“Little Silver”

Gold and silver, the traditional metals of choice for investment and speculation, dominate the precious metals markets. The silvery-white metal platinum is also a member of the precious metals family. It is less familiar to the investment world and is a more complex market to understand which leads investors to shy away from it. Many investment opportunities exist in the platinum market and it gives the precious metals investor a powerful tool for diversifying a metals portfolio. This overview of platinum will give an investment perspective of the metal with its risks and reward potential to give the investor a background to begin research. As with any investment, there is potential for loss of value. Readers are urged to do independent research to determine if platinum investments fit individual requirements.

Platinum was well-known to many ancient cultures, but most textbooks date the discovery of the metal to the eighteenth century when it was finally isolated in pure form. Archaeologists have discovered platinum artifacts originating from Egypt and Pre-Columbian America. The word platinum was derived from the Spanish platina or “little silver”. Europeans became aware of platinum after Spanish Conquistadors brought it back with plundered gold and silver from the New World. Platinum became a very fashionable jewelry material during the nineteenth century. Many famous royal jewels including the Hope Diamond and the Star of Africa are mounted in platinum settings. During World War II, platinum use was banned in the US for any nonmilitary purpose. This event suppressed consumer demand for platinum for decades, but it has made a strong resurgence in recent years as a premium jewelry material.

Platinum Properties

Platinum is a fundamental chemical element that is designated by the symbol Pt. It is constructed from 78 protons and 117 neutrons in its common stable isotope. Platinum is a heavy metal. It exhibits very a very high density of 21.45 g/cm³, greater than gold at 19.32 g/cm³. Platinum has a melting point of 3221 degrees Fahrenheit. It is located adjacent to the other precious metals (shown in bold letters) in the chemist’s Periodic Table:

Ruthenium

Atomic # 44

Rhodium

Atomic # 45

Palladium

Atomic # 46

Silver

Atomic # 47

Osmium

Atomic # 76

Iridium

Atomic # 77

Platinum

Atomic # 78

Gold

Atomic # 79

The elements shown in italicized letters are the Platinum Group Metals or PGMs. Platinum Group Metals share similar chemical properties such as high melting point, chemical inertness, low coefficient of thermal expansion, and ability to catalyze chemical reactions. The PGM metals are often found together in natural deposits and are also found in conjunction with gold and silver ores.

Platinum itself is an extremely hard substance that is highly resistant to corrosion. It has high electrical conductivity and exhibits very ductile and malleable properties for drawing thin wires and foils. Platinum is one of the most effective catalysts known for inducing a variety of chemical reactions. A catalyst is a substance that enables chemical reactions but does not react itself with the chemicals. Platinum along with the other PGM metals are extensively used for chemical processing. Platinum polishes to a brilliant shine that creates spectacular lighting effects when combined with gemstones or other metals. Its extreme hardness and high melting point makes platinum metalworking difficult and expensive.

Platinum Uses

Platinum is primarily an industrial metal. It is a critical material for many industries and is considered a “strategic metal” by the US Government as a military resource. It is estimated that about 20% of the products purchased by modern consumers either contain platinum or use it in production. Total demand for platinum falls into eight broad categories:

Automotive – used in catalytic converters, spark plugs, and sensors
Jewelry – as a substitute for gold
Chemical processing – also as a general catalyst
Electrical/electronics – for high-temperature and non-corrosive wires and contacts
Glass – dies and process technology
Petroleum refining – as a catalyst for crude oil cracking
Dental/Medical – equipment and reconstructive
Investment – bullion and coins

Automotive: Automotive demand for platinum consumes a large share of platinum production. Platinum is the active element in catalytic converters that convert unburned hydrocarbons into carbon dioxide and water vapor. Other automotive uses include oxygen and ozone sensors for antipollution subsystems. Recently, platinum is being used as an electrode material in long-life spark plugs. Being one of the largest consumers of the metal, platinum demand is highly correlated to automotive industry cycle, and therefore price.

Automakers are aggressively experimenting with ways to eliminate expensive platinum-based emission-control components. New “lean-burn” technologies are being developed by auto manufacturers to reduce or eliminate the need for catalytic converters. These techniques use sophisticated computer control of engine parameters to reduce emissions. Such breakthroughs would substantially reduce platinum demand and put downward pressure on the price of the metal. Other challenges to platinum in autocatalyst use come from its sister element palladium. Palladium can be used as a substitute along with other PGM group metals as a catalyst agent. Although palladium is not quite as effective as platinum, it will be substituted if the price of platinum rises too high.

