Platinum and Palladium Outlook

Platinum and palladium stocks started to bite again, according to RBCCM. At the PGM cherry as prices are likely to continue to rise and many current valuations look compelling.

Analysts at RBC Capital Markets believe that the current sell-off in platinum stocks – about 10% over the past week alone – offers a “second bite at the cherry with two of the ‘juiciest’ cherries looking like Aquarius Platinum and North American Palladium at present”.

RBCCM says the issues driving the sell-off “are essentially related to a belief that world economic growth is again taking a beating with rising sovereign risk in Europe and ongoing political instability in the Middle East having an unnerving impact on the price of oil and just to top it off, a large earthquake in Japan”.

RBCCM believes that this “offers an opportunity to become invested for two reasons. The first is simply that the cost base in the South African PGM (platinum group metal) industry is still escalating at rates that will require higher metal prices even if we were facing a flat demand profile. The second relates to very low valuation multiples on some of the stocks in the space – even at current metal prices flat forward”.

The second half of 2010 “delivered a sizeable increase in output”; with rising metal prices, RBCCM finds that “we now have less of the industry making negative cash flows (only about 10% versus over 25% before)”.

As much as this is a “good story”, however, says RMCCM, “one must also take note that almost half of the industry would have been making negative cash flows if the metal price basket” did not improve during the second half of 2010″. Such cash flows referred to are those expressed as including capital expenditure, increasingly known as “free cash flow”.

If the industry cost is increased hypothetically by 10% a year (seen as “easily achievable”, given power cost escalation of 25% a year and labour cost escalation at 10% a year), “a significant portion of production” will be under pressure unless the metal price increases again.

Given flat metal prices, according to RBCCM, “at least a third, but possibly as much as half of the industry, will be right back into making losses”. Again, this is on a free cash flow basis.

A “quick scan” by RBCCM “delivers a clear preference for investment into Aquarius Platinum, and North American Palladium. Beyond these, RBCCM also sees “decent value” in Lonmin, and Stillwater, while on the smaller scale, in Sylvania Resources, Anooraq, Platmin, Jubilee Platinum, and Platinum Australia.

The stocks mentioned operate in South Africa, with the exception of NA Palladium and Stillwater, which are North American. Investment risks across these companies are varied, says RBCCM with the lowest risk likely attributable to North American Palladium and Stillwater, followed by Lonmin and Aquarius with the juniors all of higher risk on average, “given the usual development problems and capital needs associated with growing juniors”.

Selected platinum stocks

	Stock	From	From	Value
Tier I platinum	price	high*	low*	USD bn
Anglo Platinum	ZAR 660.50	-20.5%	9.4%	25.218
Impala Platinum	ZAR 192.62	-20.9%	13.3%	17.638
Lonmin	GBP 16.97	-20.6%	26.3%	5.539
Averages/total		-20.7%	16.3%	48.395
Weighted averages		-20.7%	12.5%
Diversified
Anglo American	GBP 31.10	-10.4%	39.6%	67.354
Mvela Resources	ZAR 35.00	-15.9%	20.8%	1.100
Norilsk	USD 24.33	-8.6%	75.3%	46.380
Camec	Now at ENRC
ARM	ZAR 203.74	-13.7%	39.3%	6.281
Xstrata	GBP 13.67	-13.4%	64.2%	65.369
Averages/total		-12.1%	43.8%	121.115
Weighted averages		-9.9%	51.2%
Tier II platinum
Stillwater	USD 21.51	-16.9%	104.5%	2.198
Aquarius	GBP 3.40	-30.6%	60.8%	2.541
Northam	ZAR 42.00	-22.9%	7.1%	2.199
NA Palladium	CAD 6.08	-23.2%	98.7%	1.014
Zimplats	AUD 13.00	-22.3%	36.8%	1.411
Eastplats	CAD 1.40	-29.3%	62.8%	1.271
Anooraq	CAD 1.06	-41.1%	20.5%	0.220
Royal Bafokeng Platinum	ZAR 60.93	-14.2%	1.2%	1.449
Averages/total		-28.7%	56.1%	10.854
Weighted averages		-32.8%	25.6%
* 12-month

Source: market data; table compiled by Barry Sergeant

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