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A third round of quantitative easing won't help support platinum and
palladium prices, according to Erica Rannestad,
platinum group metals specialist with CPM Group in New York. So, what will
drive the platinum group metals, which have been suffering from lags in
demand and increasing interest from short sellers? Rannestad
discusses the outlook for these specialized metals in this exclusive Gold Report interview, including what they have in common with
gold.
The Gold Report: Erica, the June 6 issue
of CPM Precious Metals Advisory reported that, "Some investors
view the present easy monetary policy of the U.S. Federal Reserve as a great
reason to purchase gold, seeing the current monetary policy as likely to
result in higher inflation and the dollar losing value. When viewed over the
longer term, much to the contrary has happened since the Fed began to ease
monetary policy." It seems like the returns for quantitative easing (QE)
are indeed diminishing. Tell our readers what you mean.
Erica Rannestad: We ran an analysis on the impact of QE in the
U.S. on gold prices in our recent report. We found that the percentage return
during the periods of QE1 and QE2 were positive, but that QE2 is lower in percentage
and dollar terms than the increase during QE1. The reason for that is
investors were buying gold as a safe-haven asset during those periods. These
quantitative easing measures have not translated to higher inflation that has
trickled down to raise gold prices. It also has not contributed to a
weakening of the U.S. dollar, which would also be positive for gold prices.
Rather, during the period since monetary easing began in 2007, the dollar
actually held up pretty well.
TGR: Indeed it has. Let's
look at the performance of gold in QE1 and QE2 in more specific terms. The
price of gold rose about 36% during QE1 and about 12% during QE2. If there is
a QE3, could there be a price increase of around 4%, which would be
consistent with the pattern established in the first two rounds of QE?
ER: There are plenty of
reasons to continue to buy gold and more reasons to just hold gold positions,
but we don't think that QE3 would spur a 4% increase in the gold price. We
believe that the returns are diminishing, but it's not associated with the
introduction of additional QE.
TGR: How have the prices of
precious metals like platinum and palladium reacted to QE measures?
ER: They haven't reacted to
QE measures, necessarily. When the Federal Reserve first began reducing its
target rate, platinum and palladium prices were falling because of the
financial crisis. There was a contraction of the global economy that resulted
in a decline in demand for the various end products that platinum and
palladium are used in.
About 40% of platinum
fabrication demand comes from the auto sector and 25% comes from jewelry.
About 60% of palladium use comes from the auto sector. Jewelry is actually a
very small portion of palladium demand. The larger component would be
electronics, which is about 15–20% of demand.
"Any asset that
boasts PGM byproducts is definitely at an advantage because they're
high-value metals. It's a nice little revenue stream."
TGR: Where does investment
demand factor into the economic picture for those metals?
ER: There has been
tremendous weakness in investment demand this year. There's been a decline in
platinum exchange-traded product holdings. The holdings backing those
products are down about 6% since March.
There's also been a
massive buildup of short positions in the NYMEX platinum futures and options
market since March. They're at record levels. Gross short positions are
approaching 900,000 oz (900 Koz).
We've started to see an increase in long positions recently, but the gross
short positions have remained elevated. There could be some upward pressure
on prices once the aggregated gross short position is reduced. Until that
happens, the price remains under pressure.
The investment picture
has been building on the negative view of fabrication demand: slower growth
in jewelry demand in China and weakness in the European economy that has been
weighing on the auto market. Investment demand is weak because of those
pockets of weak fabrication demand. There could be an improvement in prices a
little bit later in the year.
TGR: Why is South Africa
receiving unusually negative attention regarding its platinum group metals
(PGM) projects and mines?
ER: There are a host of
issues being faced by PGM miners that are difficult to control because
they're mostly external in nature. The entire industry is struggling to
attract positive attention because it's been demonstrating higher costs and
lower production levels.
The biggest contributor
would be production disruptions, which increase costs and reduce revenues at
the same time. Those production disruptions are mostly caused by labor
strikes, which take a toll on supply. Safety stoppages are another reason.
Since the fourth quarter of 2011, there's been an uptick in safety stoppages
issued by the Department of Mineral Resources.
There are also
disruptions due to geological complexities. PGM mining is typically very deep
level underground mining. The miners typically face issues such as faulting
that make it difficult to extract ore from deep level mines.
TGR: These operations are
very different from most North American mines in that they make up for their
lack of machinery and automation with thousands of workers.
ER: PGM mining has to be
labor intensive because of the nature of PGM mineralization. There really is
no way of avoiding the labor-intensive method for extracting PGMs without
compromising recovery rates. It is more labor intensive and it has to be.
TGR: On the flip side, are
the rising prices of these metals due to the supply constraints created by
these problems?
