Palladium and Rhodium on Fire, is Platinum Next?

by: Clint Siegner*

Platinum was once the most precious of metals. For decades, it traded at a premium to gold. The other platinum group metals – palladium and rhodium – barely registered on investors’ radar screens.

Platinum lost its crown to gold in 2015. It was overtaken by the other PGM metals in recent weeks.

Given that platinum, palladium, and rhodium demand is largely driven by automobile manufacturing and the production of catalytic converters, one of these things is likely true; platinum is currently undervalued, or the other two have gotten ahead of themselves.

1 Oz Rhodium Bars

1 oz rhodium bars run about $1,455 each.

Which one is the correct assessment will depend on whether the current optimism for economic growth in both developed economies and emerging markets has been well placed. Either way, investors inclined to speculate on the PGM metals have some interesting market action upon which to trade.

Platinum does look remarkably underappreciated. It is hard to imagine it trading at a significant discount for too long.

Auto makers should bid for whichever metal offers the lowest cost as all three are somewhat interchangeable.

Platinum offers the largest and most liquid market of the group. It is widely available in a variety of coins and bars. For investors, platinum’s liquidity is a consideration.

However, momentum traders may want to take a look at rhodium. It is traded in relatively tiny quantities and has a history of making big moves. Rhodium saw a top near $4,000 in the early 1990s and it made a run north of $2,000 about 10 years later. It peaked at $10,000 per ounce in 2008.

Although rhodium has doubled in the past year, it currently trades just over $1,300.

The metal’s pattern of having a sharp spike roughly once every 10 years is interesting. It is possible we are in the middle of another of those massive moves now.

New York Price for Rhodium Chart

Rhodium is available primarily in 1 ounce bars. While the quantity of rhodium traded is by far the lowest among precious metals, market liquidity for that metal has seen a boost since 2008. There are now a couple of ETFs focused on the metal. Those ETFs may in fact be driving a good portion of the recent demand.

Editor’s note:  The Platinum Group Metal  pricing patterns are primarily based on supply/demand fundamentals, not on rarity of the metals in the earth’s crust.  Rhodium and palladium are running high as they are both in a substantial supply deficit situation while platinum supply and demand are much closer balanced.  Palladium, with a little rhodium, is currently the preferred catalyst for gasoline-powered internal combustion engine emission control catalytic converters, having largely succeeded platinum in this usage, but this was due to palladium being substantially less costly than platinum – that is until palladium’s (and rhodium’s) recent run.  The big question now is: is platinum, being the cheaper metal, going to make a dent in palladium’s current predominance as the catalytic metal of choice for gasoline powered engines.  It is already the dominant catalytic metal for diesel exhaust emission control.  

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Political Risk Building into the Gold Market? The Holmes SWOT

By Frank Holmes – CEO and Chief Investment Officer, US Global Investors

Strengths

  • The best performing precious metal for the week was palladium, up 5.49 percent.  Citigroup forecast that platinum could see a deficit of 172,000 ounces in 2016, but palladium’s deficit could be short by 847,000 ounces, thus the group is more bullish on the later.
  • Esturo Honda, who according to Bloomberg News has emerged as a matchmaker for Prime Minister Shinzo Abe in finding foreign economic experts to offer policy guidance, is opening his ears to Ben Bernanke.  In April, Bernanke noted that helicopter money, in which “the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them,” could work as the strongest tool to overcome deflation, says Honda.
  • Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, says there is political risk building into the gold market, including the Italian referendum and U.S., French and German elections. Blanch adds that in the past, gold used to be driven more by the U.S. dollar and commodity market movements, but “in this day and age, it’s a new world.” He also mentions that one-third of government bonds are yielding negative. The chart below shows that $9.2 trillion of sovereign bonds are trading with negative yields.

swot4
Weaknesses

  • The worst performing precious metal for the week was silver, down -2.97 percent.  With silver generally more volatile than gold, a strong rally in stocks, up 10 of the last 11 days and with new record highs, had investors chasing returns in the broader market.
  • Gold traders and analysts are bearish for the first time in four weeks, reports Bloomberg. The precious metal headed for its first back-to-back weekly decline since May, with gains in equity markets and the dollar hurting prices. David Meger, director of metals trading at High Ridge Futures in Chicago, says that the dollar’s strength continues to pressure most commodities, gold in particular. “Safe-haven demand has been diminishing, obviously with equity markets moving to new record highs,” Meger said.
  • A group of armed men stormed one of Agnico Eagle’s mines in northern Mexico early Tuesday morning, reports the Canadian mining company, injuring a security guard and making off with a haul of gold and silver. Last April a similar situation occurred when armed men entered McEwen Mining’s El Gallo 1 mine in northern Mexico, reports Reuters, even though thefts within mines are “relatively rare in Mexico.”

