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23 February 2001 PLATINUM & GOLD THE GLOW OF WHITE METAL By Brendan Ryan
There are several reasons why platinum-group metals will remain the mainstay of SA's mining industry for years to come
If mining in SA is a "sunrise industry", as the Chamber of Mines maintains, then it is a platinum dawn because gold's importance to the country is being steadily eclipsed by the white metal.
That's because of rock-bottom dollar gold prices and declining production from SA's ageing gold mines while the prices of platinum and its sister metal, palladium, have rocketed, spurring unprecedented expansion in the platinum sector.
Platinum industry leader Anglo Platinum (Angloplat) last year declared platinum the metal of the new millennium and, so far, every market indicator backs that claim.
Barry Davison Roger Baxter The platinum business is not just about platinum itself. It is the best-known of a complex of six metals referred to as platinum-group metals (PGMs). They are mined and extracted together with minor amounts of gold and substantial quantities of two base metals, copper and nickel.
The most important of the metals are platinum, palladium and rhodium (the others being iridium, ruthenium and osmium). Last year, for the first time, SA's export earnings from the three main metals alone eclipsed those of the country's gold industry (see graph, "How White Clipped Yellow").
SA gold production, in decline since the mid-Eighties, reached an estimated 430 t (13,8m oz) last year, which the Chamber of Mines estimates earned US3,6bn (R27,5bn). By the same standards of calculation, the three main PGMs generated 3,8bn (R29bn). This could reach $5bn (R39bn) this year if PGM prices remain constant through the 12 months.
SA produces about 3,9m oz of platinum annually, worth $2,3bn at 600/oz, as well as 1,9m oz of palladium, worth $1,8bn at $950/oz and about 400 000 oz of rhodium, worth $900m at the current price of 2 200/oz. These impressive figures are generating stunning profits for the platinum producers - Angloplat made record earnings of more than $1bn for the year to December - and have triggered huge expansion drives by existing producers and a rush to enter the industry from a string of newcomers.
In fact, things look so good for the platinum producers that you have to ask: what could possibly upset the apple cart? The short answer appears to be: nothing in the next three years, short of world economic Armageddon. And that, of course, would clobber everybody.
The idea that "nothing can go wrong" does not sit comfortably with any commodity business, and platinum has a boom-bust track record dating back to the discovery of SA's vast reserves by geologist Hans Merensky in 1924.
But there are fundamental differences that make the outlook far more solid than in 1988, when the platinum industry last boomed amid predictions that the good times would last.
Those proved to be premature; the motor industry promptly opted for more palladium and less platinum in its auto catalyst mix to control vehicle emissions because of high price and political risk. This harmed SA but benefited Russia.
SA produces about 72% of the world's platinum and Russia about 20%, but the equation reverses itself in palladium, where Russia controls 66% of supply to SA's 25% market share.
The automakers must now be regretting that call. Palladium in 1988 sat around 55/oz and platinum at about $600/oz. Nowadays, platinum is still around 600/oz but palladium has soared to above $1 000/oz. The reason is Russia cannot meet the auto industry's vastly increased demand for palladium from its dwindling stockpiles.
The response in the early- and mid-Nineties was a slump in the platinum business, aggravated by the Russians who flooded the market with palladium and platinum from their stockpiles. They did so because they needed hard currency to make up for the low prices of their other main exports, oil and gas.
In 2001, neither of those factors applies, which is why Angloplat CEO Barry Davison is upbeat about platinum's future.
Davison pushed the button on the first stage of Angloplat's expansion programme two years ago, based on an assessment that Russia was rapidly depleting its inventories of platinum and would not be able to continue supplying the market at levels well above its annual, new-mined production.
There are no official figures on Russian sales and stockpile levels, but best industry estimates are that Davison was right. The jump in oil and gas prices also helps.
"I don't think the Russians can cause further big disruptions to the platinum market," says Davison. "They are also marketing platinum to optimise revenues because higher oil and gas revenues have taken the pressure off them to generate hard currency."
The SA platinum producers believe the car manufacturers have no choice but to substitute more platinum and rhodium for palladium in their auto catalyst mix.
