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South Africa’s platinum industry forced by virus to look into abyss

Could sector be following in the footsteps of the gold industry?
Impala platinum, Rustenburg operations. Image: Supplied

South Africa’s gold industry has been dying slowly for years. As the coronavirus undercuts the already fragile case for investment, its platinum mines may be next.

Beset by power and water shortages, alongside whipsawing government policies, South African producers have cut spending over the past decade on mines responsible for 75% of global platinum supply. The virus is accelerating that trend, damping demand for the catalytic converters that are the largest users of the metal, while stimulus packages push automakers to speed a shift to electric vehicles.

A series of mega open-cast projects risk being shelved — depriving a recession-hit economy of essential investment — but the toughest blow may land on the so-called western limb, the traditional heartland of the nation’s platinum belt.

“The western limb region has been the bedrock of South African platinum and that is in decline,” said Mandi Dungwa, an analyst at Kagiso Asset Management. “It is the end of an investment cycle in those type of mines.”

Shunning capital spending leaves one of South Africa’s biggest export industries in limbo, just as the demise of the nation’s gold mines enters its final phase. With about 170 000 people employed in platinum mining, the timing is bad for President Cyril Ramaphosa as he battles the biggest economic contraction since World War II.

Output from South Africa’s 130-year-old gold industry slumped over the past three decades as the geological challenges of operating the world’s deepest mines pushed up costs. The platinum deposits discovered by Hans Merensky in the 1920s contain about three-quarters of the world’s known resources, but were only exploited in the 1950s with a surge in demand from carmakers using the metal to cut exhaust pollution.

“The sun is definitely starting to set over some of the conventional, deep, high-grade, western limb areas,” said Johan Theron, a spokesman for Impala Platinum Holdings Ltd. “It’s exactly like gold: there is more gold, but it’s deeper and requires more capex and prospects of making a return are slim.”

Platinum output peaked in 2006, and the lack of investment in deep-level western limb shafts will result in a further sharp contraction in production over the next 10 years.

The windfall from surging palladium prices — another platinum-group metal produced at South African mines — refilled the coffers of local producers over the past 18 months but hasn’t been enough to justify large capital expenditure projects. That’s delaying the construction of the next generation of mines on the northern limb of the platinum belt, and hastening reserve depletion.

In June, Implats balked at investing about R12 billion on building a new mine at Waterberg on the northern limb of the platinum belt. The outlook doesn’t support such spending over the next decade, said spokesman Theron.

Anglo American Platinum has delayed a decision until the second half of next year on whether to spend as much as $1.5 billion on expanding output at its key Mogalakwena mine.

Vancouver-based Ivanhoe Mines said it’s still evaluating finance for its new Platreef project, which could require about $1.5 billion of investment.

Still, notwithstanding the investment hiatus, the platinum sector remains in better shape than South Africa’s gold industry. Even without further spending, some deep-level mines have a 30-year lifespan, according to James Wellsted, a spokesman for Sibanye Stillwater, the world’s No 1 platinum miner.

Still, investment decisions are complicated because of an uncertain regulatory and policy environment, among other challenges, Wellsted said.

With the pandemic creating doubts over future demand, the development of new, lower-cost mines has been put on hold.

“With Covid-19, all the companies went into cash preservation mode,” said Arnold Van Graan, an analyst at Nedbank. “Over the next decade, there could be a big step change down in PGM production, if the industry does not invest.”

© 2020 Bloomberg

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And so begins episode 34 of the 26th series in the enthralling tale of the destruction of South Africa by the ANC. Viva !!!!

So much doomsday talk and the shares still go up.

Most precious metals are not actually that rare in earth crust, just expensive to extract; and getting more and more expensive. With so much already above ground for industrial needs, what will drive prices up?

That is the wrong question, but I will give you the correct answer anyway. ☺

The unit of account will be driven down to compensate for debt levels and lockdown measures. The world faces a decade of stagflation and financial repression. This devaluation of currencies will drive a 1400 percent increase in the dollar price of gold, like it did in the 70’s.

My conservative target is $15 000 an ounce and more likely $20 000 per ounce by 2030. The price of gold wont be driven up though. It is the value of the dollar that will be driven down.

To see it in perspective, ask yourself what caused the rise in the price since 1971 when the dollar was fixed at $35 per ounce, to above $2000 per ounce where it is today. The dollar has lost more than 98 percent of its purchasing power in 50 years. Why will this process come to an abrupt end all of a sudden? This same process will pick up speed.

The rate of increase in the price of gold measures the rate of decrease in the purchasing power of those instruments that does not keep up with gold. That implies that interest-bearing instruments will lose 80 percent of its purchasing power over the next decade.

Thanks but I was mainly wondering about platinum and palladium. Platinum was boosted by catalytic converters but that demand is disappearing..

Both are interesting for battery tech, I think Anglo was quite involved in pushing that. For stationary batteries (big grid and building systems), if somebody cracks commercial production of flow batteries, that could save those mines.

