JOHANNESBURG - Platinum mining has become an uncomfortable thought in South Africa, and most investors avoid platinum mining shares. The price of platinum seems to be in an ongoing slump, struggling to get past $1000 over the last two years.
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 20percent of the products purchased by modern consumers either contain platinum or use it in production. Demand for platinum falls into eight broad categories:
* Automotive - used in catalytic converters, spark plugs and sensors.
* Jewellery - as a substitute for gold.
* Chemical processing - also as a general catalyst.
* Electrical/electronic - 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.
According to the latest Johnson Matthey report, only about 40percent of world platinum production is used in car catalysts. The rest is for jewellery and industrial applications.
New automotive uses for platinum are on the horizon that could substantially increase demand for the metal. Makers are experimenting with fuel-cell power plants for electric cars. These fuel cells use platinum to catalyse a chemical reaction using hydrogen that creates electrical energy but generates no harmful emissions.
It doesn’t make sense that the price of platinum is so low that it does not provide for any further investment and capital expenditure. This can probably be explained by the constraints of the platinum market.
The daily spot price is based on a very low percentage (±10percent) of all platinum that exchanges hands. Most of the platinum sold is by contract, based on the average trading price of the previous 30 days, and because the liquidity is so low, it is easy to keep the price down.
Under threat
At some stage, there will become a disconnect between supply and demand, and that time must be close now. Last week we learnt that the survival of the third biggest supplier, Lonmin, is under threat (once again). The second biggest supplier, Impala Platinum, is financially and operationally troubled.
Combined with the low levels of capital expenditure, the demand must overtake the supply and stock in the industry soon.
Northam Platinum is in great shape. Currently, it produces close to 500 000 ounces of platinum group metals (PGM) annually, and the expectation is that this will grow to more than 1million in five years’ time. The road to success is led by chief executive Paul Dunn, who positioned Northam uniquely in the platinum sector. Dunn has shown this with numerous deals, including Everest, Eland and A-1, and by securing the future of Zondereinde.
Luckily, good work was also done by Dunn's predecessor, Glyn Lewis, with the Booysendal project. Booysendal was the first critical step in Northam diversifying away from a single, deep-level platinum mine at Zondereinde, bringing a large, shallow deposit with 100 million ounces of metal in the ground.
Lazarus Zim recently departed, and the board of Northam got an injection of fresh blood. New chairman Brian Mosehla is an accountant and merchant banker who has been with Northam since August 2015 and represents the JSE-listed empowerment vehicle Zambezi Platinum, holder of 31.4percent of the JSE-listed miner.
Another inclusion on the board of directors is David Brown, former chief executive of Impala Platinum. Other directors include Ralph Havenstein, a former chief executive of Anglo American Platinum, and John Smithies, a former chief executive of Implats.
South African PGM output is in decline, and it is not necessarily a bad thing for the survivors. Northam has multiple growth options, well-performing assets, a strong balance sheet and a powerful board. This places it ahead of its competitors if the platinum price recovers.
Amelia Morgenrood is PSG Wealth regional director.
-BUSINESS REPORT