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Platinum group metals overview. Introduction and background. The South African platinum industry has undergone some major re-organisation over the past few years
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Introduction and background • The South African platinum industry has undergone some major re-organisation over the past few years • The 2008 and 2010 Global Financial Crises have highlighted white metals vulnerability to ETF liquidations while the end users displayed a similar tendency to dispose of the metal stocks they saw no immediate value in • However, the recovery in vehicle sales has surprised many commentators with sales back at pre 2008 levels • Studies on further global growth, suggests that demand for PGM metals should increase at approximately 2 – 3% per annum if one takes into account, India and China, all “green effects” and the potential for substitution • The industry has long been concentrated in few hands and the information relating to individual company costs and shaft performances was sadly lacking and in our opinion saw much overestimation of current and future supplies “If we want to drive and breathe we are going to need platinum” (Michael R Jones CEO PTM September 2011) Crisis (?)=Opportunity
JM interim review -the fundamentals remain • Global supplies of platinum to increase by 6% to 6.4 m ounces this year • Supplies ex South Africa will rise by a modest 3% for the full year to 4.78 m ounces if you believe management • Platinum demand in auto catalysts is set to increase by 3% to 3.16 m ounces in 2011. • Demand will increase in North America as production of light duty diesel trucks picks up. • Purchasing of platinum for light duty vehicles in Europe and Japan will decline. • In North America and Europe, another strong year is forecast for heavy duty truck production, which will benefit platinum demand. • Jewellery Demand is forecast to be marginally higher than in 2010 at 2.47 m ounces. • In China, we predict that gross platinum jewellery demand will rise by a modest 2% to 1.69 m ounces. • We expect demand to soften in Europe due to higher prices and a move towards lower weights of individual pieces. • Gross industrial demand is predicted to increase to a new record high of 1.96 m ounces. • As platinum melting tanks are installed for LCD glass manufacturing, demand will grow by 13% to 435,000 oz in the glass sector. • Construction of new refining capacity in the petroleum industry will lift platinum demand by 24% to 210,000 oz. • Gross demand is forecast to rise by 2% to 8.08 m ounces in 2011, close to pre-recession levels. • However, continued strong demand will be more than matched by a rise in supplies and higher levels of recycling, therefore we predict that the platinum market will move to a small surplus of 195,000 oz this year.
Potential Production est. Investec June 2007 – interesting, it never happened!! WRONG, very wrong…so how to balance now? Source: Investec July 2007 In fact most are no longer around as serious projects
Industry Comments • ETF is swing producer • Very tight cost curves • Capex increases way above inflation • Very limited replacement ounces and no real new production • Labour issues, fewer concerns • No cashflow, no project development • Emission legislation tightening • Consensus price $1900/oz - $2350/oz • What if Zimbabwe mines grab happens?
Press headlines • Amplats's cost conundrum continues • Implats weighs Leeuwkop decision • Lonmin thinks twice about growth • ZIM mines grab uncertainty pressure supplies • Eastplats posts major output drop • Angloplats defers major projects
The platinum price • Positives • The Euro zone debt crisis continues to affect the PGM market dragging down the Euro and prompting a flight to precious metal commodities with precious metal prices incredibly resilient • Platinum and palladium continue to benefit from strong demand and inflationary pressure in China as masses enter middle class • Citi Bank – has observed net inflows for both platinum and palladium, potentially due to investors placing more value on an improved outlook for their industrial attributes • RBC declares shortages and big price hikes (Aug2011 research) • Big problems in the South African supply base continue to develop • Negatives • Whether a junior or a major, there is a 4 - 7 year lead time to bring new projects into production and up to steady state • This implies that even if all the new projects actually came into production, it would still take 5 to 10 years to materially impact on prices • ETF volatility will exacerbate price fluctuation in times of uncertainty may assist as swing supplier PGM market is lining up for an exceptional period
Reaching highs of the recent past Incentive price for current new projects not yet achieved
Platinum ETF Significant swing supplier potential
