(From left top) Simon Kendall, Patrick Mann, Mandi Dungwa. (From left bottom) Henk de Hoop, Suki Cooper.
Photo by: Creamer Media
JOHANNESBURG (miningweekly.com) – The new sweeter spot that platinum group metals (PGMs) has entered drew a multiplicity of mainly optimistic viewpoints from analysts attending the virtual PGM Industry Day.
Chaired by business development manager Rand Merchant Bank Henk de Hoop, the viewpoints were provided by Standard Chartered Bank executive director precious metals research Suki Cooper, Prudential portfolio manager Simon Kendall, Bank of America Europe, Middle East and Africa metals and mining research analyst Patrick Mann and Kagiso Asset Management portfolio manager Mandi Dungwa.
A view expressed by Cooper was that the platinum price rally seen most recently was driven by some longer-term investor positioning turning more favourable towards platinum.
“What’s been interesting for platinum and for a number of other commodities is that with investor positioning, we’ve actually seen prices test where their fundamental support comes into play,” said Cooper.
De Hoop: Suki, there’s been a surge in investment demand for platinum and the World Platinum Investment Council published its quarterly result and it's quite evident. What do you think it's based on because the fragile picture is still there but is a comparison with gold possible? Is it starting to become a safe haven or where is that investment demand suddenly coming from?
Cooper: The investment picture is fascinating across all commodities. If we were just to step back a couple of months, we’d see that there were perhaps only a couple of commodities that were up last year and are up this year as well, namely gold and palladium. But we’ve actually seen a recovery across the broader commodity space, and this is particularly interesting because we’ve seen somewhat of a disconnect between equity markets and the message that they are sending us. Their economic data is telling us that their recovery is much weaker, much more fragile, but equity markets seem to be suggesting that there is more optimism on the horizon. A lot of the interest we’ve seen in platinum, be it through futures positioning or through exchange traded fund (ETF) holdings, has been very much based on platinum continuing to be undervalued and there’s longer term value in the metal. In the near-term the outlook certainly does look fragile but longer term whether it’s substitution, whether its fuel cell development and whether it’s the fact that demand has perhaps reached the lowest point of the cycle, we are starting to see more optimism. The other aspect that’s quite interesting is that in terms of ETF flows, it hasn’t been just global interest. There are some differences between different regions. Say, for instance, in South Africa we continue to see some disinvestment but in other areas, across Europe and the Americas, you’re starting to see a stronger interest in platinum again. Much of this, we think, is very much strategic buying and longer-term interest in platinum, but we are a little bit cautious in the near term.
De Hoop: Patrick, your view on the hydrogen economy. There's obviously a lot more stimulus coming post Covid, by the looks of it. Europe, China and California have big programmes. Do you think it already time for some of the PGM stocks to position themselves for that, or is it way too early to even consider that to be an up-cycle?
Mann: We’ve had a lot of interest in hydrogen economy coming in over the course of this year and what’s interesting is that previously what was really holding back the mass adoption was the cost of producing hydrogen and in particular green hydrogen. As its broadening into more sectors, for example, using hydrogen to produce steel in a less carbon-intensive manner, as a way to restore renewable energy. What that does is to get to the economies of scale in the hydrogen economy and that would provide a cheap source of hydrogen and green hydrogen to drive fuel cell adoption. On the other side of that, PEM (polymer electrolyte membrane) electrolysers also use a lot of platinum and iridium. It’s early days so it’s probably too early to say buy platinum producers for that specific catalyst but definitely longer term, we do see it as potentially a big source of future demand. It also helps to offset a bit of the negatively around the loss of market share of diesel and passenger vehicles. So to say, yes, its reducing here but there is longer term application in a new, future greener economy where platinum has an important role to play. So, definitely, a lot of interest in hydrogen economy this year, but probably too early as a catalyst for the equities for now.
De Hoop: Simon, as a portfolio manager, what are you keeping an eye on as a key risk in the short medium term? If it is a bubble, or maybe it isn't a bubble, will it pop and is it a lack of cars sales recovery next year? Is the electric vehicle (EV) market share starting to creep up faster than everybody expects? Is it thrifting because of the very high prices or recycling kicking in again at a time when car recovery hasn’t come through? What is your worry?
Kendall: All of the real boom cycles in the past 20-odd even 30-odd years, and this one included, have been driven by the by-product metals of platinum rather than platinum itself, so palladium, rhodium, in fact, it’s even been nickel and ruthenium in the past. It is the price elasticity of these metals that really drive these cycles. We’re looking on the one hand at the capital cycles and aren’t seeing any significant growth in capital on the miners yet and on the other side the demand and the economy. In fact, the economy is actually weak and basically it's the volume of cars being sold and the auto industry that is the real driver. So, I think in the longer term we can look to thrifting and substitution but I think the cycle is actually still quite early and I think the emphasis is not so much on thrifting and substitution. The keynote we’re looking at is the volume of international combustion engine vehicles that are being sold.
De Hoop: Suki, if you look at what car manufacturers are facing, there’s a significant decline off a fixed-cost base. The import prices of palladium and rhodium compared with one or two year ago are enormously higher. But they have to spend it. They also need more of the metal than what they used previously but it’s coming at a time that the auto company balance sheets are under tremendous pressure. Do you think there could be a backlash building in that whole consumer base, which, in the case of palladium and rhodium, is 80% of your customers? Are you aware of them looking at significantly different catalyst technology? Are they simply locked into these metals and we just have to enjoy the run, or is there a serious risk building and a misjudgement of the amount of pain that these companies can take?
