first majestic silver

Platinum - The Noble Metal

February 9, 2005

Platinum is often referred to as the 'noble metal'. Webster's definition of Noble is "high and great in character, showing greatness, outstanding or excellent, fine splendid, magnificent"

Platinum has certainly been standing up to this definition. The noble metal averaged US$845 a troy ounce in 2004, the highest average annual price since 1980 and also up 22% from the average in 2003 of $691/oz.

Platinum has always been a leader in the precious metal sector, other than a brief time in 1996 when gold was priced higher than platinum. The platinum price has been the top performer in this precious metal rally, climbing from $350 in 1999 to $950 in 2004 up 171%.

Meanwhile gold went from $255 in 1999 to a high of $457 in 2004 up 79%. Silver up about 95% from its 2001 low to recent high.

Since platinum spiked early in the year to $950, it has settled in a trading range between $825 and $875 for the past 6 months.

Probably the big question on your mind, can the platinum price maintain these lofty levels?

I think so, and here is why

You probably are aware that the most platinum production comes from South Africa (S.A.). In 2003, 75% of global supply came from S.A. and 17% from Russia. Three mines, namely Anglo American Platinum (Angloplats), Impala Platinum (Implats) and Lonmin plc Platinum (Lonplats), accounted for 96% of S.A. production. Norilsk Nickel (Norilsk) accounted for 98% of Russia's production and Montana's Stillwater produced 2% of the world's platinum.

Much higher metal prices normally translate into higher production, resulting in lower prices as supply increases. However, since most platinum is mined in S.A. and mainly by three producers, what is happening here is of importance.

The most important factor, is the main listed PGM producers operating in S.A. have seen the S.A. currency (Rand) appreciate significantly, it has been one of the strongest currencies and this has resulted in operating margins that have actually contracted while platinum prices have skyrocketed!

According to a very recent report by Deutsche Bank, based on their new long-term rand forecast, they have calculated an average marginal cost of production for an "average" Bushveld Igneous Complex operation at US$700 per ounce. Their modelling shows a range of marginal costs of production of US$600-850 per ounce on a 3-PGM basis depending on individual circumstances.

This US$700 cost/ounce is based on a decrease in both their short-term (three-year) Rand/US$ forecast by 20-25% & importantly, their long-term real rand forecast has decreased by ±22% to R7.10/US$ (from R9.10/US$).

You can see that unless platinum prices remain high, S.A. producers will be unable to expand to meet future higher demand. The cost forecast also considers a drop in the rand/US$ rate. If the rand rises further, so will costs and probably US$ platinum prices.

There are sufficient platinum reserves if the price is high to meet long-term demand, but delays in planned expansions have resulted in demand outstripping supply since 1998. The most notable example is Angloplats, which announced in 2000 its planned expansion from 2 million platinum ounces/year to 3.5 million by 2006. Every subsequent year it has missed its target and in December 2003 it revised down its target for 2006 by 15% to 2.9 million platinum.

The longer term mining trend looks bullish too, in future more UG2 Reef and less Merensky Reef will be mined, due to a greater depletion of the latter. UG2 has a higher proportion of palladium and less platinum and base metals, which will influence the supply of platinum. The metal ratios in the eastern Bushveld also have more palladium and less platinum and base metals than those in the western Bushveld, where historically the majority of the mining has taken place.

No stockpiles left

Since 1990, approximately 6 million platinum ounces and 19 million palladium ounces have been sold from the Russian strategic stockpile. The size of the Russian PGM strategic stockpile is a state secret, but it is estimated that the platinum stockpile is now less than one million ounces, whereas the palladium stockpile is still above 20 million ounces. This stockpile can be managed though to keep palladium off the market, but there is little stockpile left that could be used to persuade platinum prices down.

Most of the demand for platinum is auto catalysts and jewellery, with both on the rise.

Diesel engines have been all the rage in Europe witnessing strong growth for the last several years. Using current technology, only platinum can be used for diesel auto catalysts as these engines are too cold for palladium. Only platinum can be used in third world countries where sulphur levels in the fuel are too high. This has been the case in China, where auto sales are soaring.

Currently, 37% of platinum is used for jewellery. Platinum demand for jewellery has grown by 7% per annum since 1980, with most of this being from the Far East. Oh yeah' we have to mention China because in the last ten years Chinese platinum jewellery fabrication surged from next to nothing to reach 1.2 million ounces in 2003, placing China above Japan for platinum jewellery demand.

Investment demand rising

I have talked numerous times about the factors (US$, low interest rates etc.) that are driving investment money into commodities. You are well aware of the commodity bull market that has been attracting investors. There has been significant buying of platinum by funds throughout 2003 and into 2004. Investment has not been limited to hedge funds as Mutual and pension funds have increased their commodities exposure and private investors have joined in through commodity trade advisors.

With change comes opportunity

Platinum mining in South Africa has for a long time been a monopoly by the major players. The change in mining legislation is breaking this apart. The majors can no longer sit on their vast amount of reserves because they are subject to the "use it or lose it" rules in the New South African Mining Act. The rationale of the new Act is to prevent sterilization of reserves and promote mineral rights that have been undeveloped for decades, therefore enhancing South Africa's monopoly in the market.

There is little doubt that higher mining costs will mean higher platinum prices so the major producers can expand to meet growing demand. If expansion and supply do not increase it will only mean further upward pressure on prices as the market remains in a supply deficit.

24 karat gold is pure elemental gold.
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