"The use of platinum in auto catalysts will continue to grow because of more stringent emission legislation for diesel vehicles and concern over long-term supplies of palladium," says Angloplat commercial director Dorian Emmet.
Impala Platinum (Implats) senior marketing manager Derek Engelbrecht says these trends will offset any losses from lower car production in the US and Implats is forecasting a 10% rise in total auto catalyst demand for platinum over the next five years.
Another concern is possible oversupply from SA. But analysts don't see that happening soon. Angloplat intends pushing annual platinum output from 2m oz now to 3,5m oz by 2006. Implats intends going from its present 1,1m oz/year to 1,8m oz by 2005. Lonplat, the third-largest producer, plans to hit 870 000 oz by 2007 from its current 670 000 oz.
In addition, a string of newcomers are already entering the business or wanting to get in: Aquarius, Kroondal, Southern Era, Cluff Mining, African Rainbow Minerals, Mvelaphanda Platinum, Harmony Gold and Avmin.
"Even if I assume every known planned expansion or likely new project comes on stream according to schedule - which is highly unlikely - then platinum supply would just balance demand by 2005," says Barnard Jacobs Mellet analyst René Hochreiter.
There are bound to be delays and setbacks to projects and worries over the availability of skilled staff, which already concerns the big platinum groups.
Gold industry executives would love to be facing that kind of problem, but their priority is survival with a gold price at 20-year lows and little sign of improvement.
SA gold production halved from a peak of nearly 1 000 t in 1970 to 494 t in 1996 and has continued the inexorable downward slide to 450 t in 1999 and an estimated 430 t last year. That trend will continue, says Chamber of Mines chief economist Roger Baxter. He hopes SA can keep gold production above 400 t for the next two years, if the gold price holds. It may, with the consolidation of SA's ageing gold mines. Major producers like AngloGold and Gold Fields Ltd are disposing of high-cost shafts and mines to leaner operators like Harmony and Durban Roodepoort Deep, which can keep them going, usually at lower production.
"The gold producers are totally focused on their bottom-line profits rather than overall gold output," says Baxter. "The only replacement production that will come in at current price levels is from the South Deep and Target/Sun developments."
The fall in the rand has provided some protection but gold mines are not going to look at new projects unless the dollar gold price recovers.
" It is going to take gold prices of $350 and above before anyone looks at a new, greenfields project in SA," Baxter says.
That is because SA's remaining gold orebodies are all deep, requiring outlay of billions of rand and delays of up to seven years before they can expect a return on the investment. That's why the SA gold companies are scouring the world for deposits such as the Morila mine in Mali. These can be mined by open-cast methods, delivering the first gold in less than two years from initiation.
As for the gold price, producers are following the lead of the platinum and diamond producers in focusing on growing demand through greater promotion, marketing and advertising. The World Gold Council, representing producers, has just doubled its annual promotion budget to $50m because, until now, it has been outspent by the platinum industry's promotional body, Platinum Guild International (PGI) . Yet world platinum demand is only about 177 t compared with world gold demand of 3 280 t.
PGI has been hugely successful in opening up a new platinum jewellery market in China which, in just five years, has grown to rival major consumer Japan. It hopes to replicate this success in India through a campaign that kicked off last year.
Ten years ago the platinum and gold mines' message to financial analysts and media was all about costs, production levels and recovery efficiencies. That is still important, but precious-metal producers now project conspicuous consumption and fashion with svelte models dripping gold and platinum jewellery at exhibitions and competitions to promote jewellery design and demand.
Davison says Angloplat's strategy is to grow demand for platinum and then expand production. In this, platinum producers have the edge on gold, being smaller and more focused. Gold miners are plagued by huge, above-ground stocks of the metal held by central banks, some of which no longer value its investment merits.
SA dominates the world platinum scene because it hosts the world's greatest known deposits of platinum. The gold miners were in a similar position until competitors using new mining and treatment technologies successfully opened up in North and South America and Australia.
There is no sign yet of a serious competitor to SA's platinum riches - a situation all South Africans should hope will last for many years to come. |
