You pays your money and takes your pick

Finweek English Edition - - INSIGHT - BREN­DAN RYAN bren­danr@fin­week.co.za Ryan holds shares in Aquar­ius Plat­inum and Im­pala Plat­inum

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%.

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