution that rhodium and palladium have in the automotive sector.

While platinum is relatively abundant, iridium and ruthenium are not, exposing the PGM industry to future volatility.

Speaking at a conference in July, Implats’s head of new commodities Seten Naidoo called for deals with prospective clients in the hydrogen industry to create ceilings and floors on prices, especially the byproducts. This will help boost the PGM sector’s chances in hydrogen technology, because securing supply will ease customer nerves.

Iridium, for instance, is a tiny 300,000oz/year industry right now — but if it’s deployed in hydrogen electrolysis, this could absorb as much as two-thirds of that primary supply, says Butler.

Holding out for a hydrogen hero

Arguably, the world’s interest in hydrogen technology is even greater than for BEVs.

For one thing, hydrogen technology could make a major contribution to the Paris Agreement targets by reducing emissions by a fifth before 2050, according to a report in May by consulting firm McKinsey & Co. But investment in that technology is lagging — less than half the $700bn required by 2030 has been raised by investors.

Either way, providing new customers with security of supply is a critical part of PGMs accessing this market, which could extend far beyond light-duty vehicles. Heavy-duty trucks are a huge opportunity for fuel cell technology, since the battery technology of BEVs is far too heavy for haulage trucks.

The rail, marine and aviation industries have similar concerns with batteries. “Imagine there’s a plane sitting for hours on a runway recharging its batteries rather than flying paying customers,” says Naidoo.

Existing applications are well defined but what really excites us are the unknown technologies coming to the fore. There is no hard data but they are solving some real-life problems – Seten Naidoo, head of new commodities, Impala Platinum.

These are industries under immense pressure to change: the aviation industry, for example, contributes 2.4% to world carbon emissions, according to a UN report.

An even greater pollutant is the fashion industry, which spews out an estimated 10% of total carbon, says Naidoo.

He says the technology is already there to capture CO2 from other industries, which is then combined with a PGM catalyst and solvent to form chemicals for polyester production. “Retailer H&M is partnering with these technologies to bring them to life,” says Naidoo.

“Existing applications are well defined but what really excites us are the unknown technologies coming to the fore,” he says. “There is no hard data but they are solving some real-life problems.”

Nonetheless, hydrogen technology is unlikely to make a meaningful offset to BEV growth just yet. UBS strategist Giovanni Staunovo wrote on July 24 that while hydrogen technology could compensate for demand weakness it “would not be able to compensate for the near-term weaker demand for autocatalysts”.

Still, the industry needs to have its eyes wide open — particularly to the risk that the rise in hydrogen technology may be all hype, no action. This is not the first time the market has become excited by the technology, as evidenced by investment in the fuel cell cars of 20 years ago.

As Butler puts it, fuel cells are “the holy grail we’ve been chasing for 30 years”. Yet the productive capacity of hydrogen is way off where it needs to be, and investment in it is still lagging.

For PGM firms — such as Northam, Amplats and Implats — some important strategic decisions need to be made, a type of “stick or twist” choice between the net gain or loss of declining ICE sales and increasing hydrogen applications.

“If I were advising a CEO I would be looking for some metal expansion in the 2030s. That means making investment decisions in the next two to three years,” says Butler. “We are heading for big market deficits, especially in iridium.”

That, at least, seems to be good news for platinum producers. But it remains to be seen if they and their investors can grit it out that long.

This article first appeared in the Financial Mail.