Cooper: In terms of the autocatalyst research and development, there are always projects looking at potential thrifting or substitution or the best catalyst combination between the PGM loadings. That’s continuing and that’s the view that most of the auto companies will continue to pursue. In the near term, there is much more focus on the broader picture in terms of auto sales and auto production rather than the current PGMs mix. There’s also greater focus, and this has been ongoing for a number of years, on electric vehicles, whether pure electric vehicles or hybrids, and that’s an ongoing dynamic as well. Going forward, we’re likely to see more focus on volatility across the sector, and price levels. There have been attempts to use other metals outside of PGMs and they haven’t been as successful as PGMs. This is one of the fantastic things about the PGMs, they’re very efficient and effective but I think in the longer term we’re perhaps going to see more of a change in terms of power trains rather than an imminent change of PGM loadings.
De Hoop: Mandi, the previous big boom for PGM metals, which lasted from 1999 to 2008, saw a similar basket price arise. We saw capital expansion. Everyone was trying to supply into the growth in demand. There were new entrants and strong share price growth, with dividends and special dividends. But it all ended up in tears in 2008 and in 2009 there was significant over capacity, misjudged demand growth and it was followed by a ten-year down cycle. Quite a few mines in the junior section ended up closing and some rights issues were required to stabilise balance sheets once again. What do you think the current PGM companies and the managements running these companies should do when you look at the amount of cash they are making now, and knowing what has happened in the past, and the expenditure that was probably spent in the wrong places? Where do you expect them to spend their money?
Dungwa: I do think for the prior ten years up to about 2018, we had capital allocation strategies that were basically maybe irrational, given what the price signals were telling some of the producers at the time, and we’ve seen a change completely to the other way. There is a significant increase in basket price at this stage but you haven’t seen a significant response on capital. We are seeing a more rational response to capital allocation and really the reason for that is that if you look out ten years for PGMs, which really if you were thinking about initiating a greenfield project in South Africa, it would take you about ten to 12 years to bring on that asset if it’s an underground conventional asset and you need to think about what the future for PGMs looks like ten years out. There is a change in the vehicle power train, there’s opportunity in the hydrogen economy, but it’s not particularly clear where we sit today what that means for PGMs. We think it’s positive. So what you’re seeing as an investor that’s been invested in this industry, through some of the tough moments in the cycle, what we expect as investors is that we would get returns on our investment. We are seeing that cash coming back to investors. We’re starting to see dividend declarations and capital return, but I think equally what’s important is ensuring that your asset base can survive through a very difficult cycle. We’ve just got out of a very difficult cycle. It seems the sun is shining on the PGMs industry now, but it is important to think ten, 15 years out for assets that are 20-, 30-year life assets, you want to ensure that when the sun isn’t shining, that your business can survive.
Kendall: What the mines need to be able to do is combine shallow projects with deep projects to provide some defensiveness. An aspect of flexibility should be engineered into their investment case and discipline exercised in investing in supply and investing in demand and returning cash to shareholders in the good times. I think there is a case for South African mining and within a South African portfolio, we need to be able to attract the foreign capital.
De Hoop: Patrick, you’ve obviously been marketing South African stocks to offshore. In the past, it was often difficult to even get an appointment with some of the foreign fund managers if you wanted to talk South African mining. Do you see a change happening or are they just flowing the momentum and have they gone as fast as they came in?
Mann: Part of it was around the jurisdiction risk. I think previously maybe a couple of Mineral Resources Ministers ago, I think the Mining Charter being up in the air and issues around constantly having to re-empower your assets had investors struggling to calculate what their likely return was going to be. More of whether it’s business friendly or business unfriendly. Investors need the certainty to say well if this is the situation, then I need to be able to calculate what prices I need or what return I need to get. I think a lot of that has been fixed. It obviously did do damage previously but now that we have a more business-friendly government and a Mineral Resources Minister that I think has worked in the industry and understands that these are long capital investments, I think that we have got a little bit more regulatory certainty around the Mining Charter, especially that your mining right is as is for the duration. Then, the second element has been around the prices. Offshore, a lot of people had almost written off the South African PGMs industry I think. I used to have these conversations where I’d phone somebody and say would you like to talk South Africa’s PGMs and they’d say no – over-supplied, double digit cost inflation, above CPI cost inflation, it’s just structurally unattractive. I think they sat out the first run up, now they’ve seen, okay, there are deficits. It looks like fundamentally it’s in a better position. So definitely better interest both from regulatory, pricing and metals fundamentals points of view. Definitely much better than it has been.
De Hoop: That’s encouraging. If you have to buy the metal or the sector, where would you be yourself?
Cooper: Given that I don’t look at the equity space, for me the allocation for me would be across the precious metals and the PGMs still offer good value, given that the fundamentals still look relatively robust for the complex as a whole, when you’re looking at platinum, palladium and rhodium. There is more upside risk for palladium prices even that they are closing in on all-time highs. For platinum in particular, we think there’s more value longer term, not perhaps in the next year or so, but we still think there’s more value in the longer term. Rhodium prices are still very much elevated and at risk of substitution particularly from palladium but that generally keeps the complex as a whole very well bid in terms of the demand profile. The concerns for the sector has a whole stem both from the demand side and the supply side. But as a commodities analyst, I’d say it was still this value underlying the metals themselves particularly as investors still are concerned about some of the supply side developments.