Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
By John Whitefoot for Daily Gains Letter
When it comes to Wall Street, oil isn’t the only commodity investors are seeking stable supplies of—you can add platinum to the list.
Besides being home to great beaches, South Africa is also home to the vast majority of platinum. South Africa produces roughly 80% of the world’s total demand for platinum. Together South Africa and Russia (both geopolitical hotspots) mine 90% of the world’s annual supply of the precious metal, which is around 130 tonnes per year, equivalent to six percent of the world’s annual gold production.
Labor strife that has gripped South Africa over the last two years at the country’s three biggest platinum mines has brought the industry to its knees, with the global output dropping by more than 40% in just a few weeks.
Rising production costs (South African platinum is located in deep subterranean seams) and wage demands have led to a number of labor strikes. The first one to make us sit up and take notice occurred in August 2012, when South African police shot and killed 34 miners. More recently, wage strikes at some of South Africa’s biggest platinum mines are almost into their second month.
With no end to the labor disputes in sight, many are calling on the government to step in and usher miners back to work. The sense of urgency comes with stockpiles of platinum at the largest producers expected to last only until the end of March, after which, platinum prices could move significantly to the upside—or rather, much more than they already have. Platinum prices are up 6.6% since the beginning of February and are currently hovering around $1,470 per ounce.
Now granted, the strikes in South Africa will end and the platinum will once again be freed from the ground. But it could take some time to get everything up and running. Not only will South African platinum mining companies see their earnings get hammered after weeks of downtime, but it will also take time to get operations back on track.
And just because they’ll start mining again doesn’t mean the cash will start flowing. That’s because it can take up to six months of processing to produce a single troy ounce of platinum.
Whereas gold and silver are in demand by investors and for luxury goods like jewelry, platinum and the platinum group of metals (PGM, including ruthenium, rhodium, palladium, osmium, and iridium) are also used in a wide variety of industries.
The automotive industry uses platinum in catalytic converters and fuel cells. It’s also used in hard disks, anti-cancer drugs, fiber-optic cables, LCD screens, fiberglass, eyeglasses, fertilizers, paints, pacemakers, petroleum, glass, and electronic components. Jewelry and watches account for roughly 40% of all platinum demand.
With buyers losing faith in South Africa and remaining dubious of Russia, many are turning to Canada and other geopolitically stable countries in search of platinum.
Stillwater Mining Company (NYSE/SWC) is the only U.S. producer of palladium and platinum, and the only significant primary palladium producer in the world. Wellgreen Platinum Ltd. (TSX/NKL) is a Canadian exploration and development company. The company’s Wellgreen project (in the Yukon territory) is the third-largest undeveloped PGM resource outside South Africa or Russia.
For many buyers, aside from the sheer volume of platinum available, South Africa was desirable because the low wages kept prices down. That may no longer be the case. And even when the striking miners head back to work in South Africa, global attention will still be focused on safer sources of platinum, which includes those U.S.- and Canada-based companies listed above.
