INDUSTRIAL ACTION and supply disruptions in South Africa put platinum in the headlines last year, and the metal spent 2012 selling at a discount to gold.

But is a platinum discount the new normal? How will the market shift in the labor strike fallout? And will mining asteroids transform supply fundamentals? CPM Group Platinum Analyst Erica Rannestad met with The Metals Report to share her price and cost forecasts for 2013 and discuss the supply and demand trends to watch this year. 

The Metals Report: Across the mining sector, investors are concerned with rapidly rising costs. How did the 2012 strikes in South Africa affect operating costs in the platinum group metals (PGM) mining industry specifically? 

Erica Rannestad: We expect a 12% decline in PGM output in South Africa. These lower output levels are expected to have the most significant impact on cash costs. Cash costs are a key performance measure used in the mining industry and are typically stated on a per-unit basis. Cash costs mostly refer to direct mining expenses such as labor, fuel and electricity. There are many variations for the calculation of cash costs, so it is important to keep in mind that this measure is not exactly comparable across companies. 

Because it is stated on a per-unit basis, cash costs can be quite unpredictable, especially if operations are located in high-risk countries. Input costs, particularly labor and electricity costs, significantly increased in 2012, which amplified the already strong increase in cash costs as a function of lower output. In summary, the majority of the increase in cash costs is due to lower overall annual production with the balance coming mostly from labor and electricity cost increases. 

TMR: What is the average cash cost for South African producers? 

Erica Rannestad: We monitor cash costs on a C1 basis, which standardizes cash cost statistics. C1 cash costs refer to a standard definition of what figures must be used to calculate cash costs, making the measures comparable across the board. Last year, South African cash costs per ounce of PGMs were about $753 per ounce ($753/oz). Global production outside South Africa was much lower at about $570/oz. But you need to consider that South African PGM production, or output value, is relatively higher in platinum, which is why the cash cost is higher than the global average. 

TMR: Is your analysis based on the combined output of platinum, palladium and rhodium?

Erica Rannestad: Yes. Other metals would be considered by-products. 

TMR: What is the trend for cash costs in South Africa next year? 

Erica Rannestad: For 2012, we have a preliminary estimate of a ~25% increase in cash costs to $940/oz. The key point here is much of that increase is due to the significant drop in output. The actual increase in cash costs could range between 15–25%. There are several ways companies can mitigate costs, such as mining higher-grade regions. 

Cash costs of $925/oz puts some of the high-cost mines in the red in the near term. The near-term cash cost increase doesn’t suggest that these mines will close, because in most cases they were profitable during prior years. This year was unusual and very event driven. However, the current cost environment puts these operators at a higher risk. 

TMR: What could happen to prices if output reverts to pre-2012 levels? 

Erica Rannestad: This year the market reacted in two different ways. First, supply shocks increased uncertainty about supply, cut off supply flows and drove prices up sharply and rapidly. Platinum had a 24% trough-to-peak price increase during the Lonmin strike, for instance. Second, prices would drop nearly as fast upon the resolution of an illegal strike as investors started focusing on the dismal demand picture once again.

My forecast is for a narrower price range in 2013. There’s less uncertainty about supply shocks—we have experienced strikes at all the major operations in South Africa and we have seen how the market reacted. The probability of a repeat of 2012 is low. But there still is a lot of pessimism about demand. As a result, I’m targeting approximately $1,450/oz for platinum as a low and $1,800/oz as a high for 2013.

TMR: What are your expectations for the demand side? Can you explain the major market segments and what is driving them? 

Erica Rannestad: The largest user of PGMs is the auto industry. Auto demand will be driven by an improvement in Europe’s economy, possibly in H2/13. Expectations for improvement in the US and Chinese economies this year would also be positive for fabrication demand. Overall, we expect positive, but tepid, demand growth for PGMs from the automotive sector. In auto catalysts there’s very little substitutability outside the PGM complex. Alternatives have been tried, but nothing else is as reliable and efficient. The auto makers are going to be buying PGMs despite the price for the foreseeable future.

The second-largest source of demand for platinum is jewelry. Platinum jewelry demand is dominated by China. We expect a lower growth rate compared to previous years—positive, but growing slower. Lastly, we expect modest growth from electronic fabrication demand, which mostly applies to palladium. Overall, we are looking for modest growth relative to 2012 levels. 

Jewelry users of PGMs are much more price sensitive. Platinum is the largest jewelry component in the fabrication demand portfolio. When prices rise, jewelry demand typically comes off. Jewelers try to keep their price points stable for customers and one way to do that is to reduce metal content, which translates to the industry buying in lower volumes. 

TMR: Investors are increasingly participating in the PGM markets—how is 2013 market sentiment looking? 

Erica Rannestad: Especially in the case of platinum, investors in 2012 looked to the economy in Europe for clues about PGM market direction. That resulted in a very negative view. Currently, there are expectations for improvement in H2/13 for the European economy that should improve the outlook for PGMs. There may be buying activity in anticipation of that economic growth. 

Slightly stronger growth in China and the US obviously would also be positive for investor views on PGMs. PGMs are seen as a way to play an overall increase in industrial and economic activity.

TMR: PGM exchange traded products (ETPs) have grown globally in the last few years. Are the ETPs a significant force in the market yet?

Erica Rannestad: The introduction of the physically backed PGM ETPs has helped to expand marketing efforts for these markets. The PGM markets are much smaller than the gold or silver markets. The ETPs have really contributed to an overall expansion of the PGM investor base. Specifically, they have provided retail-level investors with a lot more access to these markets. 