Opportunities

  • The World Gold Council and the Accounting and Auditing Organization for Islamic Financial Institutions are drafting new standards for investing in gold to comply with Sharia law, reports an Energy and Capital article. If the proposals for the changes (expected in the fourth quarter) are accepted, a flood of new investors could help send gold prices soaring, the article continues. A similar situation took gold prices to $1,900 in 2011 when surging demand came from China following the government’s urge for its citizens to own the yellow metal.
  • With the U.S. presidential election seen as the next big catalyst, Bill Beament of Northern Star Resources believes that gold’s rally is set to endure, reports Bloomberg. He says the overall trend is up and that “the U.S. vote will have more of an impact on bullion than the U.K. referendum.” The IMF also scrapped its forecast for a pickup in global growth, the article continues, yet another positive for gold.
  • Commerzbank raised its year-end gold estimate by $100, reports Bloomberg, to $1,450 an ounce. Similarly, DBS Group Holdings says that gold is in a major bull market and could surge past $1,500 an ounce as “low interest rates buoy demand and the U.S. presidential election looms.” The long-term gold price has been adjusted higher at Numis Securities as well, up to $1,400 an ounce from $1,350 an ounce.  While it’s good to see the street starting to take their price forecast higher for gold, investors should remain disciplined as the late summer can be a seasonally weak period for prices and many of the expected price targets being raised are capitulation moves to higher price levels.

Threats

  • According to data compiled by Bloomberg, investors pulled $793 million out of SPDR Gold Shares last week, the most since November. As Citigroup’s U.S. Economic Surprise Index rose to its highest since January 2015 (a sign of an improving economic outlook), demand for ETFs backed by gold has diminished some. Holdings in gold-backed ETFs around the world fell 3.9 metric tons last week, reports Bloomberg.
  • Sovereign gold bonds issued in India were trading at a 27-percent premium over the fixed price when the bonds were first issued in November, reports LiveMint. Prices of physical gold have risen 23 percent during the same period. According to the article, “Investors get a fixed interest rate of 2.75 percent per annum on these bonds over and above the capital gains that may accrue if the price of gold rises in the spot market.” The gold bonds are part of the government’s gold monetization efforts aimed to “wean the public off physical gold.”
  •  Will gold miners maintain their capital discipline? Bloomberg reports that as the price of gold rises to its best first half of the year in nearly four decades, earnings reports could indicate that miners are preparing to ease in terms of spending. “Historically there’s been a very high correlation, almost a one-to-one correlation, between costs and the gold price, implying that with higher gold prices you will likely see costs rise at the same time,” Josh Wolfson of Dundee Capital Markets said. Wolfson added that a majority of miners structured spending based on the assumption that gold will trade between $1,100 and $1,150 an ounce.  Let’s hope the miners learned something over the prior three painful years of falling gold prices.

Gold soars to 2-year high: The Holmes Gold SWOT

By Frank Holmes, CEO & Chief Investment Officer, U.S. Global Investors

Strengths
  • The best performing precious metal for the week was palladium, rising 2.24 percent. Palladium surged early in the week, doing just the opposite of gold, when polls indicated British voters were more likely to vote “remain” in the Brexit referendum, thus economic uncertainty would be maintained.
  • However, the palladium price dropped on Friday as gold soared to a two-year high following the U.K.’s vote to exit the European Union, boosting haven demand. According to Bloomberg, U.K. voters backed leaving the EU by 52 percent to 48 percent, causing turmoil across markets and prompting Prime Minister David Cameron to resign.
  • Gold dealers in London say they have never seen anything like it, describing the rush from consumers to sell gold, and many more to buy the precious metal following the U.K.’s vote to exit the EU. “We’re doing 10 times the business we normally do,” said Michael Cooper, commercial director of ATS Bullion Ltd. BullionVault saw its busiest day ever on Friday, reports Bloomberg.
 Weaknesses
  • Despite the surge in gold prices on Friday following the U.K. vote, it was the worst performing precious metal for the week, although still up 1.43 percent. Gold backed ETFs have seen a surge in assets this year as investors have started to discount that political leaders at the central banks around the world have lost their mojo, as you can see in the chart below.

HGS276

  • Gold experienced weakness most of the week, falling for the first four days of the week as polls on the Brexit referendum showed uneven results. Gold tumbled by the most in almost a month as other polls on Monday showed voters tilting toward remaining in the EU.
  • Kinross Gold Corp. temporarily halted mining at its Tasiast mine in Mauritania, reports Bloomberg, after the Ministry of Labor banned some of its expatriate workers from the site due to invalid work permits. The stoppage comes a week after a three-week strike by unionized workers ended at the mine, one Seeking Alpha article points out.
Opportunities
  • According to the median of 12 forecasts in a Bloomberg survey of analysts and traders from New York to Canada, gold prices could reach as high as $1,424 an ounce by year end, reports Bloomberg. “The Brexit referendum lowered the probability for an interest rate hike,” said commodity analyst Thorsten Proettel. Low rates are a boon to gold because it increases the metal’s appeal as a store of value, the article continues..
  • Capital spending by gold producers has been decimated, writes Sean Gilmartin at Bloomberg, which will lead to a long-term decline in the mine supply of the metal. According to UBS, high quality gold equities still offer attractive leverage to gold price upside, and will outperform physical gold in a rising price environment. Other opportunities for the metal come in the mergers and acquisitions space, reports the Financial Review, particularly in the West African-focused gold space driven by strong acquirers out of North America. In an all-share deal, Teranga Gold made an offer to buy Gryphon Minerals, boosting its share price by 22 percent on the news.
  • Hartley’s reports on Burey Gold Limited this week, noting the company’s release of significant drilling results from its maiden RC drilling program in the northern zone of its Giro project. Highlights include 2 meters at 196 grams per ton from 12 meters, and 15 meters at 255.6 grams per ton from 15 meters. Additional results include 33 meters at 6.1 grams per ton from surface and 12 meters at 21.2 grams per ton from 3 meters. Hartley’s writes “These results confirm our opinion that the Giro project has potential to define a company-making asset particularly given these significant high grade results.”
Threats
  • Physical demand for gold out of both India and China was tepid during the first half of the year, reports Bloomberg. Demand was historically weak in India, with the discount averaging $25 an ounce in 1H versus $8 a year ago. Also contributing to the overall weakness was a poor farming year in India, continues the article, yielding less disposable income for Indians to buy gold.
  • Although a vote for Brexit will benefit gold, reports SocGen, other commodities such as copper and oil could suffer. Mark Keenan, SocGen Asia head of commodities, points out that a rising U.S. dollar will depress metals such as copper, and risk aversion may hurt oil.
  • In a note from Sovereign Man this week, the author reflects on how much has changed since the publication started seven years ago. He points out that U.S. government debt soared 70 percent, that the Federal Reserve’s balance sheet more than doubled, and that the U.S. government has been caught red-handed spying on everyone – all in seven years’ time. “We’ve seen an appalling rise in police violence and Civil Asset Forfeiture to the point that the U.S. government now steals more than every thief in America combined,” he continues. Perhaps Donald Trump is right in that Mexico will pay to build a wall on its northern border, which is to keep Americans from crossing illegally into Mexico.