ER: Yes and no. These metals
are so industrial in nature that the prices tend to swing more closely with
developments in demand trends. The picture for supply since the fourth
quarter of last year has been deteriorating, but it hasn't translated to
higher prices because of the role that demand is playing right now.
That said, the higher costs of mining are expected to result in
some shuttering of operations. We saw that recently with Aquarius Platinum Ltd.'s
(AX:ASX; AQP:LSE; AQP:JSE) joint venture (JV) Marikana mine, which just closed a few days ago due to
low PGM costs and high production costs.
TGR: What was its cash cost
per ounce?
ER: In 2011, its C1 PGM cash
cost was about $994.90/oz. It was the second highest cost mine. It improved
its cash costs over the past few years, but the deteriorating operating
conditions in South Africa in recent months likely weighed very heavily on
the mine's operating performance.
TGR: A dirty little rumor
that's been making the rounds is that South Africa will nationalize at least
a portion of its PGM mines given its stranglehold on global supply. Do you
give any credence to those whispers and rumors?
ER: There's always talk about nationalization of the mining industry in South
Africa. I don't think it's going to happen, but only time will tell.
TGR: Only one PGM mine is
scheduled to open in 2012 and that's First Quantum Minerals Ltd.'s (FM:TSX; FQM:LSE) Kevitsa mine in Finland, a
relatively small operation. What are some mines that are scheduled to enter
production in 2013 and beyond? Will those mines produce enough PGMs to affect
prices?
ER: The Kevitsa
mine is going to produce PGMs in a concentrate as a byproduct of nickel. It
will only have a marginal impact on supply.
In 2013, Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX) could put into
production its Serra Pelada project in Brazil. It's
primarily a gold project, but it would actually become the first mine in
Brazil to produce PGMs on record.
The company has only
developed a resource of about 700 Koz of PGMs. Its
drill results have suggested that the asset is pretty high grade. It plans on
producing the PGMs in concentrate and then selling that to smelters. It's
coming out with an NI 43-101 resource statement and it expects to produce at
some point. It will be an interesting new play in Latin America because
there's only a little bit of PGM production in that region.
TGR: Do you think having a
mine in Brazil gives Colossus a distinct advantage?
ER: Not necessarily. Any
asset that boasts PGM byproducts is definitely at an advantage because
they're high-value metals. It's a nice little revenue stream.
TGR: Are any other companies
going into production next year?
ER: Northam Platinum Ltd. (NHM:JSE) could put its Booysendal
North project in South Africa into production. It would exploit both the Merensky and the UG2 reefs of the Bushveld
Complex, first tapping into the UG2. It's expected to produce 100 Koz of PGMs each year, which would replace the Marikana mine that was just shuttered. Booysendal North has a pretty long mine life of about 50
years.
TGR: That's a total resource
of almost 60 million ounces (Moz). Is that all
platinum group metals or mostly platinum?
ER: It's PGMs and gold, but
it's likely more platinum. It is tapping into the UG2 quite a bit and the UG2
has a more highly concentrated palladium content. It
also has chromite as another revenue stream.
Northam Platinum is interesting
because it tends to lean more toward technological innovations. It's done a
lot with deep level mining. It operates the Zondereinde
mine, which is the deepest level mine in the Bushveld
Complex. It was able to develop a method of mining that used water to
naturally cool down temperatures so it had less dependence on refrigeration.
It's introducing a reverse decline to transfer ore from the mine to the
concentrator plant at the Booysendal project to
reduce costs. It's always doing these kinds of interesting new techniques.
TGR: It only plans to produce
roughly 127 Koz/year, but it's got 60 Moz. It could
certainly ramp up production fairly easily. Why wouldn't Northam
want to produce more metals annually?
ER: I think it is probably
taking it in phases. It may be producing that much to produce revenue as soon
as possible and then it will build out from there. Additionally, it would
need to upgrade these resources to the reserve category in order to build a
mine plan for higher annual production.
TGR: There are a couple of
operations planning to go into production in 2014. Tell us about those.
ER: The
largest project coming onstream is Platinum Group Metals Ltd.'s (PTM:TSX; PLG:NYSE.A) Western Bushveld JV project in South Africa. It could produce
around 250 Koz/year. This could increase when the
company is able to ramp up project three of the Western Bushveld
JV.
It has about 8 Moz in resources there. Once it starts development, it
will likely want to increase the resource estimate, transfer some of the
resources into reserves and build that up. There's potential upside there.
TGR: Is it on schedule with
the development of Western Bushveld JV so far?
ER: Yes, it has been
actively developing it. It has been reporting over the past few months that
it will be in production on time and on budget. More often than not, however,
these things come onstream
later than projected. Because it's kind of close to the start date, there's
less uncertainty there.
TGR: There are 20 projects on
the chalkboard after 2016. It's quite likely that those all won't be
developed. Could it negatively affect price if so many mines come into
production?
