Strategy Metals Bulletin (58)

Aims to update investors on developments in the world of strategy metals – crucial inputs to industry, defense and technology innovation

Terence van der Hout

Feb 5 – 11, 2012 Gold&Discovery Fund

South Africa to nationalize platinum?
Despite the market sentiment mirroring a fatal crash to fathomless bottoms, the margins of precious metal producers were at record levels in 2011. You wouldn’t tell from their valuations on the stock markets, but some companies were eaing $1,000 per ounce of gold produced, filling their coffers with cash that may be used for expanding their reserves through exploration or take-overs.

The profitability of mining in this age of resource scarcity has not gone unnoticed. Countries that host mining operations are resorting to grabbing an ever larger share of the pie. Taxes on revenues have risen in some countries, and windfall profit taxes have been adopted in others (notably Ecuador). The most extreme form has been the nationalization of the gold mining industry, in Venezuela, a thought the more radical wing of South Africa’s ruling party ANC has also been flirting with.

This week, the ANC published details of a highly politicized report that is intended to spell out South Africa’s strategy towards minerals and their ownership. The bottom line is that nationalization is not an option, as it would be totally unaffordable, and this may be a relief for those who had been watching things getting progressively worse in South Africa. However, the report does come up with a number of pretty hefty proposals. For one, the sale of mine rights will be heavily taxed in order to prevent the practice of squatting (the formation of a company and application for mineral rights even though they have no intention of mining. After getting the licence, they sell the rights for big money). Govement’s stake in ownership would rise substantially, and a windfall tax of 50% on profits is suggested.

There was one exception to the non-nationalization principle. Given its strategic character, the ANC is set to consider the nationalization of platinum, a so-called targeted mineral. South Africa produced 75% of the world’s platinum (and holds around 95% of the world’s reserves), and is seen as a crucial input for the development of certain technologies, particularly in fuel cells. The report specifically stated that “between us and Zimbabwe, we can control the world’s platinum.”

There are contradicting views on the status of the report. Some indicate it is very likely to be adopted at a national executive committee meeting next Saturday, given that it was pushed by President Zuma himself. Others, however, see the document as a guidance which might not necessarily be implemented. The level of politicization surrounding the report ensures that it will at least get a serious consideration, and even a watered-down version has serious consequences for mining in South Africa. Should the nationalization of platinum be implemented, we can be sure this will change the landscape for platinum miners.

Platinum is used primarily in the automobile industry in catalytic converters, and has precious metal value in its use as jewelry. Markets were in deficit over 2010, but tued positive in 2011. A small surplus is expected in 2012, but the South African policy could change the supply/ demand rationale.

There are no primary platinum producers, as platinum is always found in conjunction with the platinum group metals (PGM) palladium and rhodium. Also, the PGMs are associated with nickel and copper, and platinum is often a small part of any deposit. Outside of South Africa and Russia, there are really only two producers that mine the PGMs as a primary focus. One is active in Canada, and is called North American Palladium (PDL). The name is a give-away in that the deposit’s platinum/ palladium ration is so heavily skewed towards palladium that platinum production isn’t reported separately. The second is US-based Stillwater Mining (SWC), whose ratio is somewhat better. It produces roughly 120,000 oz. platinum a year, on top of a further 180,000 oz. that it recycles, so it has a more direct exposure to platinum. However, its operations are fairly stable, and there is little upside from a resource expansion point of view.

There is one junior miner that has a more or less primary PGM deposit that is rather nicely skewed towards platinum. Prophecy Platinum (NKL.V) holds a resource of 5 mil oz. of decent grade (>0.5 g/t) platinum, on top of roughly 4 mil in palladium, and 2.3 mil oz. of gold. The project is situated in south west Yukon, and is still in  fairly early stage of development. A preliminary economic assessment (PEA), is due this quarter, so they have a long way before production. However, the company is still drilling off the deposit, and junior miners have a tendency to become increasingly fairly valued the closer they get to production. Should South Africa coer the platinum market by ‘targeted’ nationalization, we may expect this to be one of the companies to shine.
 
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Disclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund has commercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this bulletin is the author’s independent opinion of developments in markets and at companies, and hence may contain factual errors, and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intended as an investment recommendation.

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