Is platinum’s performance going to hold? 2016 has been much better for platinum producers. The unbelievable rally this year has many wondering how long it will last.
therally in platinum producers Anglo American Platinum (Amplats), Impala Platinum (Implats), and Lonmin has been nothing short of stratospheric this year. The obvious question is: how long can it continue?
Analysts were saying as long as four weeks ago that the platinum equities were pricing in improvements in the price of platinum group metals (PGMs) that were out of whack with what most were forecasting.
For instance, Macquarie in a note on 14 April acknowledged the positive impact of Amplats’s restructuring efforts, which it said would support positive cash flows, but it thought the price improvement in the company’s share had been overcooked.
“The metal prices reflected in the share prices, however, exceeded our assumptions significantly and we maintain our underperform rating on the share,” said Gerard Engelbrecht, a mining analyst for the bank. To put this into numbers, Engelbrecht lifted the target price on Amplats to R235/share from R165/share in recognition of the restructuring – which has seen it announce the sale of its Rustenburg Platinum Mines to Sibanye Gold – but at the end of April the share price was around R411/share. That’s an improvement of 149% in three months.
Other platinum counters have recorded a similar improvement. Implats is trading at R59/ share, a 40% improvement in the last month, while Northam Platinum and Lonmin are 40% and 20% higher in the last month.
The factor behind the share price increases is mostly the platinum price which was last at $1 081/oz. This is nearly $200/oz more than the average spot price – $892/oz – estimated by RMB Morgan Stanley in a report written around the same time as Macquarie’s.
Given an exchange rate of R14.25/$, this translates into revenue of R15 404 per platinum ounce. This gives the industry the blush of more profitability, although a significant swathe of the sector remains cash flow negative after capital expenditure, even with a platinum price close to $1 000/oz.
Writing in March, Citi analyst Johann Steyn said downward pressure on platinum and its sister metals palladium and rhodium would reassert itself before long, owing to some long-term structural issues in the industry that have formed over a period of years.
One factor is the growth in above-ground stocks, which the World Platinum Investment Council estimated stood at 2.32m ounces at the end of 2015. Another is growth in autocatalyst recycling, which supplies about 18% of demand as well as supply growth. SA platinum miners may be economically constrained, but technically there is overcapacity.
“We believe these four factors will continue to cap a sustained rise in PGM prices above our forecast profile over the next three years,” said Steyn in his report.
Implats is trading at R59/share, a 40% improvement in the last month, while Northam Platinum and Lonmin are 40% and 20% higher in the last month.
The Rustenburg Base Metals Refinery (RBMR), part of Anglo American Platinum’s operations.