PGM outlook good for rest of decade: Canaccord

In a recent report, Canaccord Capital mining analyst Roger Chaplin sits back and takes a look at the long-term prospects for platinum group metals and the major PGM mining stocks.

He describes the PGM market as being affected simultaneously by three factors: falling Russian output; rising Western production; and evolving downstream PGM demand in autocatalysts and jewelry.

Chaplin believes that the decline in Russia’s PGM exports, particularly for palladium, will arise from the gradual depletion of the country’s government-held PGM stockpile, which was built up during the 1970s and 1980s.

He estimates that, between 1980 and 1993, the Russian stockpile grew by 24 million oz. palladium, 2 million oz. platinum and 1 million oz. rhodium.

While acknowledging that the absolute level of the Russian stockpile is unknown to outsiders, Chaplin guesses that the level in 1979 was “probably not very large,” since the biggest of Noril’sk’s five currently operating mines only started up in 1975 and the latest one began producing in the 1980s.

Then, between 1993 and 2001, the stockpile was drawn down by 17.6 million oz. palladium, 2 million oz. platinum and 200,000 oz. rhodium. The drawdown allowed Russia’s palladium exports to average 5.2 million oz. per year from 1995 to 2000, or about 2.6 million oz. per year above available production. (The importance of these exports levels cannot be understated, as they accounted for 67% of Western supply during that period.)

Today, Chaplin estimates that Russia’s remaining PGM stockpile stands at 10 million oz. palladium, 3 million oz. platinum, and under 1 million oz. rhodium. Furthermore, he believes that the Russian government does not want to run the stockpiles down to zero but, instead, wants to keep strategic holdings that will strengthen its marketing position.

“What is clear is that the recent levels of Russian exports, particularly palladium, cannot be maintained for much longer,” writes Chaplin. “We expect that exports will fall to around the level of production in the future.”

This implies that average palladium exports from Russia will be 3.7 million oz. per year during the next five years, a fall of some 1.5 million oz. per year from recent levels.

Still, Russia remains the world’s largest producer of PGMs, chiefly as a byproduct from Noril’sk Nickel, which produced an estimated 3.1 million oz. palladium and 800,000 oz. platinum in 2001. And while production is due to flatten out this year, Noril’sk is positioned to increase production by 25-30% over the 2000-2006 period.

Elsewhere in Russia, alluvial miners in the Far East region produce an additional 250,000 oz. platinum each year.

As Russia’s dominance of the PGM market begins to wane, Western mine production is poised to achieve explosive growth over the next few years. Chaplin notes that all major Western miners have announced plans to increase production in the 2000-2006 period, with platinum production set to rise 65%, to 6.9 million oz. from 4.2 million oz., and palladium output expected to rocket 82%, to 4.7 million oz. from 2.6 million oz.

Thus, combined Russian and Western PGM output is due to soar 24%, to 17.2 million oz. in 2006 from 13.9 million oz. in 2000.

Chaplin summarizes the expansion plans of the four dominant Western PGM miners:

n Anglo American Platinum (AAPTY-O) — This Anglo American subsidiary, the world’s largest pure PGM producer, is aiming to boost platinum production 75% between 2000 and 2006, to 3.5 million oz. from 2 million oz., with higher output derived from several new mines and expansions of existing mines, all of which are in South Africa.

Of note, Amplats’s palladium output should double over the period, owing to the fact that more ore will be sourced from the palladium-rich, but lower-grade, UG-2 reef rather than from the Merensky reef.

n Impala Platinum (IMPAY-O) — By 2006, Implats expects to have expanded its platinum production by 70%, to more than 2 million oz., by developing two new mines on its own ground and as a result of having entered into several joint ventures with juniors who will mine PGM ore and bring it to Implats for refining.

n Lonmin (LMI-L) — The London-based major is ratcheting up platinum at its existing mines and is moving forward with its Pandora project in South Africa with 50-50 joint-venture partner Amplats. Including its take from Pandora, Lonmin is braced to increase its platinum production above 1 million oz. by 2008, or 60% above 1999 levels.

n Stillwater Mining (SWC-N) — The Montana PGM miner has expanded production from its Stillwater mine and has begun production from the new, nearby East Boulder mine. While PGM output is well below a previously planned rate of 1 million oz. per year, the company is still on track to produce 750,000 oz. PGM in 2003, or 80% above 1999 levels.

(Chaplin does not discuss Canada’s North American Palladium [PDL-T], which has had a strong first quarter at its Lac des les open-pit palladium-platinum mine in Ontario, with production reaching an annualized rate of 216,000 oz. palladium. Several hundred thousand ounces of PGMs are also produced by Inco and Falconbridge as a byproduct of nickel mining in the Sudbury camp.)

Turning to the other side of the PGM equation, Chaplin describes how demand actually fell in 2001 for virtually all applications in response to dramatically higher PGM prices in 2000 and early 2001. (For 2000 and 2001, respectively, platinum averaged US$545 and US$529 per oz., and palladium averaged US$682 and US$603 per oz., spiking above US$1,000 per oz. in early 2001.)

Although autocatalysts continue to represent more than 50% of all PGM demand, overall demand for PGMs in autocatalysts fell in 2001. However, this overall decline reflects both higher demand for platinum and much lower demand for palladium — a dichotomy that arose from the growing popularity in Europe of diesel-powered cars, which produce low-temperature exhaust gas and burn with a higher fuel-air ratio, an operating environment particularly suited to platinum-loaded autocatalysts, as opposed to palladium-loaded ones, which are best suited for non-diesel engines.

Meanwhile, PGM demand dropped in dentistry, with gold serving as a substitution for palladium, and in the jewelry sector, owing to a sinking Japanese economy and the resulting lower purchases of luxury goods. The dropoff in demand was sharpest in the electronics sector, where manufacturers switched to base metals or delved into their own PGM stockpiles.

Turnaround

However, Chaplin believes that last year’s fall in PGM prices will lead to a turnaround in demand for the metals, particularly palladium. He writes that “total demand for PGMs in autocatalysts is expected to continue to grow, with more vehicles being fitted with autocatalysts and with tighter emissions-control legislation making higher loadings of PGMs likely.”

In fact, he expects PGM demand in autocatalysts to rise 5.1% per year for the 2000-06 period, even taking into account the 2001 decline.

For the PGM market as a whole, Chaplin writes that “we look for long-term prices for the two major PGMs to be somewhat below the current spot market but above the average prices seen through most of the 1990s.”

For 2002, Chaplin sees platinum and palladium averaging US$501 and US$354 per oz., respectively. For the 2003-06 period, he is calling for platinum to average US$475 per oz. and palladium to bring up the rear at US$325 per oz.

Writing at the end of May, Chaplin notes that the share prices of all the South African PGM producers have performed strongly during the past six months, helped by a recovery in PGM prices and the weaker rand.

Still, he cautions that “we now consider that most PGM producers’ share prices may be due for a correction,” since most of the current share valuations are based on PGM prices which he considers unsustainable.

With the rand gaining ground and an expectation that PGM prices will fall from their current levels, Canaccord’s only “buy” recommen
dation is Impala Platinum, which Chaplin calculates as having a “fair value” of US$67 per share.

On Chaplin’s “sell” list are Amplats (fair value of US$41.25), Lonmin (f.v. of US$18.40) and Stillwater (f.v. of US$10.38). He deems Stillwater as having “higher risk” than the other major producers, owing to higher production costs.