Alec Gimurtu: Violent strikes and supply disruptions in South Africa put bullion in a headlines final year, and a steel spent 2012 offered during a bonus to gold. Is a bullion bonus a new normal? How will a marketplace change in a labor strike fallout? And will mining asteroids renovate supply fundamentals? CPM Group Platinum Analyst Erica Rannestad met with The Metals Report to share her cost and cost forecasts for 2013 and plead a supply and approach trends to watch this year.
The Metals Report: Across a mining sector, investors are endangered with quick rising costs. How did a 2012 strikes in South Africa impact handling costs in a bullion organisation metals (PGM) mining attention specifically?
Erica Rannestad: We design a 12% decrease in PGM outlay in South Africa. These revoke outlay levels are approaching to have a many poignant impact on money costs. Cash costs are a pivotal opening magnitude used in a mining attention and are typically settled on a per-unit basis. Cash costs mostly impute to approach mining losses such as labor, fuel and electricity.There are many variations for a calculation of money costs, so it is vicious to keep in mind that this magnitude is not accurately allied opposite companies. Because it is settled on a per-unit basis, money costs can be utterly unpredictable, generally if operations are located in high-risk countries. Input costs, utterly labor and electricity costs, significantly increasing in 2012, that amplified a already clever boost in money costs as a duty of revoke output. In summary, a infancy of a boost in money costs is due to revoke altogether annual prolongation with a change entrance mostly from labor and electricity cost increases.
TMR: What is a normal money cost for South African producers?
ER: We guard money costs on a C1 basis, that standardizes money cost statistics. C1 money costs impute to a customary clarification of what sum contingency be used to calculate money costs, creation a measures allied opposite a board. Last year, South African money costs per unit of PGMs were about $753 per unit ($753/oz). Cash costs outward South Africa was many revoke during about $570/oz. But we need to cruise that South African PGM production, or outlay value, is comparatively aloft in platinum, that is since a money cost is aloft than a tellurian average.
TMR: Is your research formed on a sum outlay of platinum, palladium and rhodium?
ER: Yes. Other metals would be deliberate by-products.
TMR: What is a trend for money costs in South Africa subsequent year?
ER: For 2012, we have a rough guess of a ~25% boost in money costs to $940/oz. The pivotal indicate here is many of that boost is due to a poignant dump in output. The tangible boost in money costs could operation between 15–25%. There are several ways companies can lessen costs, such as mining higher-grade regions.
Cash costs of $925/oz puts some of a high-cost mines in a red in a nearby term. The near-term money cost boost doesn’t advise that these mines will close, since in many cases they were essential during before years. This year was surprising and unequivocally eventuality driven. However, a stream cost sourroundings puts these operators during a aloft risk.
TMR: Your news states that dual of a 5 highest-cost PGM mines were already close down in 2012. What is a story there?
ER: Those are a Everest and a Marikana mines. Both of them are partially owned by Aquarius Platinum Ltd. (AQP:ASX), that had utterly an engaging and perplexing year. Those operations were closed, with Aquarius citing an inauspicious handling sourroundings and low PGM prices. Management expects to restart operations when conditions improve, that competence not be until 2014 during best. Another important high-cost cave is a Bokoni mine. That operation is undergoing some restructuring between Anglo American Platinum Ltd. (AMS:JSE) and Atlatsa Resources Corp. (NYSE:ATL). Its medium-term success depends on how uniformly that restructuring proceeds.
TMR: Are there other mines during risk for near-term closure presumably due to labor or infrastructure issues?
ER: Anglo Platinum’s Rustenburg operations competence be during risk of proxy closure, or during slightest some missile closures. This operation suffered a six-week-long strike that began in September. Costs are approaching to boost significantly in 2012. These examples aside, many of a mines in South Africa, while during risk of bad handling opening due to a fundamental issues singular to South Africa, are sincerely positioned for a stream cost sourroundings to continue operations in a prolonged term.
TMR: What could occur to prices if outlay reverts to pre-2012 levels?
ER: This year a marketplace reacted in dual opposite ways. First, supply shocks increasing doubt about supply, cut off supply flows and gathering prices adult neatly and rapidly. Platinum had a 24% trough-to-peak cost boost during a Lonmin strike, for instance. Second, prices would dump scarcely as quick on a fortitude of an bootleg strike as investors started focusing on a gloomy approach design once again. My foresee is for a narrower cost operation in 2013. There’s reduction doubt about supply shocks—we have gifted strikes during all a vital operations in South Africa and we have seen how a marketplace reacted. The luck of a repeat of 2012 is low. But there still is a lot of melancholy about demand. As a result, I’m targeting approximately $1,450/oz for bullion as a low and $1,800/oz as a high for 2013.