On the bullish side, new automotive uses for platinum are on the horizon that could substantially increase demand for the metal. Manufacturers are experimenting with fuel-cell power plants for electric cars. These fuel cells utilize platinum to catalyze a chemical reaction using hydrogen that creates electrical energy but generates no harmful emissions. Government emissions and fuel-efficiency mandates are accelerating research in this area. It will probably be at least a decade before fuel cell automobiles enter widespread use.

Jewelry: Platinum has become a very popular choice for modern jewelry, displacing significant gold demand. Its hardness and durability allows it to be used in purer form for secure stone settings. It is much superior to silver because of its resistance to oxidation and discoloration. Its rich hue and reflectivity enhances the brilliance of precious stones. Platinum is hypoallergenic which makes it the best jewelry choice for people who suffer reactions from other metals or 14k (alloyed) gold.

Platinum jewelry has been particularly popular with Asian consumers. Many Asians feel that platinum has a more pleasing contrast with the Asian skin color than other metals. Other ethnic groups have started to purchase platinum for similar reasons. Platinum also seems to have a marketing advantage to gold or silver. Products and awards with the “Platinum” designation are typically considered superior those labeled “Gold” or “Silver”. This gives platinum jewelry items additional prestige.

Chemical Processing: Platinum is used as a catalytic agent in processing of nitric acid, fertilizers, synthetic fibers, and a variety of other materials. In catalytic processes, the catalyst material is not consumed and can be recycled for future use. This makes chemical demand for platinum quite volatile. Platinum is essential in many of these processes and there are few satisfactory substitutes.

Electronics: New uses for platinum in electronics are coming at a fast pace. Traditionally, platinum has been used in thermocouple devices that measure temperature with high accuracy. Newer thin film optical and temperature-sensing systems use platinum silicide compounds in a variety of products. Platinum is also employed in wires and electrical contacts for use in corrosive or high-voltage environments. Platinum is a component in magnetic coatings for high-density hard disk drives and some of the newer optical storage systems.

A few years back, platinum surged into the spotlight when two researchers, Pons and Fleischmann, claimed to have generated a “cold fusion” reaction using platinum. This cold fusion technology was thought at the time to be a major breakthrough in atomic power generation. After publishing their controversial work, Pons and Fleischmann were unable to reproduce the reaction to the satisfaction of the scientific community. Should cold fusion become a reality, it would create significant demand for the metal. Although cold fusion may never be practical, platinum investors should keep an eye on this area.

Glass: Platinum dies are extensively used in glass production. Its hardness and high melting point make it ideal for this difficult high-temperature process. Much platinum is used in fiberglass production. The recent introduction of glass fiber communications technology is a new driver for platinum demand. Although the fiber-optic market is now in a cyclical recession, it is expected to recover along with the associated platinum demand. Glass production is a relatively small component of total demand, but represents a high growth area.

Petroleum: This is another use for the catalytic properties of platinum. The petroleum industry uses the metal in a mesh or gauze form in crude oil refining. Platinum use in petroleum refining follows global demand for refined crude oil products. Other technologies exist to perform crude oil separation but catalytic processes using platinum and palladium are much more environmentally friendly. As more refineries are built and updated, expect platinum use in petroleum refining to rise. Also, less developed countries are being pressured to improve environmental standards. Refineries in those areas will ultimately be converted to catalytic processing, further boosting demand for PGM metals. As in other catalytic processes, platinum is not consumed and is aggressively recycled and reused. This makes petroleum industry demand highly volatile.

Investment: Investment demand for platinum is a wildcard. Demand for investment-grade metal has been extremely volatile over the last ten years. In the year 2000, investment demand actually went negative as hoarded supplies were dumped onto the market. Platinum is available in coin and bar form for investors and speculators. The US Mint offers a set of “Platinum Eagle” coins that contain 1.0 oz, .5 oz, .25 oz, and .1 oz .9995 pure platinum. These coins are relatively scarce and have only been produced since 1997. Australia and Canada also produce platinum coins for investment consumption. Larger investors and end-users usually purchase bars or ingots. These are much more efficient and have lower price premiums to bullion, but may require assay when reselling.

Platinum Exploration and Extraction

Platinum is an extremely rare substance, far less abundant than gold. It is found only in a few commercially viable deposits on the earth. Most platinum is mined in three major producing regions in South Africa, Russia, and North America. South Africa is by far the largest producer supplying about 2/3 of the total world production. Russia is the next-largest producer, supplying about ¼ of world production. The rest of the platinum supply comes from North America and a few other small producers.

South Africa has been blessed with some of the richest mineral deposits in the world. They produce large quantities of precious metals, gems, and industrial minerals. South Africa’s platinum deposits are concentrated in an area known as the Bushveld Igneous Complex, one of the largest metal-bearing intrusions in the world. PGM metals are recovered from the Merensky reef that extends along the entire eastern length of the Bushveld. Several mining firms extract ores from this region, the largest being Anglo Platinum, Impala Platinum, and Lonmin Platinum.

