Platinum Group Metals Staging a Comeback!

Both platinum and palladium production seem to be experiencing an ominous effect from the number, "1%," a sign that should give investors hope, while unfortunately taking it away from producers.

Yesterday saw some decent action for a couple of Platinum Group Metals (PGMs). Palladium rose a buck to $709 an ounce, while platinum gained $3 to $1,650 bringing it to half of its prior ~$200 discount to gold. With platinum closing gold's lead over it to within $100, is it time to purchase some? I know I am...

Fundamentally, I believe that supply problems are supporting the PGMs because markets have MUCH of their attention placed on the South African mining industry - an area where platinum mining news somewhat strongly correlates with platinum prices. Supply there is being threatened by quite a number of things.

Due to prior on-site accidents and other reasons, the South African Department of Mineral Resources issued a 'safety-oriented' decree known as "Section 54," which has already caused work stoppages that aren't expected to normalize until mid this year. Platinum production in South Africa has already suffered and some analysts are expecting a flat, non-expanding platinum output this year.

On the other side of the work fence, labor issues are escalating. A strike at the Rustenburg mine, owned by Impala Platinum (world's 2nd largest platinum producer), began on January 20th and estimates show that the mine is losing a production rate of about 3,000 ounces a day. As of today, that means a grand total loss of about 66,000 ounces in output so far - this would ALREADY equal about 1% of global platinum production. An amicable conclusion to this strike does not look likely with Impala Platinum having recently fired more than 17,000 workers for what the company calls an “illegal strike.” Almost half of the workforce has been affected by the strike and things are likely to get worse due to a new union, the AMCU, already aggressively recruiting new members, as well as the Section 54 stoppages.

Current politics are also showing negative signs as both South Africa and Zimbabwe (where platinum mining is outperforming South Africa's) have experienced increased royalty fees for mining operations and the Mugabe government in Zimbabwe is currently attempting to force platinum producers to fork over 51% of the mines back to the local population. Finally, both inflation and appreciation of the South African's currency, the rand (up 17% since 2010), are not helping profitability for mining companies at all.

PGM producer, Lonmin, further affirmed platinum supply threats when its CEO, Ian Farmer, attributed such factors as “government safety stoppages, [labor] management difficulties, skills shortages, transformation and equity ownership challenges, rising community expectations, resource nationalism and high electricity prices” to making mining operations in South Africa increasingly difficult.

Probably the ONLY teeny tiny bit of good news out of all this muck is that recent reports are showing South Africa continues to fight against mine nationalization despite strong support for it from various sections of the African National Congress.

As for palladium, one of its major producers, Norilsk Nickel (Russia's largest mining company and producer of approximately 40% of the WORLD's palladium), stated that its output might drop by as much as 3% this year. A 3% drop for a company that puts out about 40% of the world's palladium mathematically signifies over a 1% drop globally - this could be significant enough to create a supply deficit over the next two years. Further, such a daunting overall statement in long term supplies can act as a constant overall bullish push for palladium over these next two years. Good news for palladium investors I must admit. On Tuesday, the company also stated that "PGMs have investment potential comparable or even greater than gold." A pretty bold statement, but with a rise of 16% so far this year, platinum may actually have a shot at out-pacing gold.

All in all, again I have to reiterate that while these recent events are rather unfortunate for producers of palladium and platinum (and I give my sincerest condolences to the families of any miner on strike), they should come as no surprise to PGM investors forecasting prices as leaning towards bullish.

Be safe, be wealthy and above all else, be happy.

- Mitch

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