Join our community of smart investors

Platinum basks in gold's sheen

FEATURE: Gold may be grabbing the headlines but platinum group metals, which are essential for growing industries such as automotive, are where the real growth will come in future.

Few other commodities are as concentrated in their production as platinum. When Hans Merensky first started to map the Bushveld complex in 1924, he probably had no idea that almost a century later, it would still account for three-quarters of the world's platinum supply.

The Bushveld resembles a huge irregular saucer some 370km across, with its centre buried underground and mineable deposits on the western, eastern and northern 'limbs'. Its structure comprises a series of distinct layers or reefs, three of which contain substantial economic grades (concentrations) of platinum group metals (PGMs), primarily platinum, palladium and rhodium.

For half a century, the Merensky reef, which is closest to the surface, was the source of all of South Africa's platinum. In the 1970s, the Upper Group 2 (UG2) ore body was delineated and now accounts for the majority of the Bushveld's output. A third ore body, Platreef, is found on the smaller northern limb.

The western limb is generally considered preferable to the eastern limb as it contains higher grade platinum and a higher proportion of Merensky reef resources, which are easier to process than UG2 due to their lower chrome content. However, the Merensky reef is depleting faster than UG2.

Away from South Africa, neighbouring Zimbabwe holds the second-largest platinum resources, with North America and Russia holding smaller quantities of mineable platinum, much of it associated with nickel ore.

There's also a healthy supply of platinum from recycling, since in many of its applications, it acts as a catalyst – it's used, rather than consumed. Precious metals refiner Johnson Matthey estimates that around half of all platinum requirements are supplied from secondary sources.

Platinum funds

As with gold, you can own platinum and palladium through exchange-traded commodities (ETCs) that are backed by physical holdings of metal rather than just futures. See 'Allsorts of commodity funds' (available from 26th April) for more details.

Demand is motoring

While gold is used for adornment and investment, PGMs remain primarily industrial metals. By far the most important end market is automotive, accounting for half of all consumption compared with a quarter for jewellery. Platinum is used in the diesel autocatalysts prevalent in Europe, while palladium is used in petrol autocatalysts more common in emerging markets such as China. Ever-stricter emissions limits support demand, but rising prices encourage car-makers to look for substitute elements. So far, they haven't found any, so they've had to vary the proportions of platinum, palladium and related elements such as rhodium.

Emissions targets are getting broader as well as stricter. The next significant new area of emissions controls are on heavy-duty diesel (HDD) vehicles; trucks, trains and off-road vehicles such as tractors, agricultural and construction equipment. Analysis by Liberum Capital suggests that emissions controls on HDD vehicles could create demand of 1.5m ounces of platinum by 2015, which is some 20 per cent of total current demand of around 7.56m ounces. This would push platinum into significant deficit and could drive prices up strongly.

Platinum has lesser-known uses away from autocatalysts and jewellery. Platinum and rhodium are used in the manufacture of liquid crystal display glass. Although it may be years if not decades before fuel cells can effectively power cars, they are increasingly used in stationary power units, which require platinum and palladium. Platinum is also used in a variety of medical devices to treat heart disease, stroke and chronic pain, and in anti-cancer drugs.

Jubilee Platinum

Since acquiring Braemore Resources in late 2009, Jubilee has focused on commercialising the ConRoast smelting process secured through the deal, and it's often forgotten that the company also controls the huge Tjate project – potentially the world's largest undeveloped block of platinum.

ConRoast has many advantages, most notably its ability to treat chrome-rich feed that can disrupt – potentially dangerously – traditional smelters, as witnessed by the numerous smelter failures suffered by Lonmin due to its heavy concentration of UG2 (high chrome) feed.

With a test plant having confirmed the viability of the ConRoast process, Jubilee is investing £11m to construct two commercial ConRoast smelters at Middelburg in the southern Bushveld. The first is scheduled to begin operations in May (its capacity has already been fully contracted) and the second by the end of the year.

Jubilee has just announced a memorandum of understanding to acquire Chemstof, a chromite miner that stockpiles platinum-rich tailings it is unable to process, but which Jubilee can treat with ConRoast. Chemstof has surface stockpiles of 500,000 tonnes of platinum-rich chrome ore tailings, containing potentially over 40,000 ounces of PGMs, plus shallow reefs that can readily and cheaply be mined.

Jubilee is to build a concentrator on site at Chemstof at an estimated cost of £5m, and will transport platinum concentrate for ConRoast processing at Middelburg. Jubilee is also in talks to acquire three further properties that could increase the resource potentially to 18m tonnes and provide critical mass to its interests on the western limb. These acquisitions provide significant earnings potential that the company can increase further by toll-treating for other platinum miners.