 

Should the platinum:gold ratio be traded as it hits extremes?

By Stefan Gleason, President Money Metals Exchange

The gold:silver ratio hit a multi-year high of over 83:1 earlier this year. It has since come down to 73.4:1, as of Friday’s close, as silver has gained strength in this year’s rally. On a historical basis, silver remains a relative bargain compared to gold. The ratio has much further to fall in a major bull market.

Another important ratio is that of gold to platinum. To gauge whether platinum is trading at a premium or discount to gold, we can simply reverse the ratio. This year platinum traded at its deepest discount to gold since 1982. The platinum:gold ratio currently comes in at 0.8:1, meaning an ounce of platinum sells for 80% of what an ounce of gold commands.

Platinum:Gold Ratio, 1980 to Present

Platinum:Gold Ratio from 1980 - Present

As a general rule of thumb, platinum is a great bargain when it sells for less than gold. As the chart shows, the platinum:gold ratio periodically gets drawn back like a magnet to price equilibrium at 1.0. It’s not a law that platinum must return to equilibrium with the gold price or spend more time than not exceeding it. It just happens to be a strong tendency supported by sound fundamental reasons, including platinum’s supply scarcity.

When platinum’s discount gets to a multi-decade extreme, as it is now essentially, then precious metals investors have an incentive not only to favor platinum over gold – but to trade out of gold for platinum.

We certainly don’t recommend giving up a core position in gold. Gold has unique qualities as the ultimate, most recognized form of money. However, for those who have accumulated an outsized position in gold and hold little or no platinum, now may be an opportune time to trade some gold for some platinum.

Let’s take an example to illustrate the potential profit opportunity. You sell 10 ounces of gold (10 x $1,275 = $12,750), then use the proceeds to buy 12 ounces of platinum (12 x $994 = $11,928). In this example, based solely on the latest closing spot prices, you’d still have $822 cash left over. (In the real world, bid/ask spreads, premiums, and small transaction costs would apply.)

Let’s assume you wind up getting an exact even exchange of 10 gold ounces for 12 platinum ounces. Three years later, the ratio has risen from 0.8 to 1.2, around the historical average. Gold now trades at $2,000/oz and platinum 1.2 times that at $2,400. The ten gold ounces you sold would be worth $20,000. The 12 platinum ounces you bought are now worth $28,800. Thus, trading the platinum to gold ratio boosted your precious metals wealth by 44%!

This hypothetical should not be interpreted as a prediction of future price outcomes. It’s merely an illustration of one type of scenario that could play out.

Platinum and palladium outlook – Big deficits ahead but will they make any difference to prices?

We have seen three major reports out for London’s Platinum Week from Metals Focus, GFMS and the WPIC.  They all offer comprehensive analyses in text, tabular form and graphical content of various aspects of the markets and they are a hugely valuable resource for followers of the pgms sector.   There are definite differences of opinion on the relative supply and demand scenarios for platinum in particular in 2015, but all three analyses are predicting supply deficits ahead for the two major pgms, but on past performance such seemingly strong fundamentals may have little impact on prices.

The latest to report was Metals Focus with its inaugural Platinum & Palladium Focus 2016, a comprehensive 78 page long analysis of the platinum and palladium markets.  In many respects it appears to this observer to offer the most realistic appraisal of the markets and likely price performance for the two major platinum group metals (pgms).

A couple of articles I’ve published on Sharpspixley.com on platinum group metals resulting from the release of these three very comprehensive reports on the sector  are linked here:

Platinum and palladium supply deficits ahead, but will this impact prices?

Is platinum in surplus or deficit? Reports contradict.

Metals Focus’ Platinum & Palladium Focus 2016 may be requested free of charge by email from charles.demeester@metalsfocus.com 

 

 

 

Gold, silver and platinum rallying – The Holmes SWOT

Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, gives us his latest report on Strengths, Weaknesses, Opportunities and Threats in the precious metals markets as reported in global media over the past week

Strengths

  • The best performing precious metal for the week was platinum, up 6.38 percent.  Platinum largely moved in sync with gold and silver price changes, but has recently outpaced its counterparts and has now begun to play a significant catch-up trade.
  • The Bank of Japan (BOJ) opted against boosting stimulus this week, in a decision that battered the U.S. dollar and gave gold a surprise lift, reports Bloomberg. The Japanese yen also reacted to the bank’s decision, surging the most since the 2010 stock-market meltdown. On Wednesday, the Federal Reserve left its benchmark rate unchanged too, helping to boost the yellow metal.
  • According to the South China Morning Post, the Chinese Gold and Silver Exchange Society plans to set up a gold vault and office in Qianhai. This will be the biggest in Hong Kong investment in the special economic zone in Shenzhen, reports Bloomberg.  Jeremy Wrathall, Investec’s Global Head of Natural Resources, thinks that gold is likely to be the best performer among global metals and minerals for 2016, reports Lawrie Williams.

