JOHANNESBURG – Investing in physical platinum through an exchange-traded fund (ETF) could be a better medium-term investment than buying shares in embattled platinum mining companies.
Following an announcement by local platinum producers Impala Platinum (Implats), Anglo American Platinum (Amplats) and Lonmin that they have reached an “in principle” undertaking with the Association of Mineworkers and Construction Union (Amcu), hopes have been high that the end of the five-month strike could be in sight.
The share prices of all three companies have been under pressure over a period of almost five years (see table below). More recently, notably Amplats has performed reasonably well considering the movement in its share price over the past six months, but analysts are cautious over the medium-term outlook for these platinum miners.
Close on 22 June 2009
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Sources: ProfileData, Bloomberg.com
Adrian Williams, equity analyst at Avior Research, says the stocks are “pretty close to full value”.
Amplats has weathered the storm best, largely because of the more diversified nature of the business.
Williams says they expect physical stocks of platinum and palladium to head into a significant deficit for at least the next three to five years.
The last time a strong double deficit (for both metals) existed was in the late nineties and a real run on the metal prices occurred, he says.
They expect to see something similar towards the end of the year or into 2015.
“We actually see better investment value from companies who are already in a position to take advantage of the metal price when it does rebound.”
Companies like Northam Platinum and Royal Bafokeng Platinum who are producing right now will be best poised to take advantage of this expected run in the metal price, Williams says.
Rob Spanjaard, director at REZCO Asset Management, says they also prefer Royal Bafokeng Platinum. On a three-year forward view, with expansion coming through, the company is cheap and mines good quality platinum at a much lower cost. It is also more mechanised.
Spanjaard says their concern is that if the platinum miners struggle to control costs, the platinum price could go up quite a bit, without companies reaping the benefits. This also happened in the gold mining sector.
However, even if miners return to work shortly it will take years to really get good labour and company relations going, he says.
“It is going to be tough for the mines.”
Going forward mines are also likely to become more mechanised, he says.
Invest in the metals instead?
Williams says they expect the dollar price of platinum to be testing USD1 540 with palladium testing USD840 by the end of the year. (At the time of writing platinum was trading at USD1 426 and palladium at USD815.)
He says they also expect the rand to depreciate further against the dollar, which could translate to fairly decent returns for the metals in rand terms. They expect a compound annual growth rate of 13% for platinum and 15% for palladium over the next five years.
Williams says the ETFs – Absa’s or Standard Bank’s – both offer fairly good exposure into the metal for most retail investors and probably without the risk of investing in the big three platinum producers.
Although Amcu might return to work shortly, it does not necessarily mean that other unions will also be on board.
Williams says the large platinum producers are talking about a three-month ramp-up to full production, which is “really optimistic”. Four months is probably more realistic and the ramp-up will be a very expensive exercise.
“The platinum producers aren’t out of the woods yet. I think if anything we are going to see their balance sheets get hammered a bit more before they actually start making cash again.”
Williams says at least for the medium term they favour exposure to the metal over exposure to the big three producers.
Spanjaard says although it is difficult to pinpoint when the expected surge in price would occur, he too believes that retail investors could consider adding platinum to their portfolio if they have a five-year view.
Investing in platinum through ETFs also has the benefit that it is not really a correlating asset and will have a low correlation to other assets in an investment portfolio, he says.
But retail investors should be sensible and only put around 5% of their holdings in something like platinum, he notes.