PALLADIUM SUBSTITUTION COULD BE A FACTOR : South African PGM production woes brighten life for North American PGM mining, exploration
Soaring platinum prices, combined with South African mining production woes, are putting smiles on the faces of North American miners and explorationists holding palladium-rich PGM deposits.
Author: By Dorothy Kosich
Posted: Wednesday , 20 Feb 2008
RENO, NV -
As South African PGM production stumbles, North American PGM miners and explorers may be, at long last, engaging in their own version of Peanuts icon Snoopy's Happy Dance.
What used to be the curse of palladium-heavy PGM deposits found in North America and the northern hemisphere may now be a blessing as auto makers and other industrial consumers seek an alternative to platinum as the metal soars past the $2,100/oz mark.
South Africa's power woes, which have crippled precious metals miners, have recently attracted the lion's share of attention in the international financial media, strengthening institutional investors' already growing fondness for palladium. But, North American PGM producers also worry that soaring palladium prices could harm a scenario now unfolding which may finally earn palladium more respect.
On January 31, well-respected North American metals analysts John Bridges of JPMorgan declared that "a perform storm" may exist for palladium. By February 13, he issued a warning that the "gravity of the situation is only gradually being realized. There are minimal inventories of platinum and highly regulated uses in emissions control that is responsible for about half of total demand. Demand will have to be rationed by price to the critical users."
"Higher prices will direct the PGMs to the critical users, and this will help, but economic growth and advance of emissions controls will require more metal each year," he warned.
On February 12, New York-based commodities research group, CPM suggested that while many investors may be aware of the use of platinum, palladium and rhodium in automotive catalytic converters," they may not be aware that these metals are also used in catalysts to clean up pollution from factories, smaller shops, dry cleaners, and other stationary sources of harmful emissions." CPM went on to highlight PGMs' uses in petroleum refining, chemical process catalyst for plastics, explosives, cleaners, medicine and other products. PGMs are also used in a wide range of electronic products.
"This combination of critical industrial applications and scarce resources make these metals expensive. As the world economy continues to grow at a rapid place-even in the face of a temporary U.S. economic slowdown-the need for increasing volumes of PGMs expands," according to CPM.
"Supplies meanwhile are hard to find and slow to develop. Much of the PGMs currently mined in the world are mined in South Africa, where a series of mine accidents, weather problems, labor disruptions, and, as of early 2008, power shortages and outages are disrupting supplies.
"Added to this mix is the fact that institutional investors, seeking portfolio diversification at a time of weak equity prices, low interest rates, and volatile financial markets, have viewed the rising PGM prices with desire, and are buying physical metals for their portfolios," CPM said.
Dr. Edel Tully, Mitsui & Co. Precious Metals of London, recently cautioned that "auto companies face a nightmare situation. Will manufacturers concentrate on thrifting their platinum requirements and intensify their focus towards palladium substitution?" Palladium is a full substitute metal for platinum in gasoline auto-catalysts and a partial substitute for auto-diesel catalysts.
Tully suggested "that it is very likely that senior management will not be able to ignore such a market, and any remaining auto manufacturers that still use platinum in gasoline engines will adapt their methods. In many cases, auto companies alter their PGM loadings on the occasion of new launches." In Europe, major automobile manufacturers such as BMW and Mercedes have already made the switch to diesel engines for EU nations. Now BMW diesel standard and hybrid cars are being introduced to U.S. markets.
JP Morgan's Bridges noted that Russian sales into Switzerland "are beginning to suggest that government sales of Russian metals stocks are running down. [Russia has been a prime supplier of palladium, nickel and other related metals] Now what if the Russian sales end at the same time as South African sales of both platinum and palladium slow?"
Earlier this month, Base Metals & Minerals Analyst George Topping of Blackmont Capital suggested that the estimated inventory of Russian palladium in Zurich "still exceeds 7.0 million ounces, which, if true, is sufficient metal to allow the Russians to continue to control palladium prices. We believe the price differential to platinum will accelerate the substitution where possible. In addition, has now been seven years since the Russians destroyed the market by withholding supply and driving the palladium price to over $1,000/oz. It typically takes about seven years to demand to return after such an event as evidenced by a similar event in the rhodium price in the nineties."
Stillwater President and CEO Frank McAllister, the chief U.S. spokesman on all things palladium, suggests that jewelry manufacturers and others may actually be driven away not only from the high price of platinum, but also from the soaring price of gold. Mitsui's Tully has already predicted that jewelry demand could suffer "a much quicker death" in the face of record platinum and gold prices.
HAPPY DANCE FOR NORTH AMERICAN MINERS
In a discussion with Mineweb, McAllister noted these and other significant developments, which may actually benefit North American PGM miners and explorationists. While the current Eskom power woes are making headlines in South Africa, McAllister suggests that the same shortage of miners and experienced mine managers to run mines in South Africa could mean big trouble for the nation's domestic PGM producers.
Meanwhile, McAllister has already watched Stillwater Mining shares increase 75% during the past few weeks.
President and CEO Harry Barr and his management team at Pacific North West Capital (TSX: PFN) recently told Mineweb that new uses of palladium in pellets in breast and pancreatic cancer treatment have also opened horizons for North American PGM investment. They estimated that about 50% of palladium has been purchased through ETFs.
Interest has steadily increased in North American PGM exploration and the palladium-rich northern hemisphere. A joint venture project between Anglo Platinum and Pacific North West Capital in Sudbury, Ontario, is attracting quite a bit of interest. With a palladium-platinum ratio of 3:1, Pacific North West Capital's 43-101 resources calculated 8.53 million tonnes containing 353,200 ounces of palladium, 116,800 ounces of platinum and 39,000 ounces of gold."
In his recently published outlook letter, Barr said that "the price of palladium is also a major factor for the River Valley Project and any major increase in Palladium will positively affect the project's economics." A longtime North American PGM explorer, Pacific North West Capital has attracted key institutional shareholders including Stillwater Mining, BAC Platinum and Pinetree Capital.
Spiros Cacos, Manager, Investor Relations for PFN, told Mineweb that shares which normally trade from 30,000 to 50,000 are now trading at a brisk 334,000 shares this week.
Meanwhile, Blackmont Capital initiated coverage of the Marathon PGM Group (TSX: MAR) earlier this month. In his analysis, George Topping noted, "There are very few investment vehicles for Platinum Group Metals (PGM) exposure, albeit with a sizable copper by-product outside of Africa. Being located in Ontario is an advantage as both Xstrata and CVRD have smelter capable of processing Marathon's poly metallic mix."
"With the election of Jacob Zuma as President-Elect coupled with an increasing crime rate and an infrastructure under stress, we believe the short to medium term outlook for South Africa is very negative. Consumers will encourage the production of non-South African supply," Topping predicted.
Marathon PGM is developing its Marathon PGM-Cu Project about 10 km north of the town of Marathon in northern Ontario. There are several active mines in the general area, which are wrapping up their mine life, which may free some mill equipment and a skilled labor force for the project, according to Blackmont. A resource update is expected this year, along with a definite feasibility study. Blackmont anticipates that production will begin in early 2011 and yield 46.2 million pounds of copper, 180,000 ounces of palladium, 43, 600 ounces of platinum and 12,400 ounces of gold annually.
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