Will platinum group metals (PGMs) soon be mined in space? Some very influential people seem to think so. MJ Morgan investigates this and the other more-terrestrial developments his round-up of the sector.
Whilst the platinum industry is dominated by South Africa, where around 75% of output originates, an unorthodox and unlikely rival may be on the horizon. In what sounds more like an April Fool’s story, Seattle-based Planetary Resources plans to mine ‘near earth asteroids’ (NEAs) for platinum group metals. The company claims that 1,500 of these NEAs are “easier to reach than the moon”, although how six moon landings between 1969 and 1972 lasting a total of less than 90 minutes at a cost of billions – if not trillions – of dollars can be described as “easy” is not explained.
It’s probably a little early for South Africa’s miners to get too panicky, however. The legality of property rights in space, the prodigious costs of space mining, the amount of time missions may take and the unproven nature of the technology mean failure is all too likely. It cannot be described other than as a very high risk investment.
This has apparently not deterred the Google founders, Ross Perot and film director James Cameron from investing. With each of the 500m NEA containing more PGMs than have ever been mined on earth in human history, the company says, the rewards are apparently there.
Meanwhile, in the real world, it remains South Africa that the world looks to for its PGMs. For one thing, the country possesses sufficient proven reserves to last about 300 years, making poking around in space for it as unnecessary as it is expensive.
According to the experts at Thomson Reuters GFMS, platinum supply rose 5% last year, mainly due to improved Canadian output and greater scrap volumes – particularly in Japan.
Platinum supply exceeded demand again last year, as it did in 2010, but the surplus fell by 12% to 735,000 oz. Demand for fabrication, as opposed to investment, rose 7% to a three year high, most notably due to Chinese jewellery demand.
Philip Klapwijk, Global Head of Metals Analytics at the firm, says “the fact that platinum prices remained elevated over much of last year – enabling a new all-time high in annual average terms of $1,722 – was testament to broadly favourable investor sentiment, evidenced by a 12% rise in world investment demand.”
In South Africa, the story is one of stalling prices – currently at $1,500/oz, around 14% lower than last year’s average – and production stoppages. The latter have been caused by the contentious Section 54 safety regulation. PGM mining is very dangerous and the government is trying to reduce casualties. Between 2007 and 2011, Anglo Platinum suffered 73 fatalities and Impala Platinum 55. The government now requires a shutdown every time there is a death.
Industry leader AngloPlats says the country has lost 300,000 oz in production in 2011 as a result of such stoppages, 120,000 oz by AngloPlats alone.
Adding to the sector’s woes is the increase in South African platinum royalties to 10% from January of this year. Additionally, PGM mining is very energy thirsty and so rising South African energy costs are also a challenge.
One of the principal uses of platinum is in diesel automobile catalytic converters. Demand from this sector, although slightly recovered, is still considerably lower than it was pre-recession. This weak demand is partly due to flat car sales in Europe (where diesel engines are proportionally more popular than in the US or China) and partly because of the increasing substitution of cheaper palladium for platinum, due to technological innovation. The disruption that resulted from the tsunami in Japan also dampened demand.
Palladium is used primarily in petrol automobile catalytic converters, as an oxidation catalyst, whilst rhodium is used as a reduction catalyst. The deficit in the palladium market halved to 313,000 oz last year.
The four big PGM miners Anglo Platinum, Impala Platinum, Lonmin and Aquarius Platinum dominate the industry, accounting for about 75% of global output.
Aquarius’s first quarter of 2012 PGM output fell 18% year on year, leaving the company nursing a $9.4m loss as compared with a $25.3m profit over the same period last year. Its shares fell 14% on the news and have more than halved in 12 months. Aquarius is also engaged in the challenging process of disposing of 51% of its Mimosa mine in Zimbabwe, in accordance with the country’s indigenisation laws. Mimosa, which is half owned by Impala, is Aquarius’s most profitable mine.
Impala’s subsidiary ZimPlats reached a deal with the Zimbabwean government in March, granting 10% ownership to the local community, 10% to its employees and 31% to the National Indigenisation and Economic Empowerment Fund. The skill of CEO David Brown in navigating through this challenge has been much admired. How the country is going to pay for this 30% stake (with an estimated value of $300m) is an interesting question. After all, Finance Minister Tendai Biti has been quoted as saying that “This is not nationalisation, money will change hands.”
Elsewhere, a strike at Impala’s Rustenberg plant resulted in the loss of 200,000 oz of production earlier in the year.
Zimplats’ first quarter 2012 profits rose 170% to $52m, buoyed by higher prices, despite a 2% fall in production. Meanwhile AngloPlats shed 24% of its output over the same period, as a plant closed for maintenance. Safety stops fell to 13 from 32 in the previous quarter.
Zimbabwe has the second-largest reserves after South Africa, but the government’s policy of indigenisation may clash with its goal of attracting the billions in investment required to raise production to 1.5m oz by 2020.
A relatively new player, Chinese miner Wesizwe, is investing R12bn ($1.5bn) in its Bakubung Platinum Mine project in the North West province of South Africa. It believes it will be capable of producing 350,000 oz of PGMs and gold a year in due course.
With the Eurozone crisis far from being resolved – with dramatic implications for platinum demand – significant downside risks remain. However, the outlook for palladium may be slightly rosier.
Philip Klapwijk observes that “palladium prices are also likely to benefit from the favourable investor climate towards precious metals, while the downside may be limited as palladium’s demand base in autocatalyst is less exposed to Europe and is quite broadly based geographically”.
His consultancy, GFMS, sees platinum trading in a $1,745-1,775/oz range this year and palladium between $575-775/oz. Last year both metals posted record average prices of $1,722/oz and $734/oz respectively.
Any rise in interest rates will run current PGM stockpiles down, due to the opportunity cost to investors of holding a non-yielding asset. It is unlikely that things will really hot up for platinum until 2013 or 2014.