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Why Platinum has soared to 17 month high, outflanks gold

Platinum prices have hit new heights on concerns over a tightening in South African supply, rising to a 17-month high and surpassing the gold price for the first time in 10 months.  
Why Platinum has soared to 17 month high, outflanks gold

Platinum prices have hit new heights on concerns over a tightening in South African supply, rising to a 17-month high and surpassing the gold price for the first time in 10 months.

Platinum for April delivery, the most active contract, recently reached a high of $1,744.50 a troy ounce on the New York Mercantile Exchange, the highest price since September 22, 2011.

The contract is currently trading at $1,712.0 an ounce, still topping gold prices. 

A contraction in the supply of Platinum out of South Africa as a result of factors making much of the nation’s Platinum mining unprofitable has positively impacted the commodity’s price.

"The Platinum group metals pipeline from production to refinery to end users is very, very thin - there are not large stocks of the metal," says Ross Norman, owner of London-based bullion broker Sharps Pixley.

"This means when there is a dislocation, there are huge price spikes, which we have seen with Platinum previously," he says. 

The largest producer of the metal, Anglo American Platinum, said it would cease operations at a number of its South African mines reducing the company’s annual production by about 15%.

Anglo American said the closures would reduce its Platinum production capacity by 400,000 ounces, the equivalent of about 7% of global output.

Prior to the Anglo American announcement, supply was already tightening as a result of mine closures, electricity shortages and labour strikes in South Africa, from where 75 per cent of Platinum’s global supply of 6.48 million ounces hailed in 2011.

Prices of Platinum have varied widely. According to specialty chemicals company Johnson Matthey, more than a century ago, it was cheap enough to be used to adulterate gold, and was nearly eight times as valuable as gold in 1920.

In addition to concerns over supply, Kirill Kirilenko, precious metals analyst for global mining and metals experts, CRU, forecast last year the market surplus will continue shrinking in 2013  as demand will improve due to the introduction of the Euro 6 emission standard in Europe - which is a major consumer of diesel cars that are equipped with Platinum-rich catalytic convertors.

Aside from its obvious uses in jewelry, Platinum is also used in wire, as a corrosion-resistant apparatus, and in many industrial products. It is also an excellent catalyst, having long been used in the contact process for producing sulphuric acid, and as a catalyst in cracking petroleum products. There is now a lot of interest for the use of the metal as a catalyst in fuel cells and in anti-pollution devices for automobiles.

In 2011, autocatalysts accounted for 31 per cent of Platinum demand, according to Johnson Matthey.

The new Euro 6 emission standard for vehicles entered into force in the EU starting on 31 December 2012 for new heavy duty diesel vehicle models, and comes into force one year later for all vehicles in an effort to limit pollution by cars.

All vehicles equipped with a diesel engine will eventually be required to substantially reduce their emissions of nitrogen oxides – a positive for the price Platinum.

Platinum plays are sparse on the ground. Here are a few:

The demand/supply equation bodes well for Platinum companies such as Platinum Group Metals (TSE:PTM) (AMEX:PLG), an exploration and development company with projects in South Africa and Canada. 

Shares of the company have advanced more than 67% so far this year, to current levels of $1.36, up from lows of 80 cents in early December. 

It holds the Western Bushveld JV project 1 in South Africa, which has advanced to construction, with the company currently focused on developing underground access decline tunnels. The project is  owned 74% by Platinum Group Metals and 26% by Wesizwe Platinum Limited (JSE:WEZ).

Wesizwe is building the adjoining Bakubung Platinum Mine, a deeper mine with a cost recently estimated at USD$1.5 billion. The companies have said that operations and construction at the WBJV Project 1 have proceeded uninterrupted throughout last year. 

Stillwater Mining (NYSE:SWC) shares have gained more than 38% since mid-November to $14.55, with the company focused on the extraction, processing, smelting, refining and marketing of palladium, Platinum and associated metals from a geological formation in southern Montana known as the J-M Reef.

Its Stillwater Mine currently provides over 70% of the company's Platinum group metals production.

In 2010, Stillwater acquired Marathon PGM Corp, whose Platinum group metals-copper project in northwest Ontario is at an advanced development stage. The property is in the permitting process and preparations for detailed engineering and construction of a conventional open pit mining operation are in progress. The project is expected to add significantly to the company’s current production of PGMs in addition to new copper production.

North American Palladium (TSE:PDL), meanwhile, is a precious metals producer that has been operating its flagship Lac des Iles mine (LDI) located in Ontario, Canada. It also operates the Vezza gold mine in the Abitibi region of Quebec, and mines for palladium, Platinum, gold and certain base metals. Its stock has surged 34% since the start of the year, or over 20% since mid November, to $1.80. 

Meanwhile, Platinum Australia (ASX:PLA) is in advanced discussions with Jubilee Platinum (LON:JLP) regarding a proposed merger via a scheme of arrangement under which Jubilee would acquire all of the shares in Platinum.

If it goes ahead, the merger would create a mining group with the potential to become one of the world’s top five Platinum producers.

The combined company could restart mining operations at Platinum’s Smokey Hills Mine and bring the operation into production in the second half of 2013, ramping up to 70,000 ounces per annum of Platinum group metals in 2014.

Platinum and Jubilee previously executed an agreement under which Jubilee will use Platinum’s Smokey Hills Mine concentrator to process Platinum-bearing tailings from the Dilokong Mine in South Africa.

This agreement will accelerate processing of the Dilokong tailings by some 14 months to commence during the first half of 2013.

With the exception of the Tjate Platinum project – Jubilee’s prime asset in South Africa, the combined projects are near term with relatively low capital requirements. 

The combined group plans to grow its earnings profile from cash generated by its own operations.

On the junior end, there is Atlatsa Resources (CVE:ATL), which is focused on the mining, exploration and development of Platinum group metals mineral deposits located in the Bushveld Igneous Complex (BIC), South Africa, and Yukon-focused Prophecy Platinum (CVE:NKL). 

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