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White hot platinum shares feel the heat

Created:
1 November 2007
Written by:
Daniel O'Sullivan

Platinum has benefited as much as gold from the flight to "safe havens" against inflation sparked by dollar weakness, with both the white and yellow metals gaining around 17 per cent since the US Federal Reserve started cutting rates in mid-August. Main-market platinum miners have gained accordingly, with Lonmin up 20 per cent and Aquarius Platinum up almost 40 per cent.

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There are good reasons for Aquarius' outperformance, but Lonmin's gains seem driven by platinum alone, as it recently announced yet another full-year sales target miss plus reduced guidance on sales next year and a warning about higher costs. Aquarius has just announced first-quarter results showing record total production, and is also proposing a three-for-one share split that should increase liquidity in the stock. Yet, despite the marked difference in company fundamentals, there are good reasons for thinking both shares are now overcooked.

A clutch of seven factors can explain 80 per cent of price movement for both Lonmin and Aquarius since 2000, the first full year of listing for the latter. The platinum price itself is prominent, and so too is the exchange rate between the South African rand and US dollar - a stronger rand is bad for these South African miners, who must pay local costs from dollar-denominated metals earnings. Beyond these, other positive factors include market risk itself, in the form of FTSE All-Share performance, and the gold price - wider mining commodity price gains are good for these stocks. Negative factors are the oil price and the break-even inflation rate; even after allowing for the beneficial effects of higher metals prices, inflation in general is bad for these miners.

The real kick comes with the seventh factor, however: eurozone industrial production. On the one hand, this is a proxy for European automobile manufacturing, the major industrial customer for platinum through catalytic converters. But, because the market regularly views forecasts for such figures, they should already be heavily discounted in the platinum price and the actual platinum miner share prices as well.

The data says emphatically not - probably because forecasts are often significantly out. And, for both Aquarius and Lonmin share prices, European industrial production is at least as statistically significant as the platinum price, but with far more leverage. The data says that all else being equal, a 1 per cent shift in the platinum price spells a 0.7 per cent shift in Lonmin shares and a 2 per cent shift in Aquarius shares. But a 1 per cent shift in European industrial production spells a 6 per cent shift in Lonmin shares and a massive 16 per cent shift in Aquarius shares.

All of which means that the two large-cap platinum miners could hit a wall next week, when announcements of industrial production figures from France, Italy and Germany plus a slew of OECD economic indicators are due. The general feeling is that these will reflect an industrial slowdown, albeit from current elevated levels. Other key factors listed above might also weigh against the two stocks, such as a further weakening in the dollar and an inflation outlook also seeming biased toward the negative.

The real sting for Aquarius, however, is that despite its fundamentals looking better than Lonmin's, it seems more geared to these factors, whereas Lonmin seems more sensitive to the FTSE All-Share itself and the gold price.

IC VIEW

HighEnough

For all of the reasons cited above, and after their recent strong performance, Aquarius Platinum, at 1,841p, and Lonmin, at 3,430p, look high enough.

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