Weaknesses

  • The worst performing precious metal for the week was palladium, still up 3.93 percent, and not far behind the other precious metals (all of which closed in positive territory). Palladium was the best performer in the precious metals group last week, when it closed up 5.99 percent.
  • Commodity exchanges boosted margin requirements on more products, reports Bloomberg, sending stocks in China to the lowest in a month. “The boom in the commodity markets isn’t a good thing for stocks as that will distract some investors and divert money away from the stock market,” said Wu Kan, a fund manager at JK Life Insurance in Shanghai.
  • The metals and mining sector is the top performer in both high-grade and high-yield indexes this year, according to BI Senior Credit Analyst Richard Bourke. But has the rally in metals and mining bonds come too far, too fast? An analysis of commodity spot prices shows that they are all above consensus forecast price, and may portend a correction.

Opportunities

  • RBC Capital Markets released a research piece on its gold companies under coverage on Monday, explaining that a decline in production and growth expenditures is expected in 2016. Overall gold production of the North American companies listed in the report, is expected to decline by 7 percent year-over-year. Exploration and expenditure budgets continue to face downward pressure as well, leading to an ongoing decline in reserve lives. While this may appear negative at first glance, the forecast should bode well for acquisition activity to pick up later this year in a heated gold market.
  • HSBC has been bullish on gold since 2015 and the group believes that the strong rally this year could continue. In addition to gold’s inverse relationship with the U.S. dollar, HSBC points out that the group’s counter-consensus view of a strong euro, along with the expectation for the euro-dollar to continue trading higher.  Investors may also take a gold position to hedge against the upcoming UK vote to exit European Union membership.
  • Paradigm Capital released a comprehensive and informative research note this week, focusing on gold equities and opportunities to be found for the generalist. The group highlights negative interest rates and central banks buying gold (rather than selling it) as a few reasons why this up-cycle is different. Paradigm also states that “Producing gold is a better business than most today, one with expanding margins, yet gold equities still offer excellent relative value.”  In the chart below, this shows the long-term price relationship between gold bullion and gold mining stocks.  One can observe that the gold miner valuations are currently substantially depressed relative to the change in gold prices.

SWOT 2-5

Threats

  • Earlier this month, Deutsche Bank admitted to manipulation of the gold and silver price fix, agreeing to turn in any information about other banks’ wrongdoings over to the authorities. In an article from ZeroHedge this week, the group reminds its readers that the CFTC in 2013 closed its five-year investigation concerning these allegations, proudly stating there was no evidence of wrongdoing. Fast forward to April 22, 2016. The CFTC and its director have come out saying they were unaware of the DB story, finding no reference to it in the commission’s file of “news reports of interest.”
  • Could silver’s upswing be due for a correction? Another article from ZeroHedge this week points out that an old indicator, the commitment of traders report (COT), has been a pretty reliable gauge for precious metals’ “short-term trajectory.” However, since speculators are “exuberantly long” silver at this time, this could imply that a correction is coming.
  • Although no one is predicting a heavy fall for precious metals, a commodity specialist from the Industrial and Commercial Bank of China (ICBC Standard) thinks now is probably not the time to buy, reports News Markets. The bank pinpoints an already crowded market for this trade, as speculators have increased their long positions.

 

Astounding U.S. Gold and Silver Coin Demand – Holmes SWOT analysis

By Frank Holmes – CEO and Chief Investment Officer, US Global Investors

Strengths

  • In a down week for most markets, silver fared the best, falling only 0.11 percent.  There was no particular story supporting the move, but note that silver really didn’t fully participate in the precious metal rally last week and perhaps had less to lose.
  • Over the past five days investors bought 26.8 metric tonnes of bullion through exchange-traded products backed by the metal, according to Bloomberg, the most since January 2015 as seen in the chart below. In addition, Reuters says gold and silver demand is off the charts; the U.S. Mint sold nearly as much gold on the first day of 2016 as in all of January 2015, with silver sales equally as astounding.
  • HSBC believes that gold has “shrugged off” two bearish developments, a strong dollar and weaker commodity prices, announcing that they remain bullish on the precious metal. The group sees good emerging market demand, eventual dollar declines and central bank accumulation helping gold this year. As reported by Bloomberg, the FTSE/JSE Africa Gold Mining Index, which rallied 20 percent this year, has had the best start since 1995.

swot

Weaknesses

  • Platinum faced the worst losses this week with a 5.75 percent price decline.  Price action seemed to track the falling equity markets but in countries like South Africa and Russia, which have had falling local currencies, the incentive to continue producing remains attractive.
  • Rubicon Minerals is having a rough start to the year, tumbling nearly 80 percent for the week, after a revised new resource estimate showed a significant decrease in metric tons and ounces compared to a 2013 report. Similarly, Royal Gold extended its drop (24.5 percent for the week) after an update on its Phoenix Gold Project, and Eldorado Gold tumbled 29.85 percent due to “Greek mining woes,” as reported by Bloomberg.
  • The controversial Pebble Mine project, a proposed gold mine near Alaska’s Bristol Bay, was deemed an environmental risk by the Environmental Protection Agency which is moving toward a formal decision to bar mining operations there. The EPA, however, was questioned on its “misuse of authority,” according to the Washington Post, and now the group’s internal watchdog has announced there is “no evidence of bias in the agency’s efforts.” Critics who have followed the EPA’s review process noted that the EPA investigator did not consider a significant body of publicly available information brought to light by the Congressional Science Committee that demonstrates clear instances of bias and predetermination.