As to your gold thesis : good luck. I prefer assets that generate positive growing cashflow. Their value is determinable and logical in any currency. If the dollar depreciates, it generates more dollars than last year and the value increases accordingly. In this madness of quantitative easing the value of an asset like Apple with its cashflow and profit ratio is even better as the alternative is watching paint dry on a .25% yield (or physical gold with a negative income yield).

Compare total yield buying $100,000 per year Gold vs $100,000 per year Apple shares for the past decade???? Even two decades, even three decades, even four decades… I would venture (have not calculated) that the annual dividend on Apple will approach the gold portfolio value

This is such a pathetic article. Platinum investment has been rising. Two incompetent writers! Our PGM miners are milking it all the way to the bank.

I am not sure what Pt investment you are referring to. Western limb is the largest contributor to global platinum supply. Rustenburg production is expected to fall by about 50% in the next 10 years (equates to about 14% of global supply). No new supply is expected from Rustenburg area. This should support Pt prices over the long term.
Existing operations need significant Capex. Sibanye and Implats have shown reluctance to commit new Capex to South Africa.
The most significant recent discovery is the Waterberg Project. This needs about R16b of investment. The IRR of the project in the DFS is quoted as 13%. Not a dripping roast, since the cost of capital in South Africa is higher than that, although at current metal prices the IRR will be higher. It is telling that Implats has decided not to take up their option. This mine is not going to get built any time soon.
The long term trend remains intact, the South African Pt industry will continue to shrink and shed jobs.

John- disagree. Gold and platinum group elements (PGE) are very rare in the earth’s crust. There is about 1ppb (1 gram per 1000 tonnes) of Au, Pt, Rh in the crust. This is geochemically very scarce. Compare this with Cu 55000ppb, Zn 70000ppb, Pb 12000ppb and Ni 120000ppb.

Oddly enough on average the earth contains more platinum than tin but the former resides mainly in the nickel iron ore whereas the latter in the crust.

You are ignoring the important distinction between monetary metals (Au and Ag) and precious metals (PGEs). Monetary metals have a very slow declining marginal utility and as such they do not behave as mere commodities. The demand for gold is almost insatiable. The world produces about 2500 tonnes of gold annually. There are more than 100 times this sitting in vaults, under mattresses and buried under huts. Yet the demand carries on uninterrupted. When the price goes up, gold does not come out of hiding like other mere commodities. This is because gold is recognised and accepted as the ultimate form of money. Why gold and not rhodium? I don’t know but it is what it is.

Sorry Richard, have to disagree.

If precious metal demand is insatiable then its price should not be about double what it was 40 years ago, it should be three or four factors higher. $80,000 per ounce.

The gold bulls always surface when gold price if high. It has now barely beaten its price of the last decade! I would venture that 30y US Treasury bonds had a better decade. They had a better 40 years!

For me resources with mainly useful demand (as opposed to vanity and speculation) are more attractive. (platinum, palladium etc). Have a use, have a value. The rest are barely different from tulips.

Gold’s actual demand (as gold) is covered at several hundred times by its above ground reserves if all the gold in the crust disappeared tonight.

For me : give me something useful like a share that generates income, not a theory like gold, which is all that gold is. Ask “why” five times after somebody says gold is worth $1m per kg – and consider the best answers one could come up at each level.

The ANC took SA into the abyss through corruption and gross mismanagement, Covid-19 and ANC response just took us further into the abyss.

Has nothing to do with the virus. It is govt policy ruining the economy. The virus is nothing compared to ANC policy.

The ANC is much more dangerous than any virus could ever be.

Calling the government a virus now, I see. Sounds legit.

Definately Time for the Western Cape to break away and form our own Singapore type of Paradise but very secure border from the rest of Rsa/Africa !!!

I love the idea.

Edalsg for President of the new Republic of WC

Has a nice ring to it..

Lol. The Eastern Cape border will be blurry. You will need machine gun nests every 500m, helicopter gunships and 7 aircraft carriers. Maybe that would revive Denel.

Still not enough. Napalm and small nukes

Correction – this and any industry looking into the abyss is not from the virus, it is from global governments massively disproportionate response in locking down.

Lockdown and Luthuli House policies before Covid and their reactive policies now make the following ZAR targets distinct possibilities:

21.38/ 22.03/ 24.44/ 33.12…

Was the previous government not corrupt? It was corrupt by the influence of the US. Now the government is corrupt by the influence of China. Don’t worry about the Platinum mines. Soon they will belong to the Chineses and they will bring their own workers. Like they do in the DRC, in Angola, in Ghana etc… They will bribe the ministers of the government and nothing will happen. The people will carry on suffering more and more and more. They are just waiting to take over very quietly. Just like they have waited few decades to take over Tenke Fungurume, the richest and biggest copper deposit in the world ( in DRC). The chinese were already present in the DRC in the 70s , «  donating » things to the people ( like tractors, trucks, etc,…). They knew exactly what they wanted at that time already. Patiently, they have now succeeded. Look at all the inscriptions in chinese at the OR Thambo airport. It says it all but people are blind. Look at Tibet, Hong Kong…

End of comments.

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