Platinum production in Russia dates back to the 19^th century when alluvial deposits in the Ural Mountains were heavily mined. These historical deposits are now mostly depleted but new richer sources have been discovered in northern Siberia. Siberian PGM production is concentrated in the Noril'sk-Tainakh complex, a set of underground veins that are part of massive copper-nickel deposits in the complex. Russian production suffered during the transition period before and after the collapse of the Soviet Union. New investment in modern plant and equipment could dramatically boost output, possibly exceeding South Africa. Russia is a wildcard on the supply side of platinum production.

North America boasts three large PGM ore deposits. The Stillwater Complex in southern Montana is contains the only commercially exploitable PGM deposit within the United States. The JM-Reef formation within the Stillwater complex produces a high-grade ore. Exploitation of the Stillwater deposit began in 1987. Stillwater Mining Company holds claim to most of the richest properties. The other two North American deposits lie within Ontario, Canada. The Sudbury Mine in southern Ontario produces PGMs as a byproduct of nickel mining. The Lac des Iles region north of Thunder Bay produces mostly PGM with some base metals. All of the North American deposits are primarily palladium sources with platinum being a relatively small percentage of the metal production.

Global geological surveys indicate that there are many unexploited platinum resources around the world. Promising areas for new exploration are Zimbabwe, Zambia, Indonesia, Australia, and Chile. Also, expansion of base metal production often leads to greater PGM production because many base metal deposits contain extractable amounts of platinum group and other precious metals. Higher metal prices could encourage exploitation of these regions, greatly increasing global production.

Supply and Demand Characteristics

As mentioned above, platinum is a very scarce substance. It is estimated that all of the platinum ever mined would fit into a cube 17 feet on a side, about 5000 cubic feet. Unlike gold or silver, platinum is not hoarded to any significant extent. The chart below shows the 10-year supply and demand numbers for platinum. Note the erratic supply figures for Russia. The uncertainty in Russian platinum production is a major supply-side price driver for the metal. The major demand-side drivers are jewelry and autocatalysts. Jewelry is the fastest growing market for platinum and is now the major consumer. Also note the decrease in investment demand for the metal, particularly by large players.

Platinum Supply and Demand

'000 oz 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Supply

South Africa 2,750 3,360 3,160 3,370 3,390 3,700 3,680 3,900 3,800 4,080

Russia 750 680 1,010 1,280 1,220 900 1,300 540 1,100 1,050

North America 200 220 220 240 240 240 285 270 285 340

Others 120 130 140 100 130 120 135 160 105 110

Total Supply 3,820 4,390 4,530 4,990 4,980 4,960 5,400 4,870 5,290 5,580

Demand by Application

Autocatalyst:

gross 1,550 1,685 1,870 1,850 1,880 1,830 1,800 1,610 1,890 2,360

recovery -230 -255 -290 -320 -350 -370 -405 -420 -470 -510

Chemical 215 180 190 215 230 235 280 320 285 285

Electrical 165 165 185 240 275 305 300 370 450 380

Glass 80 80 160 225 55 65 220 200 255 290

Investment:

small 145 125 155 75 110 180 210 90 40 50

large 110 180 240 270 130 60 105 90 -100 0

Jewelry 1,510 1,615 1,740 1,810 1,990 2,160 2,430 2,880 2,830 2,520

Petroleum 120 105 90 120 185 170 125 115 105 130

Other 150 165 190 225 255 295 305 335 375 435

Western Sales to China

0 20 50 130

Total Demand 3,815 4,065 4,580 4,840 4,960 5,130 5,370 5,590 5,660 5,940

Movements in Stocks

5 325 -50 150 20 -170 30 -720 -370 -360

3,820 4,390 4,530 4,990 4,980 4,960 5,400 4,870 5,290 5,580

Source: Johnson Matthey

Almost all of the metal production goes directly into industrial or consumer use with only a small percentage going into storage. Since there is little inventory buffer, the price of platinum is very volatile. Supply and demand is delicately balanced for this essential industrial resource. Critical suppliers are in unstable parts of the world. A strike, military conflict, or political crisis can disrupt major sources of platinum supplies. Supply disruptions such as these can result in dramatic price rises.

Conversely, demand is highly dependent upon economic cycles in the various industries that rely on the metal. For example, a recession in the auto industry can reduce demand for autocatalysts depressing platinum prices. Also, substitution effects are important in the platinum market. Other PGMs, particularly palladium, can be used as a substitute for platinum in some catalytic applications. If the price of one metal rises significantly, there will be spillover demand into the other PGMs as producers substitute cheaper metals.

