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The PGM sector overshoots on US Automaker woes
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As US automakers struggle to survive in an increasingly uncertain market fraught with recession worries, concerns have emerged regarding the Platinum Group Metals (PGM) sector and PGM companies. After all, the auto sector which uses both Platinum and Palladium in autocatalysts, and is the largest consumer of PGM’s.
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An autocatalyst, or catalytic converter, is a cylinder containing a fine honeycomb coated with a solution of chemicals and PGM, which converts over 90% of petrol or diesel exhausts into less harmful emissions. Falling auto sales and consequent production cut backs by automakers, particularly those in the US, have driven PGM prices down. Platinum has fallen 60% from its peak of $2050/oz in April 2008, while palladium has tumbled 64% from its peak of $510/oz. Autocatalysts account for 48% of platinum and 52% of palladium consumption worldwide.
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Doubts over the prospects of PGM companies have surfaced again as the big three US automakers face near bankruptcy. The US Senate has refused to pass a $15 billion bail out package and President Bush is looking to use Troubled Assets Relief Programme to help struggling automakers. Bleak economic news and prospects of a long and painful recession offer little respite to PGM companies.
However, a closer look at the industry dynamics reveals that matters are perhaps not so bad for the PGM sector in general, particularly platinum. For starters, much of the platinum consumption in autocatalysts actually comes from countries other than the US, where more diesel vehicles are in use. Automobiles in North America generally run on gasoline using less platinum and more palladium in their autocatalysts. The US accounts for only 20% of platinum consumption in autocatalysts whereas Europe uses 51%.
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A somewhat different picture emerges when it comes to palladium. North America accounts for 38% of palladium consumption in autocatalysts; this is due to the prevalence of more gasoline engine vehicles in North America, which consume more palladium and less platinum.
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European automakers are big producers of diesel engine automobiles and thus big consumers of platinum. Chinese, South Korean, Indian and Indonesian automobile manufacturers, whose markets are also known to prefer diesel engines, use platinum-dominant autocatalysts. These are growing markets that are expected to be the driving force for PGM in general, and platinum in particular.
Apart from the relatively low consumption of platinum by the US automakers that are currently in peril, platinum fundamentals have also been buoyed as a result of production cuts by the three main platinum companies, namely Anglo Platinum (LSE: ANP, JSE: AMS), Impala Platinum (LSE: IPLA, JSE: IMP) and Lonmin plc (LSE: LMI). All three are in the process of scaling down their output, partly as a result of their operational issues, and partly in an attempt to curtail supply and boost.
Electricity problems and regular power cuts in South Africa also forced the big three to curtail mining and processing in 1Q2008. For instance, Anglo Platinum temporarily closed the Amandelbult mining property due to flooding. Lonmin also lost production due to smelter problems from its Marikana mine. Further a field, Russian output of platinum - from Norilsk Nickel (RTS: GMKN) - also fell during 2008. Meanwhile, Johnson Matthey (LSE: JMAT) reckons the platinum market to be in deficit by 240,000 oz in 2008, despite a 2.3% drop in demand to 6.52 million ounces, and expects platinum supply to fall 4.2% to 6.28 million ounces in 2009.
Much of the recent price weakness for platinum has come from investment fund sales precipitated by the global financial crisis. However, it appears to be an over-correction and the worst seems to have passed for PGM, especially platinum. It is now time to take a look at PGM companies, particularly those with a high exposure to platinum.
Several PGM companies emerge as attractive investments with, of course, the three main players - Anglo Platinum, Impala Platinum and Lonmin plc - obvious candidates. In addition, there are some less well-known, yet attractive companies such as Northam Platinum (JSE: NHM), Platmin (TSX/AIM: PPN) and Eastplats (TSX/AIM: ELR, JSE: EPS). All of these have South African assets, provide exposure to platinum, have ongoing production and are well financed. In North America, Stillwater Mining (NYSE: SWC) and North American Palladium (AMEX: PAL, TSX: PDL) are in the PGM space, with ongoing production.
Should PGM prices increase, exploration companies would be bound to benefit as this would boost their valuations. Unlike the dizzy days of the commodity cycle, investors would only be keen on companies that have seen some exploration success and good drill results. Also, alliances with larger companies may be hard to come by making companies with already established alliances interesting stories.
Amongst these, Anooraq Resources Corporation (AMEX: ANO, TSX/JSE: ARQ) stands out. The company has projects in the Bushveld Complex - a region that is internationally recognised for its PGM and chromitite deposits, located in South Africa. Anooraq is developing the Middelpunt Hill UG2 expansion project at Lebowa, with Anglo Platinum - having recently bought 51% of the Lebowa Platinum Mine from them.
Pacific North West Capital (TSX: PFN) also has a joint venture with Anglo Platinum in Ontario, Canada. A $525,000 budget has been approved by Anglo Platinum to further evaluate newly generated targets of mineralized zones. Northern Shield Resources (TSX: NRN) also has an option agreement with Impala Platinum to develop its High Bank Lake property in Ontario.
The markets do not appear to have factored these developments into any of these company’s ratings and consequently these companies are trading at low valuations. Their current levels appear to result from an over-correction precipitated by investment fund sales. This may well be a good opportunity to take a bet on PGM companies, particularly those with higher exposure to platinum.
Sources & Acknowledgements:
US Geological Survey (USGS), Johnson Matthey, Eastplats
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Editor’s Note: Sam Kiri is a CFA Charter Holder and a qualified Management Accountant (ACMA) with over 10 years of capital markets and asset management experience in North America, England and the Pacific Rim, with primary focus on Resources and Oil & Gas sectors. Sam is a director of Proactive Investors North America Inc., a financial media forum focused on small to mid cap companies. He is also involved in listing North American companies on the London Alternative Investments Market (AIM). Sam can be reached at sam@proactiveinvestors.com. To learn more about companies exploring and mining in Ghana, Please visit our web site at www.proactiveinvestors.com
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