TMR: What are your expectations for a approach side? Can we explain a vital marketplace segments and what is pushing them?
ER: The largest user of PGMs is a automobile industry. Auto approach will be driven by an alleviation in Europe’s economy, presumably in H2/13. Expectations for alleviation in a U.S. and Chinese economies this year would also be certain for phony demand. Overall, we design positive, though tepid, approach enlargement for PGMs from a automotive sector. In automobile catalysts there’s unequivocally small substitutability outward a PGM complex. Alternatives have been tried, though zero else is as arguable and efficient. The automobile makers are going to be shopping PGMs notwithstanding a cost for a foreseeable future.
The second-largest source of approach for bullion is jewelry. Platinum valuables approach is dominated by China. We design a revoke enlargement rate compared to prior years—positive, though flourishing slower. Lastly, we design middle enlargement from electronic phony demand, that mostly relates to palladium. Overall, we are looking for middle enlargement relations to 2012 levels.
Jewelry users of PGMs are many some-more cost sensitive. Platinum is a largest valuables member in a phony approach portfolio. When prices rise, valuables approach typically comes off. Jewelers try to keep their cost points fast for business and one approach to do that is to revoke steel content, that translates to a attention shopping in revoke volumes.
TMR: Investors are increasingly participating in a PGM markets—how is 2013 marketplace perspective looking?
ER: Especially in a box of platinum, investors in 2012 looked to a economy in Europe for clues about PGM marketplace direction. That resulted in a unequivocally disastrous view. Currently, there are expectations for alleviation in H2/13 for a European economy that should urge a opinion for PGMs. There competence be shopping activity in expectation of that mercantile growth.
Slightly stronger enlargement in China and a U.S. apparently would also be certain for financier views on PGMs. PGMs are seen as a approach to play an altogether boost in industrial and mercantile activity.
TMR: PGM sell traded products (ETPs) have grown globally in a final few years. Are a ETPs a poignant force in a marketplace yet?
ER: The introduction of a physically corroborated PGM ETPs has helped to enhance selling efforts for these markets. The PGM markets are many smaller than a bullion or china markets. The ETPs have unequivocally contributed to an altogether enlargement of a PGM financier base. Specifically, they have supposing retail-level investors with a lot some-more entrance to these markets.
TMR: Platinum has been hovering during roughly a $100 bonus to a cost of bullion for a final several months. Is this a transitory condition or a new normal?
ER: The run-up in bullion prices above bullion creates clarity since of all a layers of doubt in a tellurian financial markets in new years. The historically vast reward that bullion has over bullion during benefaction reflects a scarcely high turn of doubt about destiny mercantile growth, mercantile deficits, financial issues and a horde of other problems that came to light during and after a financial crisis. We trust a lot of a run-up in bullion prices formed on these layers of doubt are labelled into a marketplace now. Once these layers of doubt start to dissolve, we design to see a bullion cost pierce above bullion once again. In a prolonged term, we see platinum’s fundamentals as some-more certain than gold, so we design to have bullion prices rising, since we see a lot of intensity for bullion prices to decrease in a middle term. Potentially as early as 2014, we could see a annual normal cost of bullion surpass that of gold. On a daily basis, this could occur sooner—perhaps by late 2013.
TMR: Besides bullion or ETPs, another choice for financier bearing would be mining equities. What companies are we watching?
ER: Despite a lot of scrutiny spending in Canada, a categorical area of seductiveness stays South Africa. Approximately 85–90% of a tube for destiny PGM cave prolongation is located in South Africa with a residue totally in North America.
In North America we design several miners to rise PGM projects over a subsequent 10 years. Those include Stillwater Mining Co.’s (NYSE:SWC) Marathon project, Polymet Mining Corp.’s (POM:TSX; PLM:NYSE:PLM) NorthMet plan and Panoramic Resources Ltd.’s (PAN:ASX) Thunder Bay North project.
TMR: Because prices have been clever for some time, a PGM recycling rate is high. Does PGM recycling contest with cave supply?
ER: At this indicate it’s not competing (albeit it is a vicious member of supply in today’s market), though we design clever enlargement in bullion and palladium recycling rates over a subsequent 10 years. Palladium began to be used some-more in gasoline engines in a late 1990s, with or replacing platinum. Many of those converters are due to be recycled, so enlargement in palladium recycling is approaching to be stronger relations to bullion recycling over a subsequent few years. Secondary supply will comment for a many incomparable apportionment of sum supply in a future. We see it rising from a stream 10–15% of supply to 20–30% over a subsequent decade.
TMR: What are a vital differences between bullion and palladium in terms of cost performance?
ER: Palladium prices respond many some-more strongly to financier views on industrial activity. Platinum will trade rather as a financial item like china and gold. Palladium is many some-more an industrial play.
