Platinum a poor bet, for now

[] — THE prospects for platinum and the share prices of local platinum producers have definitely weakened further since Miningmx warned investors against the sector back in August.

Readers will recall that there are now two major demand components for platinum:
China, largely for jewellery, and then the catalysts for the light diesel engines so popular in Europe. Both these demand components look rather suspect at present.

In its latest comprehensive survey on platinum and palladium, as well as the valuations of the various producers, the influential Goldman Sachs, for example, advises investors to avoid the sector in its entirety. With one exception, Aquarius Platinum, Goldman recommends that all these shares should preferably be sold.

Investment advisers and analysts seldom give an unqualified “sell’ recommendation, preferring to make do with a gentle “avoid’, or else they remain neutral. A clear “sell’ recommendation as Goldman has given for our two major producers is very uncommon.

Goldman Sachs and Johnson Matthey forecast that the current surplus or oversupply of platinum will be with us until 2013, hopefully only showing a small deficit again in 2014.

According to analysts, the undersupply of palladium could continue until 2015 and could perhaps even increase.

This makes Goldman Sachs say the following in its latest report: “We prefer palladium over platinum as a result of its China/BRIC exposure and platinum’s significant exposure to a weaker Europe.’

The over- and undersupply of the two metals over the past decade should also explain clearly why the prices of platinum shares did so well until 2008 before they bogged down so disastrously in the past year. Nearly the opposite applies to palladium.

Goldman Sachs’ headlines for its analyses of the five leading local producers neatly encapsulate its current feeling:

Anglo American Platinum.
Price target: R550. Divergent quality in the portfolio dilutes returns. Sell.

Impala Platinum. Price target: R180. Slower ramp-up at Impala; it all depends on Zim. Reiterate. Sell.

Lonmin.Price target:1050p. Weaker prices impact cash flow, debt. Could impact growth outlook. Sell.

Aquarius Platinum.Price target : 230p. Performance disappoints. Zimbabwe overhang limits upside. Neutral.

Eastern Platinum.Price target: 60p. Asset value remains, execution a worry. Down to neutral.

The local platinum producers have just experienced two unfortunate years with the platinum price and the rand/dollar exchange rate. When the price of platinum climbed so wonderfully about two years ago, largely on the back of the gold price, the stronger rand (sometimes close to R6/$) put a damper on local merriment. Now that the value of the rand has weakened significantly to R8.50/$, the price of the metal has begun to fall.

The graph, compiled by Treasury One, shows that the price of a typical, locally produced PGM basket has fluctuated between R10,000/oz and R11,000/oz over the past two years. The prosperity from a nice quick climb in the price of the typical PGM ounce dried up as far back as December 2009.

Unfortunately, the local mines did not manage to do well in the past two years. Increases in production costs are still eroding the benefits of the relatively high price of the PGM ounce.

The prosperity from a nice quick climb in the price of the typical PGM ounce dried up as far back as December 2009.

Producers and investors must try to supply a proper question and answer for the following three variables in the future:

Will the dollar price of PGMs, especially with platinum dominant in them,soon rise as a result of a healthy industrial demand? The answer seems to be an unfortunate no.
Will the rand weaken further to, say, R10/$? It seems highly unlikely, especially now that our interest rates are probably not going to decrease.

The answer to the third variable is equally negative. The likelihood of the local platinum mines significantly improving efficiency and costs over the next two years is equally slim.

All three variables clearly go along with Goldman Sachs to warn investors rather to avoid the sector for the time being.

– The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit