Canaccord revises PGM forecast downward

In a November research report, Canaccord’s London-based gold analyst, Roger Chaplin, lowers his price projections for platinum group metals (PGMs) and their producers.

Building on PGM supply-and-demand figures gleaned from Johnson Matthey’s recently released Platinum 2001 — Interim Review, Chaplin states unequivocally that “the sparkling performance of the PGMs, particularly palladium, over the past couple of years appears to have come to a screeching halt.”

He sees three major trends taking shape in the next five years: the major Western mining companies are all increasing production of PGMs; the levels of PGM exports from Russia should fall sharply; and there will be more flexibility in the choice between using platinum or palladium, particularly in autocatalysts.

According to Johnson Matthey, demand for PGMs in 2001 has dropped by 14% after an exceptional run from 1990 to 2000 that saw average growth rates of 7.5% per year. A good part of this year’s drop is attributed to users dipping into stockpiles built up as PGM prices rose over the past four years.

Next year, Canaccord is looking for a recovery in PGM demand as these stockpiles dwindle, and during the period 2002-2006, the brokers are estimating a more moderate, but nonetheless impressive, average growth in demand of 4.1% per year.

To match the expected new demand, the major Western PGM producers are all planning significant hikes in production over the next five years. Total Western PGM production is expected to increase to 12.5 million oz. in 2006 from 7.3 million oz. in 2000.

Chaplin emphasizes that Russia, the world’s largest PGM producer, has been exporting far more than its annual production of PGMs, particularly palladium, since 1993. He reckons that Russia’s remaining stockpiles are low, and there is less financial pressure to sell as oil revenues take a predominant place in the country’s balance of payments.

Overall, Chaplin expects Russian exports of PGMs to fall to around mine-production levels, less any internal use, from 2003-04 onwards.

As Canaccord now expects a slower growth rate for PGM demand, the company has lowered its long-term average price forecasts for PGMs. For 2002, Canaccord forecasts prices of US$425 per oz. for platinum and US$325 per oz. for palladium, and for 2003-2006, the forecast is US$450 and US$350 per oz., respectively (previously, its long-term forecast was US$500 per oz. for platinum and US$500 per oz. for palladium).

Canaccord believes platinum will have a total surplus in supply of about 900,000 oz. over the next five years, an amount that will not fully make up for the 1.5-million-oz. shortfall seen over the past three years.

Palladium is expected to have a surplus of just 500,000 oz. over the next five years, following shortfalls of 2.3 million oz. in 1997-2001. Still, Chaplin cautions that the overall balance of the palladium market will be determined by the level of Russian exports.

Canaccord has accordingly revised downward its “fair-values” assigned to the major PGM producers and modified its recommendations: Johannesburg-listed Impala Platinum (Implats) is Canaccord’s top pick and is rated a “buy”; Anglo American Platinum (AAPTY-O) and London-listed Lonmin are “market performs”; and Stillwater Mining (SWC-N) is deemed a “sell.”

Chaplin describes Amplats as being the “leading pure producer of PGMs,” with production in 2000 of 1.9 million oz. platinum and almost 1 million oz. palladium. Expansion plans are in place to grow to 3.5 million oz. platinum per year by 2006.

The company’s operations are described as being “highly profitable,” with long-term cash costs, on a pro rata basis, of just over US$200 per oz. platinum.

Implats ranks as the number-two pure PGM producer, with production this year estimated at 1.3 million oz. platinum and 700,000 oz. palladium. Cash costs are around US$200 per oz., also making Impala highly profitable.

By boosting output at its own mines, engaging in joint ventures and providing toll refining, Implats expects to see its total production of platinum grow to 2 million oz. in fiscal 2006 from 1.3 million oz. in fiscal 2001.

Chaplin assigns Implats a “fair value” of R522, or US$54.50 per share — 29% above the share price at the time of his writing. He adds that even with lower PGM prices in 2003-04, Implats’ price-to-earnings ratio is only 6.5 times and its yield is more than 7%.

Lonmin is the Western World’s number-three PGM producer through its 73%-owned Lonplats. The subsidiary produced 660,000 oz. platinum and 290,000 oz. palladium in fiscal 2000, at cash costs of about US$180 per oz. platinum.

Lonplats plans to increase production by 40%, and with the addition of the Pandora joint venture with Amplats, the subsidiary’s total attributable production should swell to 1 million oz. by 2006.

Chaplin notes that Lonmin may be subject to corporate developments for several reasons: Implats holds the other 27% of Lonplats, though the European Union has already blocked a merger attempt; Lonmin’s 32% stake in Ashanti Goldfields (asl-n) is up for sale; and the company still holds about US$300 million in cash, even after US$150 million worth of share buybacks.

Turning to the Stillwater operation in Montana, Chaplin foresees a rocky financial road ahead as the company gets doubly hit by lower palladium prices and a slimmed-down production plan of 700,000 oz. PGM per year instead of the originally planned 1 million oz.

Canaccord’s cash flow model looks for Stillwater to generate a loss of US13 per share in 2002, assuming the company’s financing difficulties are overcome.

Chaplin states that if the revised mining plan works, earnings could rise to US40-50 per share in 2003-05 but that, even so, cash flow will only be sufficient to cover ongoing capital expenditures and interest payments, with nothing left for debt repayments.

“The revised production plan is achievable, but the cash flow will not repay debt and therefore leaves little or nothing for shareholders,” writes Chaplin.

Canaccord’s “fair value” for Stillwater is now just US$4.75 per share, roughly one-third its present value.

Canada’s North American Palladium was not rated, but the stock has taken a dive in recent months and now trades below $8 per share, off from $15 in June.