TMR: At present, are investors or industrial users a categorical motorist of a PGM market?
ER: While investors competence be a extrinsic member in terms of engaging supply, they are vicious in quick adjusting a marketplace price. Investors have driven PGM prices this year. The 2012 cost draft looks like a drum coaster—clearly shabby by supply shocks when investors were behest adult a price. When a supply shocks were resolved, investors would concentration on their views about mercantile conditions. That resulted in reevaluating phony approach expectations, that were unequivocally disastrous formed on a state of a economy.
TMR: Do we design a identical conditions going forward?
ER: Yes. we design investors to try to constraint any upside in a marketplace that develops due to supply constraints and/or certain approach expectations. That said, we design sensitivity to be rather reduced from 2012 levels.
TMR: Many or many bullion equities have had gloomy batch marketplace opening in 2012 —much worse than their underlying commodities. Is there a light during a finish of a hovel for equity investors in a PGM mining sector?
ER: The PGM mining zone is still a mining sector. It has been a tough time, though generally bad for a PGM miners since of a outrageous faith on South Africa. A bad mining attention sourroundings and bootleg strikes and vast increases in money costs equals bad equity performance. One approach mining companies have attempted to residence this is changing management. The CEOs in a top-four largest PGM companies all altered in 2012. Lonmin Plc’s (LMNIY:OTCBB) Ian Farmer stepped down due to illness and was temporarily transposed by Simon Scott, CFO. Aquarius’ former CEO, Stuart Murray, was transposed by Jean Nel, former arch handling officer for a company. Impala Platinum Holdings Ltd.’s (IMP:JSE) David Brown was transposed by Terence Goodlace, a former CEO of Metorex Ltd. (MTX:SJ). Finally, Anglo Platinum CEO Neville Nicolau quiescent and was transposed by Chris Griffith, who was CEO of Anglo’s Kumba Iron Ore Ltd.
TMR: It’s a identical materialisation to what has been holding place among North American comparison bullion miners.
ER: It is a pointer that a attention is holding a some-more assertive position in seeking solutions to a challenges.
TMR: New mining frontiers have done headlines in 2012, both underwater and airborne. Asteroids have come into concentration as a intensity source for PGMs. What’s your perspective on this topic?
ER: Asteroid mining is a novel idea. we get asked about novel technologies in a PGM zone all a time. The executive indicate to remember is that these technologies are not near-term intensity contributors to a market. In this case, there would be a extensive volume of apparatus growth compulsory and towering logistical requirements. That’s going to take decades.
Commercialization of new and novel technologies takes many longer than many people competence think. One example, that is also an rising focus of PGMs, is fuel cells. Fuel cells were grown over 100 years ago, though they’re usually now being practical to commercial-scale markets. Mining asteroids for bullion is interesting. . .but is a prolonged approach off.
TMR: CPM Group publishes glorious marketplace commentary. How can investors entrance those?
ER: We furnish a monthly Precious Metals Advisory and a Base Metals Advisory, both of that enclose cost projections, applicable marketplace information and supply and approach tables. It is expelled in a third week of a month. These are annual subscription products. More infrequent marketplace participants can join a placement list to accept giveaway marketplace commentaries. CPM Group also publishes 3 changed metalsYearbooks that are effectively a “year in review” for a gold, china and PGM markets, expelled during a initial 6 months of each year.
TMR: Thanks for your time—it has been interesting.
ER: My pleasure.
Erica Rannestad is a commodity researcher during CPM Group. Rannestad covers a changed metals and rural softs markets as good as banking markets. She is obliged for building CPM Group’s supply and approach statistics for a changed metals Yearbooks and Long-Term Outlook reports. Rannestad is now many closely monitoring a china and bullion markets, providing near- and medium-term cost forecasts for these metals in CPM Group’s Precious Metals Advisory, a monthly publication. Rannestad also mostly contributes to and supports CPM Group consulting projects and frequently presents CPM Group’s marketplace views during conferences and seminars around a world. Rannestad binds a Bachelor of Science grade in financial from Fordham University’s Gabelli School of Business.
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DISCLOSURE:
1) Alec Gimurtu of The Metals Report conducted this interview. He privately and/or his family possess shares of a following companies mentioned in this interview: None.
2) The following companies mentioned in a talk are sponsors of The Metals Report: None. Interviews are edited for clarity.
3) Erica Rannestad: we privately and/or my family possess shares of a following companies mentioned in this interview: None. we privately and/or my family am paid by a following companies mentioned in this interview: None. we was not paid by Streetwise Reports for participating in this interview.
Related: Physical Platinum Shares (NYSEARCA:PPLT), Physical Palladium Shares (NYSEARCA:PALL).
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