Power – the big question • The current South African Electricity Supply/Demand situation is very tight • The latest forecasts indicate a worsening situation starting in 2011 and proceeding through to 2016 • The central assumption is that the economy will return to a long-run average growth rate of just over 4% per annum from 2012 • expected shortfall, before doing anything to try and mitigate the impact, of some 10GWh by 2013 • Current capacity of some 42GWh, which puts this potential shortfall in stark context
The Cost of new and existing production • Labour and power cost increases are expected to add a minimum annual cost increase for the industry of approximately 10% • Assuming a 10% jump in cost per ounce in 2011, it can be expected that over 40% of production drops back into negative cash flow • Costs are averaging US$1000/oz with capex of US$300/oz. No returns at prices of the day? • Cash cost continues to increase… reducing the available free cash required for capital investment • Margins ever lower (on static production bases) REAL METAL PRICE BASKET – THE INDUSTRY NEEDS 30% HIGHER PRICES TO BE ABLE TO INVEST IN FUTURE OUTPUT
Company analysis • Angloplats • Deferred growth • 3 key projects suspended • Costs above spot prices • Implats • No real exapnsion outside of Zim • Big shafts reaching completion all deeper ones • Stable introduction outlook if Zim holds • Lonmin • All over the place • Sale of Messina (R1bn?) • Akanani development....when? • Smelter issues all the time • Northam • In growth mode on Eastern Limb • Labour disputes • Big capex needed • Sale of Booysendal? • Shareholder issues? • Aquarius • In limited expansion phase/mode • Acquiring smaller key near surface projects • Long term key Everest expansion with Booysendal
So whats the angle? • Despair and concern all around • Projects of replacement ounces being delayed • Costs pressures forcing reorganisation and cessation of older production • Margin squeeze continues with power, wages and all inputs rising • Zimbabwe a real concern as a mines grab will cause supply disruptions • Capital of new projects vital • Seek out correct funding partners and start developing new mines now
Value Curve Progression $187.7/oz $7.1/oz Juniors activity Majors activity Resources Reserves Capex Production Exploration Pre-development Valuation BFS Platinum Australia Proven Measured Wesizwe Indicated Pre-Feasibility Study Probable Primary zone for acquisitions and partnerships Discovery Operations Jubilee Inferred Bauba Current position on value curve Pre-inferred Time, exploration and development spend Unit-based valuation (Yardstick Method) DCF, reserve/resource and cash flow based valuation Sources of finance Private equity funds, hedge funds, general public Institutions, general public, banks Private equity funds, hedge funds
Platinum market supply • Production from the majors is in decline. Any new production is only likely to stem this decline and as a result there is limited scope for growth in production • Focus is on the deeper areas • Costs and capex will increase significantly as will lead times to new production • Majors and up-and-coming juniors have focused largely on the Western limb • Shallower easier to reach Merensky Reef (“MR”) has been fully exploited • Focus has now shifted to UG2 which has triggered an increase in blend of feedstock with MR dropping from 68% to only 40% over the period from 2000 to 2009 • The current South African electricity supply/demand situation is very tight. The latest forecasts indicate a worsening situation starting in 2011 and proceeding through to 2016 • Labour and power cost increases are expected to add a minimum annual cost increase for the industry of approximately 10% and thus it can be expected that over 40% of production drops back into negative cash flow • Total costs are averaging US$1,100/oz with capex of US$300/oz. No returns at prices of the day? • Cash cost continues to increase… reducing the available free cash required for capital investment • Margins ever lower (on static production bases) • All majors have declining profiles while Angloplats have delayed capex for four new generation shafts
Asset valuations The relative underperformance of the juniors coupled with the outlook for consumption, the lack of replacement capacity and growth in developing nations suggests the best targets are the juniors, which on a value basis have significantly underperformed the seniors ( which have performed poorly themselves over four years
The big five salient facts *2011 All have issues, big funding issues and catch up too
Disclaimer The information contained in this document has been compiled from publicly available sources, and has not been independently verified. Accordingly, no representation or warranty express or implied, is being made or given as to the accuracy or completeness of the information or opinions and no responsibility is accepted for any such information or opinions. The information contained in this document is subject to completion, revision, verification and amendment. This presentation is confidential and may not be disclosed to any third party without the written consent of Qinisele Resources (Pty) Limited.
