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Jun 2003 - Platinum Mines

Platinum mines do not only produce platinum

We find that a number of advisers and investors still perceive platinum companies as only producing platinum and not up to 12 different metals all from the same reef or ore zone, namely the 6 PGMs or platinum group metals of platinum (Pt), palladium (Pd), rhodium (Rh), iridium (Ir), ruthenium (Ru) and osmium (Os), the other 2 precious metals of gold (Au) and rarely silver (Ag), plus the 4 base metals of nickel (Ni), copper (Cu), cobalt (Co) and chrome (Cr).

With the surge in the platinum price currently trading at about US$660/oz (4 June 2003) a number of exploration hopefuls are beginning to appear, reporting platinum intersections in a number of different forms. However, to be meaningful, the standard is to report intersections, reserves and resources in 4E PGE, being 3 of the PGMs and gold, usually platinum, palladium, rhodium and gold.

Nickel and copper values (usually to 3 decimal places of a percentage) should also be quoted as they actually are significant with nickel the third most important source of revenue after platinum and palladium as in Zimbabwe’s Great Dyke. The copper and nickel contents are also essential components of a platinum company’s orebody since they are regarded as the “collector” minerals for the PGMs in processing.

Copper in fact is renowned for going too far as a collector mineral in that most platinum companies “lose” their rhodium when they first begin production as the rhodium goes with the copper unless it is forced back into the PGM group for treatment in the two PGE refineries. The production of platinum usually involves a base metal smelter to remove the copper and nickel, followed by the first PGE refinery which extracts platinum, palladium and ruthenium. And then the second PGE refinery, which extracts the rhodium, iridium and osmium.

We recently saw one report that jumbled the South African platinum and chrome bearing reefs together and assumed that they could average say 5 g/t resulting in a number of moz. This should not be able to be done. If it is in the Bushveld Complex of South Africa then the geological sequence is the platinum-bearing Merensky (at the top) followed by the Upper Group and then the Lower Group chromite reefs at the bottom. Platreef which occurs in the eastern limb of the complex has been interpreted as a skarn between the Bushveld rocks and underlying dolomite formations. The complex can be perceived as an extremely large flat cereal bowl in shape, with negligible folding, and the reefs dipping into the centre of the bowl and then apparently flattening out at depth.

The most common Upper Group reef that is mined by South African platinum companies is No 2 as in UG2, while the No 6 in the Lower Group as in LG6 is the one that is usually mined by the chrome companies. The percentage composition of platinum, palladium, rhodium etc varies in each of the reefs such as Merensky and UG2. We have so far not come across LG6 being mined by the platinum companies, so the three individual reefs should not be capable of being clumped together.

Table 1. Comparison of some Platinum-bearing reefs in Southern Africa for DH03estGDNjun03

The platinum reef in the Great Dyke in Zimbabwe also has a different distribution and in general higher nickel and copper contents as shown in Table 1, since its platinum-bearing reef was formed at a different time namely about 0.5bn years earlier (or about 2.4bn years’ ago) than the Bushveld complex at about 1.8bn years’ ago.

There is also a misconception over the cost of producing platinum group metals. It is capital intensive and can require more than US$1bn for the refineries, consequently most junior companies produce a concentrate or matte and ship that for treatment to larger established companies like Impala Platinum, which want to receive as much concentrate or matte as possible so that they can reduce their production costs that result in the refined products.

According to Implats, the supply and demand for platinum is about 6.9mozpa and IMP estimates the deficit to narrow from about 390,000oz in 2002 to 35,000oz in 2003, based on increased supply with jewellery demand slowing, but that could be a conservative outlook. From analysis that we have made, it appears that there could be insufficient platinum to meet demand, largely due to overlooked Chinese demand.

About 5 years’ ago very little was estimated in terms of Chinese demand for platinum jewellery yet alone considering autocatalysts. China’s growth has been well documented but some of the underlying statistics are dramatic, such as 94m rural workers moving to cities in 2002 (up from 89.3m in 2001), leaving 480m rural workers remaining, and 83 new cities having formed in the 11 years to 2001 resulting in 269 cities. Shanghai has been designated to become the new financial centre of China (no longer Hong Kong) with US$12bn in foreign investment spent in 2002, and it has a population of ~16m. Consequently, the recent approval to commence platinum trading at the Shanghai Exchange during 2003 could become significant.

China imported 40t (1.29moz) of platinum in 2001 and by 2002 that had risen to at least 48t (1.54moz), while producing about 1t (0.03moz) itself. IMP estimated that Chinese platinum jewellery demand could have been as high as 1.5moz in 2002 out of global platinum jewellery demand of 2.76moz. Total platinum jewellery demand rose by an estimated 230,000oz in 2002 of which at least 200,000oz of the increase has been attributed to China.

Currently very little has been factored into the demand equation for autocatalyst demand from China. It is known to be growing and was possibly 200,000oz in 2002. The actual number of lead-free petrol cars being sold per year in China is unknown apart from GM building a new plant in Shanghai in 2001 and achieving payback within one year. No projections have yet been made for what level of demand Chinese autocatalysts could become over the next 5 years because the inference results in not enough platinum.

On the supply side, a number of the new South African projects appear to be struggling. The Russian stockpiles are believed to have been effectively depleted, and if these driving factors were not enough, the Bush administration has reputedly made a major allocation to advancing fuel cell applications.

Palladium seems to have been largely written off after its collapse from the dizzy heights of US$1115/oz on 29 Jan 2001 (when platinum was at US$616/oz) to current levels of about US$150/oz. The dramatic fall in autocatalyst demand of almost 2moz in 2002 was attributed by Johnson Matthey to US auto companies using their heavy inventories, with the demand side balanced by Russia restricting shipments. Although Russia has stated that it may resume its shipments, with palladium at only US$180/oz and approaching 25% of the platinum price, reverse substitution seems likely to recur, and that could result in higher palladium prices.

The platinum companies are extremely sensitive to their metal price products, with the 10% increase in the platinum price to US$660/oz (if sustained) resulting in an increase in our valuations of both Aquarius and Zimplats by about A$0.83 per share. A multiplier effect can occur if the other PGM prices rise too, and even further if stronger nickel prices are achieved.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, who has a Proper Authority with State One Equities, and with his associates, has held interests in some of the stocks in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

  • Written by: Keith Goode
  • Sunday, 01 June 2003