Opportunities

  • Evercore ISI took a look at sectors they believe are candidates for being “exalted” in 2016, meaning those that have underperformed over the past several years, but could now perform in excess of their index. Of these “exalted” industries, gold makes the list. Jeremy Wrathall of Investec is quoted this week in Mineweb reinforcing ISI’s annual rotation picks, stating “we will see a very different mining industry in 12 months’ time…those who haven’t got debt will reshape the industry.”
  • In its Technical Outlook 2016, UBS writes that the seven-year cycle in equities is rolling over and now it’s time to “buy gold.” The group warns investors not to be surprised by “record spikes in volatility over the next 12 to 17 months.” Adding to UBS’ rhetoric, U.S. Treasury Secretary Lawrence Summers is quoted in Bloomberg this week saying that “risks are substantially tilted to the downside,” when it comes to global commodity and stock markets.
  • Jeffrey Gundlach, CEO of DoubleLine Capital and one of the first to predict the oil price crash in 2014, thinks that gold could surge this year. Gundlach believes that as investors look for safe haven assets in a volatile market, the precious metal could “soon climb” 30 percent higher from its current price, according to an article on StreetTalk.

Threats

  • Gold demand in India could take a hit this year as farmers are likely to reduce buying on account of a poor crop production this season, according to a CommodityOnline article. This could also mean that gold demand will see a dent during wedding season. Experts predict a 10 to 15 percent dip in purchases this year.
  • According to Pranabesh Ray of the Xavier School of Management (during a conference on e-waste this week), 50 pounds of gold and 20,000 pounds of copper could be extracted from one million discarded cell phones if processed properly. “E-waste,” which comprises precious metals like gold and silver, can produce more gold than what is obtained through mining, according to a Bloomberg article recapping the conference.
  • Bullion may drop to around $995 per ounce in the fourth quarter, according to Societe General’s Asia Head of Commodities Research Mark Keenan. During a Bloomberg TV interview this week Keenan reminded viewers that SoGen has been bearish on gold for some time.

 

World’s tenth largest gold miner to become 5th largest platinum miner too

 

South Africa’s biggest domestic gold miner, Sibanye Gold, has confirmed that it is to acquire Anglo American Platinum’s (Amplats) Rustenburg platinum mining operations.  Sibanye was spun out of Gold Fields as a separate company some three years ago, and in its own right is already the world’s 10th largest gold miner in terms of gold output – 49.4 tonnes last year.  Assuming the Rustenburg acquisition goes ahead, and there’s no reason to suggest that it will not, the company will also become the World’s fifth largest producer of platinum group metals with current output of over 800,000 platinum ounces per year – around 13% of global new mined platinum output based on the latest quarterly production figures as assessed by the World Platinum Investment Council.

Sibanye’s CEO, Neil Froneman, is of the opinion that now is the ideal time to make such an acquisition given his view that precious metals prices are currently at, or near, their likely low points in the commodities cycle.  Even so it is something of a gamble given that many of the operations are marginal producers at the current platinum price, albeit just about profitable in the first half of 2015 in generating cash of around US$19 million – but the platinum price is currently around 10% below its half year average.  Amplats has, however,  been rationalising operations at Rustenburg, closing unprofitable sections and reducing the labour force and will continue this process until the transaction is complete.

The Rustenburg platinum mining operations are similar in many ways to Sibanye’s gold mining operations involving narrow ‘reef’ structures, and are exceedingly difficult to mechanise without excessive ore dilution.  Because the rocks are younger than in the Witwatersrand gold mines, the rock temperature gradient is higher and there can be problems in dissipating heat as the mines get deeper – but in general the Rustenburg operations are not as deep as the gold mines and the platinum reefs are generally more consistent in dip and grade.  Sibanye has excellent experience  and a good track record so far in working these types of narrow reef horizons and is confident it can carry this over to Rustenburg.

Should precious metals prices pick up this will be seen as a very opportune acquisition, although if not the operations could prove to be a short term drag on the company’s financial performance.  There are some inbuilt protections against this in the proposed deal, while there are also arrangements which will limit Sibanye’s potential profits from the operations over the next six years should pgm prices and profitability pick up.

Sibanye Media Release

The full Sibanye media release is set out below – and a more detailed report on the proposed transaction is set out on the company’s website – www.sibanyegold.co.za where the full SENS (Johannesburg Stock Exchange’s Stock Exchange News Service) statement is available.

Sibanye today announced the proposed acquisition of the Rustenburg Operations from Anglo American Platinum Limited (“AAP) for an upfront consideration of R1.5 billion in cash or shares and a deferred consideration equal to 35% of the distributable free cash flows generated by the Rustenburg Operations over a six year period, subject to a minimum nominal payment of R3 billion(“Deferred Payment”). Should there still be an outstanding balance at the end of the six year period, Sibanye may elect to extend the period by a further two years. Any remaining balance at the end of this period will be settled by Sibanye either in cash or shares.

