All that glitters is not gold

Investors are seeing the longer-term potential of platinum group metals.

Although gold has been a strong performer over the years, investors are seeing the longer-term potential of platinum group metals (PGMs) which include platinum, ruthenium, rhodium, palladium, osmium, and iridium.

The primary use for these metals is in emissions reduction, particularly in catalytic converters in vehicles. Jewellery is an important source of demand as well, while PGMs are also used in the electrical, medical and forensic industries.

But the real magic lies in the role of these metals in reducing emissions, clearly a global imperative as governments turn up the pressure on climate change and decarbonisation.

Don’t make the mistake of assuming that only platinum is important. For example, the past decade has seen increased demand in palladium as a cheaper alternative to platinum that is still effective in petrol-powered cars. Platinum is the only option for diesel cars, but these have dropped significantly in popularity in the wake of emissions scandals in Europe.

It may come as a surprise to you that South Africa has more than 80% of the world’s platinum reserves and is the largest producer in the world of PGMs.

Due to our critical importance in the global supply chain, our ongoing issues in this country give price support to platinum. Load shedding, any potential labour issues and the general lack of a Covid-19 vaccine has assisted in creating worries over supply, which helps to drive the price higher.

Year-to-date, the platinum price is up nearly 20%. Over 12 months, the increase is 32%. In case you need a reminder of how important market timing can be, the increase over five years is only 39%. In other words, the real price action has been in the past 12 months.

Platinum is primarily an industrial metal, rather than a store of value. It suffered a precipitous drop in March 2020, down 40% from the peak in January 2020. Although South African challenges help the price, there’s minimal demand for platinum when new cars aren’t being built and sold.

For investors who are bullish on this space, one option is to invest directly in platinum itself, although that doesn’t consider the supply-demand dynamics and potential benefits of the other PGMs.

Platinum is currently trading at similar USD price levels to 2006, so it hasn’t been a good investment over the past 15 years or so unless you consider ZAR depreciation. In contrast, gold is trading 4 – 5x higher than it was in the mid-2000s (again in USD).

Tied to the fortunes of the broader economy due to its application in the new vehicle industry, platinum isn’t a hedge in equities portfolios in the same way that gold is. It requires investors to take a more active view on the demand and supply realities, as well as the fundamentals of the leading miners in this space.

Assuming the metal itself isn’t the preferred option for any given investor, the alternative would be to buy a selection of PGM mining houses or to even back a specific stock (obviously the riskiest option of them all with no diversification).

Share price growth in the mining companies is tied closely to metal prices rather than the timing of financial results. This is because analysts can predict earnings with reasonable levels of certainty, based on the rand price of the metal in question and an approximation of the cost of production.

This is the reason why recent blockbuster results from South African mining houses haven’t necessarily caused significant jumps in share prices. The financial results are largely priced-in, based on the average price of the metal during the reporting period which ended in December for many of these miners.

Over 12 months, Impala Platinum (JSE: IMP) is up 41%, Sibanye-Stillwater (JSE: SSW) is up 38% and Anglo American Platinum (Amplats) (JSE: AMS) is up 26%. The really incredible story has been Jubilee Metals (JSE: JBL), a tailings business that reprocesses PGM and other metals. The company is up 346% in the past 12 months! When you get it right with small caps, the rewards are significant. So are the risks.

Amplats and Impala Platinum are pure-play opportunities in the PGM space. Sibanye-Stillwater is a more diversified play, with platinum operations in the US and South Africa as well as gold operations locally.

Mining giants must constantly balance current prices against future expectations. It takes years to execute a mining project, by which time the forces of supply and demand will probably look different.

This is why mining is a high-risk, high-reward game.

Sibanye-Stillwater is perfect evidence of this. After the Stillwater merger in 2017 which left the company with a massive debt pile, the recent rally in the prices of PGMs helped the company beat the debt trap and post incredible profits of nearly R30bn.

Sibanye-Stillwater acquired Lonmin in 2019 in an all-share offer that valued the PGM business at R4.3bn. This includes the Marikana complex, which is a PGM juggernaut that has a sad history. The Marikana massacre of 2012 will never leave the memories of South Africans and especially the people affected, but the mine today is a jewel in Sibanye’s crown.

Sibanye recently confirmed a further R3.9bn investment into K4 at Lonmin. CEO Neal Froneman is outspoken and critical of the South African government, so this investment would not be approved by the group unless they are feeling confident about the future of PGMs.

Considering this project will take eight years to complete, it’s a strong show of faith in PGMs from one of the most iconic leaders in the industry.

All that glitters is not gold after all.

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It is simply not true that platinum group elements can in any way, shape or form reduce carbon emissions from an internal combustion engine. All the catalytic converter does is convert noxious emissions e.g. carbon monoxide to harmless forms such as carbon dioxide.

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