Meanwhile, Jubilee has drilled 51 bore holes at Tjate, where a scoping study estimated an initial net present value of $1.2bn (£0.74bn). Further drilling should take the company to a bankable feasibility study (which can be used for fund-raising) late next year and should release further value from the large ore resource that currently stands at over 22m ounces of PGMs.

Outlook for platinum

With the automotive industry accounting for such a large proportion of demand, it's no surprise that 2009 was a miserable year for PMGs. But the global automotive market recovered strongly in 2010 and is expected to continue to strengthen in 2011. Emerging market car sales are still strong, while high fuel prices are encouraging western drivers to consider more frugal models, especially small diesels. The Society of Motor Manufacturers & Traders recently reported that the average carbon dioxide emissions from new UK cars sold during the first quarter were 140g/km – down 3.4g on a year ago – while diesel car sales grew 7.9 per cent and now account for almost half of new car sales.

Johnson Matthey expects industrial usage to continue to recover as high demand from China and other developing markets offsets more sluggish growth in traditional markets such as North America and Europe. The rise of exchange-traded investments has also encouraged buying of physical metal as collateral, although not to the extent it has in gold. But jewellery demand may soften as consumer spending is impacted by weaker economic performance and austerity measures in North America and Europe. There's little growth in supply, though. Overall, Johnson Matthey is forecasting that platinum could remain in moderate surplus this year with rising demand offset by increased recycling. That hasn't stopped the price rallying to $1,781 an ounce, though – and suggests that external factors such as speculative investor interest and the buoyant gold price are in the driving seat.

Sylvania Platinum

Sylvania Platinum (formerly Sylvania Resources) minimises the risks of producing platinum by processing surface tailings rather than mining ore, in addition to which it has shallow mining projects that could add greatly to value.

In the fourth quarter of last year, Sylvania achieved 10,135 ounces of production from its surface dumps, which is 1,009 ounces up on the previous quarter and keeps the company on track to achieve its target of 40,000 ounces this year. The platinum grades of the dumps are low, but so are Sylvania's extraction costs, and this offers huge margins at current platinum prices.

With its source of surface tailings, Sylvania makes the perfect partner for Jubilee Platinum and its ConRoast process. Late last year, the two companies expanded their previous framework agreement into a joint venture to evaluate using ConRoast to process platinum concentrate from Volspruit, a project acquired by Sylvania on the northern limb of the Bushveld.

Volspruit contains lowgrade but shallow platinum together with nickel by-product that has to be unlocked for the project to be economically viable. This is beyond the capabilities of traditional smelters but not ConRoast, which should be able to commercialise resources of 2.44m ounces of platinum and nickel and copper by-products.

Platinum's cousins

Whereas South Africa is the swing supplier in the platinum market, palladium supply is dominated by Russia. Not so much in amount – South Africa still supplies half the world's primary production – but in uncertainty. Russia retains state-controlled stockpiles of the metal, and in the past, the size and timing of sales from this inventory have proved hard to predict.

In forecasting the palladium market, Johnson Matthey has assumed that remaining Russian stocks were sold last year, although it remains unclear whether any state stocks remain to be sold this year. If not, palladium could be in substantial deficit, even though mine output is expected to increase in other regions and recovery from scrap is set to rise too.

Just as silver has outperformed gold, palladium's recent price performance has left its more illustrious relation in the shade. The ratio between the two metals' prices is surprisingly volatile, as the chart (below) shows. Since the first quarter of 2009, palladium has become more expensive than average relative to platinum, and in the early part of the new millennium it was briefly more expensive in absolute terms.

Demand for petrol cars in China and other developing countries continues to grow while manufacturers are expected to add palladium to diesel aftertreatment systems for heavy-duty diesel vehicles. Emerging-market demand is an even bigger factor for palladium than it is for platinum, and should make up for any softening of demand in North America and Europe.

Platinum plays

The world's two biggest primary platinum producers, AngloPlat and Impala Platinum, are both listed in Johannesburg. But UK mining giant Anglo American controls a majority of AngloPlat shares, and so can consolidate its turnover and profits. In 2010, platinum accounted for 8.6 per cent of the group’s overall operating profit.

London's two big platinum plays are Lonmin and Aquarius Platinum, both of which have endured operational problems in recent years; Lonmin with an unstable smelter, and Aquarius with contractual and labour disputes. Both have to contend with rampant South African cost inflation and a strong rand, too. The Alternative Investment Market is home to several platinum juniors whose prices were badly hit by the financial crisis and have yet to fully recover. We highlight two of the most attractive, Jubilee and Sylvania Platinum, in the boxes above.