PLATINUM GROUP METALS
Platinum 2012 Outlook Bleak
Dull prices and margin squeeze are likely to be the name of the platinum game in 2012 with much of the positive sentiment hinging on the jewellery sector
Posted: Thursday , 01 Dec 2011
According to a report on the sector released by RBC Capital Markets today, with total costs continuing to increase to just under the US$1400/oz level compared to the current basket price of approximately US$1230/oz a further margin squeeze is on the cards.
One of the major contributing factors to this is the wage increases seen at operations in South Africa - for example both Amplats and Impala have agreed increases of 8-10%
And, the revenue side of the equation looks equally poor. RBC lowered its 2012 forecast for platinum from US$1900/oz to US$1800/oz with corresponding drops in palladium and rhodium driving the basket price assumption down from R11 229 to R10 735.
As a result of this and, despite, the recent weakness in the South African rand, the bank has lowered its 12 month forward earnings forecasts and dropped its target prices for producers.
"We believe a return to the noninvestment demand fundamentals remains a more sustainable proposition. However, we note that with weaker automotive and industrial numbers unlikely to spur investment demand, sharp increases to metal prices remain unlikely in the short term." RBC said
Senior analyst at Macquarie, Hayden Atkins concurred, saying expectations for 2012 hinge on jewellery and the investment market rather than the autos and industrial applications.
Speaking on Mineweb.com's Metals Weekly podcast, Atkins said, "The starting point for the market is fairly weak and when you look into 2012 from some of the key sectors of demand, industrial applications and all those in particular, it looks pretty stormy when you look somewhere like Europe, so the expectation will be that that will be very weak and I think that's probably fair."
RBC said that the lower platinum prices are stimulating demand from the jewellery sector with purchases on the Shanghai Gold Exchange now well ahead of 2009 which was a record year for metal bought on the exchange. RBC believes that this indicates some investment demand for metal in China over and above jewellery consumption.
Despite this, the overall demand/supply balance expected by both Macquarie and RBC for platinum next year points to a surplus which would keep pressure on prices.
Atkins differs with RBC in his price forecast, however, saying that "If gold is going back to $1 950 or $2 000 an ounce, which is not out of the question, then I think platinum can get to relatively similar levels."
The platinum price relative to gold has raised some questions on when it is expected to reassert its position. Atkins believes there will be a long term reversion eventually but not any time soon. RBC pointed out that gold has breached the 1:1 ratio against platinum for the first time since late 2008 and that this was indicative of the continued flight to safety of many investors, as well as a perception of deteriorating industrial demand fundamentals.
As far as production interruptions on the mines go Atkins believes that the impact of this went largely unfelt by the industry this year due to the de-stocking of concentrates. Whether there is leeway to carry this into next year remains to be seen Atkins said.
"Where to from here?" investors may ask. RBC said it continues to find value driven off tangible earnings and/or cash flows in Aquarius Platinum and Sylvania.
"We believe that Aquarius is being discounted due to its Zimbabwean exposure and that this is overshadowing the growth expected to come from its South African operations. Sylvania's surface operations are at the lower end of the cost curve and with limited planned capital expenditure planned on these assets - cash generation should remain strong even at depressed metal prices."