In addition to the Deferred payment, which allows for a favourably extended payment period; should the Rustenburg Operations generate negative distributable free cash flows in either 2016, 2017 or 2018, AAP will be required to pay up to R267 million per annum to ensure that the free cash flow for the relevant year is equal to zero. This provides important capital investment and downside price protection for Sibanye, facilitating ongoing capital investment in the first 3 years following the conclusion of the Transaction. Should higher prices result in early repayment of the Deferred Payment during the first 6 years, Sibanye will share the upside with AAP.  

Commenting on the Transaction, Neal Froneman CEO of Sibanye said: “We have for some time indicated our interest in participating in the PGM sector and believe that these assets provide an attractively priced entry at an advantageous moment in the price cycle. The Rustenburg Operations are similar in nature to Sibanye’s current gold operations and, after extensive engagement with AAP and completing a thorough due diligence, we are confident that we will be able to realise value for our stakeholders by leveraging our successful operating model. The Rustenburg Operations have been significantly restructured and are well positioned to benefit from a recovery in PGM market conditions and provide a platform to grow regionally within the PGM sector. The outcome is a sensible commercial transaction, which is strategically advantageous for both parties.”

Consistent with its transformation objectives, Sibanye will be including a consortium of Broad Based Black Economic Empowerment stakeholders (“BBBEE Stakeholders”) such that, at the closing of the Transaction Sibanye will own 74% of the Rustenburg Operations, with the BBBEE stakeholders owning 26%. Discussions are underway with the following broad based partners: employees, the surrounding community, the Royal Bafokeng Holdings and the Bakgatla-Ba-Kgafela Traditional Community.

The Rustenburg Operations are located centrally on the Western Limb of the Bushveld Complex, near the town of Rustenburg and comprise the Bathopele, Siphumelele, and Thembelani (incl. Khuseleka) mining operations, two concentrating plants, an on-site chrome recovery plant, the western limb tailings retreatment plant and associated surface infrastructure as well as approximately 4 months of working capital on a going concern basis. The lease area covers an extensive 28 km strike length with the ore body extending 8 km down dip.

Current PGM (4E) Mineral Reserves comprise approximately 9.7 million oz and Mineral Resources 88.8 million oz. With annual production of over 800,000 oz the Rustenburg Operations are placed firmly as the fifth largest PGM producer globally.  AAP recently rationalised and restructured the Operations, eliminating loss making production and  reducing the workforce by approximately 7,500 people. Operational optimisation will continue under AAP until the conclusion of the Transaction, but in H1 2015, the Rustenburg Operations generated approximately R261 million in cash, despite prevailing low PGM prices.

 

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The decreasing importance of gold to South African economy

Readers of LawrieOnGold may be interested in thefollowing note from Statistics South Africa (the SA government statistical body) drawing further attention to the continuing decline in the once dominant South African gold mining industry.  When I worked in the South African gold mining industry in the late 1960s it was producing over 70% of the world’s gold at over 1,000 tonnes a year.  Today South Africa is moving down the table of global gold miners and was estimated by consutlancy GFMS as to only have produced 164.5 tonnes in 2014 and in danger of dropping below Canada currently lying in 7th place

Top 10 World Gold Producing Countries 2013/2014 (tonnes) 

Rank Country 2013 output 2014e output Change Y/Y
1 China 438.2 465.7 +6%
2 Russia 248.8 272.0 +9%
3 Australia 268.1 269.7 +1%
4 USA 228.2 200.4 -12%
5 Peru 187.7 169.3 -10%
6 South Africa 177.0 164.5 -7%
7 Canada 133.3 153.1 +15%
8 Mexico 119.8 115.7 -3%
9 Indonesia 109.2 109.9 +1%
10 Ghana 107.4 106.1 -1%
World 3049.5 3109.0 2%

Source: GFMS, Mineweb

The Statistics South Africa comment and accompanying chart is set out below:

Monthly gold production reached a new monthly low in January, according to data released by Stats SA. Although a number of temporary factors might have contributed to the unusually low level, general historical trends show that gold has lost the prominent place it once had in the South African economy.

Stats SA has published comparable mining production indices that go back as far as January 1980, for the industry as a whole as well as for various minerals, including gold, iron, platinum and coal. The indices provide an indication of the level of production, set against a particular base period. Currently, the index has been set to 100 for the base period of 2010.

Historical values of the gold index show the extent of how production has fallen. In January 1980, the index was 359,0, while the volume of gold produced was far lower in January 2015, resulting in the low index of 48,4. In other words, South Africa produced 87% less gold in January 2015 compared with the same month in 1980. Figure 1 shows how the monthly gold production index has fallen. What is not shown in the graph, however, is that production started on its downward trend well before January 1980.

Figure 1: Monthly gold production index, 1980-2015 (Base: 2010=100)

sagold

The fall in production has reduced gold’s contribution to the South African economy. The metal contributed 3,8% to gross domestic product in 1993, falling to 1,7% in 2013. In terms of sales, gold made up 67,0% of all mineral sales in 1980, falling to 12,5% in 2014. Coal currently leads the pack, having contributed 27,0% of total mineral sales in 2014.

South Africa has also fallen in global gold production rankings. Prior to 2007, the country held the number one spot as the top gold producer in the world, according to the U.S. Geological Survey Mineral Resources Program. By 2014, South Africa had dropped to sixth place, according to Thomson Reuters GFMS, falling behind other countries such as Peru, USA, Australia, and Russia. China is currently the world’s top gold producer.