Because of these substitution characteristics, prices of the PGMs tend to move roughly together. The platinum and palladium charts below show this tendency quite clearly. The driver in these charts is palladium which made an extraordinary move from about $150 in 1997 to over $1000 in 2000. Platinum followed the move in palladium by peaking over $600 in late 2000.

Another potential substitution story for platinum is in jewelry. Platinum has made a significant resurgence in popularity for premium jewelry. A significant rise in the price of gold will make platinum items relatively less expensive and more appealing. Gold and platinum prices have a relatively low correlation but that may change in the future if investment demand for gold rises.

Platinum Investments

Investors and speculators may exploit platinum in three primary ways:

physical metals
mining company stocks
derivatives

Physical Metals: The safest and most direct method of investment is by buying metal in coin form. Coins are legal tender of the issuing country and cannot fall in price below the face value of the coin. Coins need not be assayed for metal content or purity because the issuing mint guarantees them. Coins capture a small price premium over metal content but this premium is intrinsic and can be passed on to the next purchaser. Because of its hardness, platinum coins can be made from pure metal. This is in contrast to gold coins, which are often made from alloys because pure gold is so soft. The one-ounce coins are the best value because they have the lowest price premium over bullion. Smaller coins are an inefficient method to acquire the metal but they make fine gifts. Most gold and precious metals dealers also offer platinum coins. An Internet search of precious metal coin dealers will reveal numerous sources. As with any metals purchase, verify the dealer’s reputation using independent sources before sending money.

Platinum bars and ingots are typically purchased by industrial users to be converted into products. Investors wishing to acquire large positions in the metal are probably best served by this bulk form. Industrial metals suppliers would be the best source for bulk platinum. Always purchase metal with at least .999 purity for investment purposes. Assays may be required on bars or ingots to verify content and purity.

Stocks: There are few pure plays in platinum mining companies. Almost all producers extract PGM ores in combination so these stocks represent PGM prices in aggregate. Stock prices for platinum group miners are highly volatile, representing the volatile nature of the metals themselves. This volatility affords the speculator many lucrative trading opportunities but can mean many sleepless nights for the long-term investor.

The only large US producer of platinum is Stillwater Mining Corp., ticker SWC on the New York Stock Exchange. Stillwater is primarily a palladium producer with about a quarter of its output being platinum and a small percentage of other byproduct metals. The Stillwater mines have been operating since 1987 so ore reserves are relatively undepleted. The company reports 27,000,000oz combined palladium/platinum proven and probable reserves residing within the two mines currently in operation. The stock price shows significant volatility ranging from $10-50 over the last five years reflecting the action of its primary palladium product.

As its name would suggest, Canadian mining company North American Palladium PAL on the American Stock Exchange, is also primarily a palladium producer. PAL owns and operates the Lac des Iles deposits near Thunder Bay Ontario. Only 15% of metals production is platinum with about the same amount in gold. PAL started trading as a public company in 2000 so it does not have significant price history. The company reports “proven and probable reserves estimated to be 96.2 million tonnes averaging 1.55 grams per tonne of palladium, containing 4.8 million ounces of palladium. Under the current mine plan, these reserves will support annual production of approximately 250,000 ounces of palladium, 23,000 ounces of platinum, 18,000 ounces of gold, 6 million pounds of copper and 2 million pounds of nickel for approximately 17 years.”

The only pure-play platinum miners are outside North America. The largest pure-plays are the South African companies Anglo-American Platinum and Impala Platinum, both traded on the South African JSE exchange. These securities are difficult to trade by North American investors.

Derivatives: Derivatives in the form of futures contracts are traded in platinum. Typically, futures are used by large producers and consumers of the metal to lock in pricing. Small investors are advised to stay away from this risky investment strategy.

The Future

The future for platinum and the associated PGM elements is bright. New uses are being discovered all the time. Understanding this complex market is challenging, but a quick look at the price history shows many opportunities for significant profits. Precious metals investors should look at platinum as an opportunity to diversify a metals portfolio. As in any investment, there is the possibility of loss. However, it is certain that this beautiful and useful metal will always fetch a premium price.

George J Paulos

gpaulos@freebuck.com

March 19,2002

References

Gotthelf, Philip, The New Precious Metals Market, McGraw-Hill, 1998

US Geological Survey, http://minerals.usgs.gov/minerals/pubs/commodity/platinum/ , Official US Gov’t platinum production statistics.

Johnson Matthey Co., http://www.platinum.matthey.com/data, PGM supply and demand statistics.

Mbendi, http://www.mbendi.co.za/indy/ming/plat/af/sa/p0005.htm , PGM mining in South Africa

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are advised to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.