Asset manager sees silver lining in platinum industry

While much of the focus amongst market participants over the last few months has been on gold and gold stocks, which is largely considered a safe haven during volatile times, RE:CM believes there is better value to be had in certain platinum counters.

According to Paul Whitburn, senior analyst at RE:CM, platinum shares have generated great returns for shareholders since platinum mining started on a large scale almost 40 years ago. “We also like the concentration of the industry, with three companies – Lonmin, Impala Platinum and Anglo Platinum - accounting for around 64% of total world platinum production. These are high quality companies that have grown returns and dividends faster than the market.”

Whitburn says that part of the reason why platinum stocks are currently out of favour is due to the industry’s current high operating costs. “We however think the platinum price would need to move up with costs due to concentration of supply of South African producers in order for producers to continue mining economically.”

He says another reason why the market does not currently like platinum stocks is due to its high usage as an industrial metal. 60% of all platinum group metals mined goes into the automotive market, which has come under pressure in the current market downturn in Europe.

“Platinum volume growth has averaged around 2.8% per annum over the last seventeen years, but only 0.7% in the last five years. However, as environmental standards in the automotive market pick up globally, we believe the demand for platinum and palladium should rise.”

He says the increased preference for platinum jewellery over gold is another factor driving demand for the metal. “Demand for platinum jewellery has been growing at 5.5% per year over the last five years. 28% of all platinum produced is now used in the jewellery, where demand for it has surpassed yellow gold, particularly in Asian countries such as China. In addition, with the recent spike in the gold price, the price of platinum jewellery is now often equivalent, or even cheaper, than gold.”

According to Whitburn, it is unlikely that the supply side will keep up with demand in coming years. “Ten years ago, all producers had a target to double output, but the reality is that they are below the peak produced in 2006, despite spending large amounts of capital. Junior mines in particular had huge promises to produce ounces, but have failed to do so and we may see smaller producers close down, with only the low cost producers, including Lonmin, Impala Platinum and Anglo Platinum able to continue to supply the market economically.”

He says that this is one of the key reasons why RE:CM has been investing in Anglo Platinum over the last few months, with the counter now comprising one of its top ten holdings.

“Impala Platinum looks interesting but versus Anglo Platinum, their profitability levels are close to their long term means. Operating margins for the industry average between 30-32%. Anglo Platinum’s is currently half of that at 15.8%. This is partly as a result of the company’s substantial capital expenditure over the last ten years and high cost base. Management have realised the need to get costs under control and we anticipate that there will be a mean reversion to historic returns for the company and the industry.

“We therefore believe the stock is trading at a discount to fair value and offers the potential for good returns over the medium to long term.”