So with the waning importance of gold to South Africa, does the future hold any promise for the industry? One estimate suggests that the country will soon need to look beyond the precious metal as a major resource. Stats SA’s 2014 Environmental Economic Accounts Compendium provides 2011 estimates on depletion rates for various minerals. At current production levels, South Africa will exhaust its coal resources in 119 years, and platinum in 218 years. For gold, resources will be exhausted in only 33 years. An update to theCompendium is due for release before the end of this month, containing new depletion estimates, but if this estimate holds true, many South Africans alive today will see the country taking on a much reduced role on the global gold mining stage.

Given the fall in the gold price over the past three years, this will also have impacted adversely South Africa’s income from this source as well.  Indeed current metals and minerals pricing across the board will be having a damaging effect on the country’s exports and economy.  With even bigger falls in coal and iron ore, both of which are significant for the South African economy, and a comparative fall in platinum , South Africa’s other principal metal export by value, the government is surely wrestling with a significant change in its balance of payments, whichis thus a contributor to the large falls in the South African Rand against the rampant U.S. dollar.  Indeed, were it not for the fall in the Rand, which has applied something of a cushion in terms of Rand earnings, the production figures for the county’s metals and minerals might well have fallen further.  The fall in the Rand has enabled some marginal operations to stay afloat which otherwise would probably have closed down.

As for South Africa’s gold mines, the major Witwatersrand operations are getting ever deeper (which substantially increases mining costs and dangers, and grades are declining and there is little prospect of significant new discoveries to replace the output falls.  One can see little chance of anything but a continuing drop in output year on year unless there is a very significant rise in the gold price in the offing.

Dearth of gold articles!

Apologies for the apparent dearth of gold and precious metals articles from me published here this week.  Its not that I haven’t been writing – I have – but most of my work in the past week has been going direct to Mineweb – my main source of income –  so you can still read my thoughts and comments on what’s happening in gold and silver – and sometimes in other metals too – (notably platinum in the past week) so you can always read them there.

Here follow links to some of my recent Mineweb articles.  I’d hate to deprive you of my thoughts however obscure they may be!  Apologies if you have already read all or any of them

China gold demand up 17% ytd

Russia cools gold reserve additions in January

Platinum price puzzles

Can platinum regain its premium over gold in Q2-Q3?

Have the big banks been manipulating gold and silver prices?
 African mineral development risk: The best and worst nations

And my latest – published today:

HK January gold exports to China confirm strong demand

LBMA’s panel of experts’ views on gold, silver, platinum and palladium in 2015

Each year The London Bullion Market Association (LBMA) organises a competition whereby it invites a number of professional analysts, mostly from banks and other financial institutions, to predict precious metals prices for the year ahead.  This year it received entries from a record 35 such analysts and one would think the accumulated expertise, averaged out, might be a great indicator of what is to happen in the year ahead.  But, be warned,  on past performances this is sometimes far from  the case.  The individuals are also asked to give their reasons for their predictions and these make for some interesting reading.  The full resultant ‘survey is available for download directly from the LBMA by clicking on this link.

A slightly edited version of the executive summary for the competition entries and averages is set out below:

LBMAtab

Tabulation courtesy of the LBMA

This year’s LBMA forecast contributors are predicting that the gold price will remain broadly flat in 2015, but are more bullish (marginally) on the price prospects of the other precious metals forecasting increases of 2.1% (silver), 5.6% (platinum) and 5.3% (palladium) from that prevailing over the first two weeks of the year. Ross Norman of Sharps Pixley is the most bullish analyst with his forecast of $1,321 for the average gold price which gives him a great advantage should the gold price take off this year as anything above this level will gain him victory in the gold price competition and add to his impressive tally of past first places.  Adam Myers of Credit Agricole the most bearish with $950 and he again would benefit should the gold price take a really big dive this year and end amongst the debris promulgated by the out and out anti-gold brigade.

(For the record, here at LawrieOnGold we do believe that there are enough positive factors out there for gold that Ross Norman’s prediction could even be conservative and that Adam  Myers’ bleak forecast, which if it came about would probably drive 50% of the world’s gold mines into serious deficit and likely closure, is the most unlikely result for the year.  But we shall see.)

The analysts cite a number of factors which they see as likely to restrain gold prices in 2015, including the possible further strengthening in the US dollar, interest rate hikes by the Fed possibly commencing  in the second half of 2015, QE programmes in Europe (although some see this as gold positive) and a weak oil price reducing gold’s attraction as a hedge against inflation.  But the price could be supported by strong retail demand from China, India and elsewhere but only limited support is expected this year from the official sector suggesting a decline in Central Bank purchases.

Analysts are slightly more optimistic about the prospects of silver in 2015, forecasting a modest increase in price of 2.1% to $16.76/oz, with prices forecast to trade in an average range of $13.91 to $19.36. Ross Norman is again the most bullish ($18.56) with Robin Bahr of SocGen the most bearish ($13). Negative price factors again include expected strengthening of the dollar, disinflation as well as slow growth from China and the Eurozone thus affecting industrial demand for the metal. But some positive factors which could lend support to prices include expected additional global investment in solar power, continued support of silver ETFs and expectations that retail investors may take advantage of attractive prices.

