Precious metals and oil (DBO) seem to have reversed higher last week on the
military coup in Egypt. Bernanke is scheduled to speak and the markets may
already be pricing in some dovish statement to alleviate fears of tapering
which could cause some short covering and bargain hunting. Prices of platinum
(PTM) and palladium (PALL) continue to outperform other metals such as gold
(GLD), silver (SLV) and copper (JJC) over the past 9 months. For many months,
I have been warning my readers about the growing risks to platinum and palladium
supply as labor strikes intensify in South Africa.
Palladium is the only metal that is higher over the past year. Palladium is
up over 14% over the past year while platinum, copper, gold then silver are
still in negative territory. Palladium and platinum are showing great relative
strength in this precious metals correction. I
forecasted this since the end of October 2012.
Some of the largest platinum and palladium producers in South Africa are suffering
from the labor disputes and violence. South Africa accounts for close to three
quarters of the world's platinum supply.
I do not believe that long-term solutions will be worked out there between
the unions and the mining companies. Some of the miners have settled but it
comes with increasing costs to miners who are already barely marginable.
The risks to disruptions in production are just too great for new capital
going into South Africa mines. Once production is disrupted and the deep underground
mines are closed it is very difficult and costly to restart.
The geopolitical instability from South Africa may have a significant impact
on the supply demand equation for Platinum Group Metals. These metals are crucial
to reduce noxious emissions from vehicles as they are used in catalytic converter
to lower tailpipe emissions.
No suitable economic replacements for PGMs have been found. Vehicle sales
are increasing worldwide especially from emerging economies.
Emission standards are being implemented in emerging economies. Demand for
PGMs is skyrocketing as we are seeing a rebound in the North American, Japanese
and Chinese automobile sector. Supply is extremely tight from South Africa.
Major strategic consumers could be actively searching for safe and secure
supplies of platinum and palladium.
Keep a close eye on top platinum/palladium projects in North America. One
small junior PGM miner in North America just completed close to a $6 million
financing which shows strong support for the caliber of the company's platinum
and palladium assets in the Yukon and Ontario.
Investors should look for platinum and palladium projects in safe jurisdictions
as the fundamentals are extremely strong with rising demand and declining supply
from South Africa, which produces over three quarters of current supply.
This supply demand imbalance should impact the price over the long term. This
correction in the mining sector (GDX) is one of the strongest declines in history
and is similar to the 2001 thirty-year low in the mining sector. At that time
similar to now, major miners (SIL) were shutting down mines and cutting back.
Although it looks negative for the short term, these are the sort of moves
that are characteristic of a major bottom. Mines take time to build and expand.
There are major lag times that create shortfalls should prices move higher.
The mothballing of projects may be setting the stage for the next major super-cycle
in commodities as supply is constrained. The pain that we are seeing in the
sector now is setting the stage for the next boom and may be an excellent opportunity
for top junior miners developing top notch assets.
Although this is a painful correction, many expect this downturn to lead to
higher valuations down the road and increased merger and acquisition activity.
Investors should focus on high quality assets with strong management teams
and shareholder support that is advancing PGM development.
The supply of PGMs comes mostly from unstable mining jurisdictions. High quality
projects in safe jurisdictions could become increasingly valuable as there
is a need for a safe and secure supply of these critical platinum and palladium
metals.
Disclosure: Author does not own any of the securities mentioned.
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