ER: The likelihood is that
those projects would come onstream
between 2016 and 2025, or not at all. Some of those projects are really
complicated or require a lot of infrastructure to be built up, which involves
the state and permits, among other requirements. A lot of these projects will
take much longer to put into production.
It's a positive
indicator if a company comes up with a really interesting or positive funding
deal. For example, recently Stillwater Mining Company (SWC:NYSE) engaged in an agreement
with Mitsubishi Corporation on its Marathon asset in Canada. That agreement
gives Mitsubishi 25% ownership of the asset and an option to purchase 100% of
the PGM production from Marathon.
Deals like that show
strong funding for development. It's much more likely the asset will be
developed more actively and that the development will be accelerated.
Companies that have trouble getting funding for projects are going to take
much longer to get into production.
TGR: Stillwater is one of the
few PGM producers in North America.
ER: The Stillwater mines and
the Lac des Iles mine owned by North American Palladium Ltd. (PDL:TSX; PAL:NYSE) are the only primary
palladium mines in North America and the world. Marathon would be the third
primary palladium mine in the world.
TGR: What advice would you
offer to investors looking to gain some exposure to companies mining PGMs?
ER: Investors should buy
PGMs when they're very bullish on the economy. That said,
there are regional differences in economic conditions that can cause an
investor to be more bullish or bearish on platinum or palladium.
For instance, if the
European auto market isn't doing well then they'd likely be more bearish on
platinum. That's the case right now. Palladium is a bit more volatile, but it
tracks economic conditions more closely than platinum does.
Platinum can behave more
like gold or silver as an investment asset. It's a little less volatile. It
can behave more like a hedge against inflation or a safe haven. If an
investor wants a little bit more exposure to safe-haven qualities, platinum
would be a better play.
There is also more
investor interest in developing projects that could produce PGMs in countries
other than South Africa. There are a lot of projects being developed in
Canada and some in Minnesota in the United States. Those are a good way to
reduce exposure to the risks of cost increases and production disruptions in
South Africa. However, South Africa has the highest PGM basket price because
there's a higher platinum content. That gives investors more exposure to
potentially better revenues. Investors have to pick and choose.
"There is also more
investor interest in developing projects that could produce PGMs in countries
other than South Africa. There are a lot of projects being developed in
Canada and some in Minnesota in the U.S."
TGR: We've talked about
platinum and palladium, but we haven't talked about rhodium. There's been
quite a bit of price volatility in rhodium over the last year. Is that a good play for investors right now?
ER: Poor rhodium. It's less
than half the price that it was the beginning of 2011 because of
deterioration in demand. A couple of years back, rhodium reached $10,000/oz.
When that happened, users were saying, "We've got to stop using
rhodium!" There was a lot of thrifting. For
instance, there have been some technological advances in the auto industry
that have helped reduce rhodium use for auto catalysts. Rhodium is competing
with that technology.
There's also been an
interesting trend development in rhodium supply. Rhodium supply in South
Africa has grown at a much faster pace relative to platinum/palladium in the
past 20 years. A lot of that is because of new developments in the processing
of the metal and greater recovery rates of rhodium. There have been larger
surpluses of rhodium in the past decade. That coupled with aggressive
developments toward substituting and thrifting in
auto catalysts and other catalytic applications is bearish for rhodium.
Rhodium is a good medium- to long-term play, but I expect some further
declines in the price in the short term.
TGR: I'm sure Cecil Rhodes is
turning in his grave.
CPM Group's PGM
Yearbook will be released June 26. Readers can purchase it at a discount
price on the CPM Group's website. CPM Group analysts
will present the main conclusions of the Yearbook at 10am on June 26.
To register for this event, click here.
Erica Rannestad is a
commodity analyst at CPM Group. Rannestad covers
the precious metals and agricultural softs markets as well as currency
markets. She is responsible for building CPM Group's supply and demand
statistics for the precious metals Yearbooks and Long
Term Outlook reports. Rannestad is currently
most closely monitoring the silver and platinum markets, providing near- and
medium-term price forecasts for these metals in CPM Group's Precious
Metals Advisory, a monthly publication. Rannestad
also often contributes to and supports CPM Group consulting projects and
regularly presents CPM Group's market views at conferences and seminars
around the world. Rannestad holds a Bachelor of
Science degree in finance from Fordham University's Gabelli
School of Business.
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Disclosure:
1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Colossus Minerals Inc. and Platinum Group Metals Ltd.
Streetwise Reports does not accept stock in exchange
for services. Interviews are edited for clarity.
3) Erica Rannestad: I personally and/or my family
own shares of the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following
companies mentioned in this interview: None. I was not paid by Streetwise
Reports for participating in this story.
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