Analysts are more bullish about the prospects of the platinum group metals in 2015 despite the current fall in the platinum price to below that of gold.  Platinum is expected to be the best performer with prices forecast to average $1,294 in 2015, 5.6% higher than its price in the first half of January although still 6.6% below its average price in 2014. Bart Melek of TD Securities offers the most bullish forecast of $1,434 and Glyn Stevens of International Commodities the most bearish at $1,098. Analysts cite positive influences on the price to include a supply deficit (despite expected improvement in South African production).  Rising costs might also push prices higher along with strong demand from China and industrial investors. On the negative side is the weak outlook for gold prices and macro-economic factors which are likely to act as a restraint on prices.

Palladium prices are forecast to average $838.40, up 5.3% from where it started the year and 4.4% above its average price in 2014. Rene Hochreiter of Sieberana Research is the most bullish with a forecast of $950 and again Glyn Stevens the most bearish with a forecast of $738. The palladium price is expected to benefit from a supply deficit as well as improving industrial demand and strong car sales in North America and China.

Overall all credit should be accorded to the analysts for setting precise forecasts out for all to see opening their judgements  up to negative comment should they end up being way out in their predictions. But then the kudos for being nearest to correct can bring some very positive accolades from their peers and followers.

To find out more about what the analysts predict will happen to prices for precious metals this year, and tables showing also their high and low price forecasts for the precious metals and what the factors are which are likely to affect their price, read their ‘expert’ views by clicking on the link noted at the start of the article and repeated here.

LBMA top gold forecaster: gold price to average $1321 in 2015, silver $18.56

The annual LBMA precious metals price competition’s top gold forecaster over the years, Sharps Pixley’s Ross Norman, is bucking the mainstream analyst consensus with a $1321 average gold price forecast for 2015.  Silver $18.56, Platinum $1268, Palladium $876.  Slightly modified version of article posted to Mineweb.com – the website for the best global mining and metals news and comment.

Lawrence Williams

In his submissions to this year’s LBMA precious metals forecasting competition, Ross Norman who heads up London bullion broker Sharps Pixley, and who has been probably the most successful forecaster in the LBMA panel in the past, says he is going out on a limb with his forecast for the gold price average this year at $1321. (It would certainly have been out on a limb last month although perhaps seems less so now given the gold price performance so far this year.) He is also looking for a gold price high of $1450 and a low of $1170 during the year. With most of the forecasting panel being bank and institutional analysts, whose forecasts tend to be much more conservative – some would say decidedly bearish – Norman must have a good chance of adding to his wins if gold’s advances continue.  The LBMA is expected to publish its full listing of its annual competition forecasts later this week, along with the analyst participants’ reasons for their predictions.

Norman has been the outright winner of price forecasting sections of the LBMA competition five times in the past  – usually by ‘going out on a limb’ which was a pretty good policy when the gold price was in its bull market phase  Norman has also had numerous Top 10 positions.  Perhaps he tends to favour the more bullish trends so will he be back on track again this year?  If the current momentum in the gold price gathers more strength still his forecasts could even prove conservative but it would perhaps be foolhardy to automatically assume that gold’s good start to the year will not beget a serious correction at some stage later on.

Norman’s stated reasons for his fairly positive predictions on gold this year are as follows: “If markets move on what you don’t know today, but will know tomorrow then it follows that many factors such as a US interest rate rises should already be factored into the current price… it also begs the question what the new drivers for 2015 will be. We see ongoing declines in economic growth prompting central banks to fight deflation by resorting to inflationary pressures in H2.  If our outlook for gold in dollar terms is bullish, in emerging currencies it may be even more so as investors seek to insure or hedge against currency debasement. As such, we foresee good demand for the physical.”

He sees gold already demonstrating that it has turned a corner and sees investor flows returning strongly but reckons there are unlikely to be runaway prices beyond the $1450 level without either significant new product innovations or without the sort of black swan events in the economy that few would wish for, although the potential for these looks ever greater following the SNB’s decision of last week to drop the Swiss Franc peg against the Euro.

He is also fairly bullish on silver, looking for an average price of $18.56 over the year, encompassing a high of $21.75.  In percentage terms these are big rises from the prices prevailing at the beginning of the year.  This is commensurate with the general pattern of silver moving up faster than gold on the upside – and he also reckons that investors will take comfort from silver ETF holdings which have remained firm (unlike gold ETFs) coupled with reported retail sales of the physical – coins and bars -which have also remained robust.

He seems to be a little more sanguine in his views on platinum.  Despite many analysts seeing platinum in serious supply deficit this year, he is looking for a yearly average price at $1268 – somewhat below that of his gold forecast suggesting that at some stage during the year the platinum price will fall back below that of gold as it has now already done on Friday after struggling to stay above the gold price level for most of last week.  He does foresee a high price during the year of $1480 – thus higher than that he sees for gold.

Finally there is palladium – the precious metal probably most supported by analysts in recent months due to what are seen as continuing strong fundamentals.  Norman is looking for an average price over the year here of $876 with a 2015 high reaching $975 as against the price at time of writing of $755.  Palladium was last year’s best performer in the precious metals sector and Ross suggests it may have trouble matching last year’s 10.9% increase, but even so he feels the junior precious metal as having another positive year based on continuing attractive supply/demand fundamentals despite the backdrop of a relatively weak global economy. He also points to an assessment suggesting an ongoing supply deficit in the order of 1.4 million ounces which will keep the metal well bid. Of the four metals, palladium remains once again his favourite, although, on his predictions perhaps gold and silver will do even better!