Putting Pressure on Platinum


Those who haven't invested their hard-earned money in platinum commodities may be forgiven for not knowing how poorly the investment has done in the past half decade.  Today's bidding price of $1170 per ounce for the beautiful white-gray metal represents less than a 10% improvement on the five-year low of $1090 per ounce, reached all the way back in the third week of March.  At the height of the recession, platinum traded for nearly twice its value today, making it one of the biggest losers of recent years, more so than gold but less so than rhodium.  As one year of poor performance stretches into two and two stretches into three, platinum companies the world over have been forced to reexamine their business structures and financial commitments in order to remain profitable.  At a time when many mining interests are divesting themselves of platinum, should investors follow suit?

Rarity and Demand

Platinum's high value relative to semi-precious metals like silver or base metals like copper may be illustrated by its extreme scarcity.  While iron and aluminum may be found throughout the Earth's geology in relative abundance, you need to sift through approximately a quarter of a billion kilograms of soil in order to come up with one kilogram of platinum.  Like other precious metals, the overwhelming majority of production hails from the troubled region of South Africa, where a five-month wage strike by the largest mining union in the nation positively crippled output in 2014, effectively wiping out half the entire world's production.  While the strike should have boosted the ailing commodity on speculation of scarcity alone, platinum stayed consistent from the beginning to the end, though the return to work and output has caused the metal to lose further value.  Platinum's scarcity influences the high demand (and high price tag) for the metal, with uses ranging from corrosion-resistant catalytic converters to $100,000 wristwatches modeled by European soccer stars.  That said, the metal's volatility outpaces other precious metals used as bullion or currency reserves, dropping by over $1000 per ounce between the months of May and August of 2008.

Not Spending Money To Not Make Money

Mining companies the world over are facing hard choices thanks to a particularly harsh 2014 and a drop in commodity prices across the board as the US dollar gains stronger value.  Some prefer to sit on their stocks and wait out the storm, while others don't have the luxury and have to dig deeper and deeper in order to chase smaller and smaller profit margins.  Platinum companies appear to be taking the prior approach in order to tighten up supply and drive the markets to a more favorable high.  Lonmin PLC (LMI on the London Stock Exchange trading for $222 per share) represents the world's largest production of platinum and has openly stated their business model dictates that they will not pursue expensive new projects while the metal remains in a bear market.  In 2014, Lonmin estimated they would commit a quarter of a billion dollars to new capital investments; by January of 2015 that number fell to $185 million; only a week ago CEO Ben Magara dropped spending even further to the $160 million marker.  The change in spending reflects a change in assets: Lonmin stock had their worst month in company history during February, when their company fell from 3200 rand per share (approximately $270) to less than 2000 rand per share (approximately $170).  The massive drop in value has forced the company to slash 3500 jobs and consider mechanization processes at a number of its mines, a labor-saving move that competitor Anglo-American Platinum (AAL on the London Stock Exchange, trading for $1720 per share) hopes to achieve by 2020.  It's no wonder that JP Morgan Chase's most recent commodity report suggested that half the platinum mines in South Africa were burning money simply by running operations as usual.

Gains Against Falling Dollar

The platium problem has been exacerbated by increased output of the precious metal in the aftermath of the wage strikes.  As production nearly doubled in the wake of the strikes, companies like Lonmin find themselves sitting on more platinum than they can sell at a profit.  With 5.7 million tons generated in the last quarter of 2014 compared to just 3.2 million in the first quarter, the highest output since 2007 (and, incidentally, a triumphantly morbid report that the company had been fatality-free during the 2014 fiscal year), Lonmin mined significantly platinum but gained only about 10% more profit thanks to the swing in value.  The company plans to allow the stocks to settle during Q2 in order to preserve cash flow, which appears to be a better investment than their product.  Anglo-American Platinum and Lonmin have to dance a particularly unpleasant tango together, furthermore, in order to resolve their joint venture Pandora mine (owned at a near 50-50 split), which has had poor output.  One company may sell to the other in order to free up cash and workflow, but it's not clear which company would benefit more or less from total ownership of Pandora.  The mine mimics the broader shift in the entire platinum industry, one in which no company seems certain how to best recover from the bottoming out of the market. 

Taking Action

Let there be no confusion: platinum trades today for about the same value that it did in 2009 after the metal lost half its value seemingly overnight.  The easy solution, as such, is to buy low, though it's not clear whether or not platinum will go significantly lower.  As the companies that dictate global stock tighten their belt and as the South African economy dwindles, platinum will likely rise in turn.  The recovery of the past three months indicates that the absolute worst appears to be over, with modest gains trending upwards.  Platinum has outperformed gold and palladium in the past 90 days, indicating that relief is on the horizon for the commodity even as the mining community suffers.

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