You pays your money and takes your pick
Two top investment firms have very different views on which platinum miners should be bought
DIFFERING OPINIONS are what create markets and two top investment firms have come up with very different recommendations on which platinum shares to buy, despite the fact that both RBC Capital Markets (RBC) and JPMorgan Cazenove (JPMorgan) are bullish about the prospects for platinum group metals this year.
The platinum price has jumped 9% over the past month, from around US$1 670/oz in early December to around $1 820/oz now, backing up the analysts’ contentions. They aren’t alone in their optimism. Deutsche Bank has also recently published an upbeat research note punting palladium in particular on the back of an anticipated recovery in the North American automobile market.
South Africa produces 75% of the world’s platinum, 40% of its palladium and 85% of its rhodium, all of which are used in the autocatalysts required to clean up vehicle exhaust emissions. The North American market is dominated by petrol engines that use palladium predominantly in its autocatalysts mix, while platinum is much more widely used in diesel engines.
That means Deutsche’s forecast isn’t necessarily that bullish for SA’s platinum miners, but the firm notes “a robust North American auto market is also marginally positive platinum”. So what shares should you buy? JPMorgan analysts Steve Shepherd and Allan Cooke have selected Anglo Platinum (Angloplat) as their top pick, saying: “Fundamentally, the stock offers the most attractive value proposition of the big three (Angloplat, Impala Platinum and Lonmin) based on our numbers.”
The analysts are the most negative on mid-tier producer Aquarius Platinum (Aquarius), about which they comment: “Our cash flow model suggests the share is relatively expensive. So, fundamentally, it’s hard for us to see it outperforming its platinum peers.”
That’s not how RBC analyst Leon Esterhuizen sees the situation. His top share pick is Aquarius. Esterhuizen says: “Valuing the (Aquarius) shares on a P:CF (price:cash flow) of 12 plus (in line with the major producers and recognising the growth) our target price comes to £ 4,80/ share, which delivers upside potential of 37%. Given the strong growth, an equally strong balance sheet with $360m looking to buy more growth and the highly geared nature of the earnings profile to a rising metal price, we continue to rate the stock outperform, above average risk.”
The JPMorgan analysts have a different take. They say Aquarius has “a relatively small minerals inventory and, aside from restoring production at its suspended Everest and Blue Ridge mines, we believe it has limited opportunities for quantum, internally resourced, production growth. It has made no secret it desires to grow by acquiring ounces, which might prove expensive.”
Both firms also disagree fundamentally about the prospects for Lonmin, which is the world’s third largest platinum producer after Angloplat and Impala Platinum (Implats). Lonmin is RBC’s “vehicle of choice” of the large market cap stocks. The firm sees a potential 30% upside in its stock price, based on the marked operational improvement delivered over recent months plus a “possible takeout by Xstrata”.
JPMorgan has dropped its rating on Lonmin to neutral from overweight because its growth outlook beyond 2013 “is less clear and in the end that might weigh on ratings”. The firm also highlights the issue of Xstrata’s intentions, given it still holds 25% of Lonmin.
Just to round it all off, Deutsche’s SA platinum picks are Implats, Aquarius and Northam. Since 5 January, the Implats share price is unchanged, Angloplat is up 6,7%, Aquarius up 5,6% and Lonmin up 1,2%.