TMR: Platinum has been hovering at roughly a $100 discount to the price of gold for the last several months. Is this a transient condition or the new normal? 

Erica Rannestad: The run-up in gold prices above platinum makes sense because of all the layers of uncertainty in the global financial markets in recent years. The historically large premium that gold has over platinum at present reflects the unusually high level of uncertainty about future economic growth, fiscal deficits, monetary issues and the host of other problems that came to light during and after the financial crisis. We believe a lot of the run-up in gold prices based on these layers of uncertainty are priced into the market now. 

Once these layers of uncertainty begin to dissolve, we expect to see the platinum price move above gold once again. In the long term, we see platinum’s fundamentals as more positive than gold, so we expect to have platinum prices rising, whereas we see a lot of potential for gold prices to decline in the medium term. Potentially as early as 2014, we could see the annual average price of platinum exceed that of gold. On a daily basis, this could happen sooner—perhaps by late 2013. 

TMR: Besides bullion or ETPs, another option for investor exposure would be mining equities. What regions are you watching? 

Erica Rannestad: Despite a lot of exploration spending in Canada, the main area of interest remains South Africa. Approximately 85–90% of the pipeline for future PGM mine production is located in South Africa with the remainder completely in North America. 

TMR: Because prices have been strong for some time, the PGM recycling rate is high. Does PGM recycling compete with mine supply? 

Erica Rannestad: At this point it’s not competing (albeit it is a critical component of supply in today’s market), but we expect strong growth in platinum and palladium recycling rates over the next 10 years. Palladium began to be used more in gasoline engines in the late 1990s, with or replacing platinum. Many of those converters are due to be recycled, so growth in palladium recycling is expected to be stronger relative to platinum recycling over the next few years. Secondary supply will account for a much larger portion of total supply in the future. We see it rising from a current 10–15% of supply to 20–30% over the next decade. 

TMR: What are the major differences between platinum and palladium in terms of price performance?

Erica Rannestad: Palladium prices respond much more strongly to investor views on industrial activity. Platinum will trade somewhat as a financial asset like silver and gold. Palladium is much more an industrial play.

TMR: At present, are investors or industrial users the main driver of the PGM market?

Erica Rannestad: While investors might be a marginal component in terms of absorbing supply, they are critical in rapidly adjusting the market price. Investors have driven PGM prices this year. The 2012 price chart looks like a roller coaster—clearly influenced by supply shocks when investors were bidding up the price. When the supply shocks were resolved, investors would focus on their views about economic conditions. That resulted in reevaluating fabrication demand expectations, which were very negative based on the state of the economy. 

TMR: Do you expect a similar situation going forward?

Erica Rannestad: Yes. I expect investors to attempt to capture any upside in the market that develops due to supply constraints and/or positive demand expectations. That said, we expect volatility to be somewhat reduced from 2012 levels. 

TMR: Many or most platinum equities have had dismal stock market performance in 2012 —much worse than their underlying commodities. Is there a light at the end of the tunnel for equity investors in the PGM mining sector? 

Erica Rannestad: The PGM mining sector is still the mining sector. It has been a tough time, but especially bad for the PGM miners because of the huge reliance on South Africa. A bad mining industry environment plus illegal strikes and large increases in cash costs equals poor equity performance. One way mining companies have attempted to address this is changing management. The CEOs in the top-four largest PGM companies all changed in 2012. 

TMR: It’s a similar phenomenon to what has been taking place among North American senior gold miners.

Erica Rannestad: It is a sign that the industry is taking a more aggressive position in seeking solutions to its challenges.

TMR: New mining frontiers have made headlines in 2012, both underwater and airborne. Asteroids have come into focus as a potential source for PGMs. What’s your view on this topic?

Erica Rannestad: Asteroid mining is a novel idea. I get asked about novel technologies in the PGM sector all the time. The central point to remember is that these technologies are not near-term potential contributors to the market. In this case, there would be a tremendous amount of equipment development required and staggering logistical requirements. That’s going to take decades. 

Commercialization of new and novel technologies takes much longer than many people might think. One example, which is also an emerging application of PGMs, is fuel cells. Fuel cells were developed over 100 years ago, but they’re only now being applied to commercial-scale markets. Mining asteroids for platinum is interesting. . .but is a long way off.

TMR: CPM Group publishes excellent market commentary. How can investors access those?

Erica Rannestad: We produce a monthly Precious Metals Advisory and a Base Metals Advisory, both of which contain price projections, relevant market information and supply and demand tables. It is released in the third week of the month. These are annual subscription products. More casual market participants can join our distribution list to receive free market commentaries. CPM Group also publishes three precious metals Yearbooks that are effectively the “year in review” for the gold, silver and PGM markets, released during the first six months of every year.

TMR: Thanks for your time—it has been interesting.

Erica Rannestad: My pleasure.

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The last four or five years have been a nightmare for many investors, especially those of us investors in the natural resource stocks. Even though gold and silver rallied to new highs in 2011 most shares did not follow and have in fact greatly lagged in performance.

Of course during this time there have been some companies that have performed well and were big winners but we know, as well as you, that on balance the natural resource sector has been a nightmare for investors of the shares of juniors and exploration companies. Frankly, that’s putting it nicely.

Throughout the darkest hours we never lost the vision of our dream. The reasons for us investing in the natural resource shares over the last few years, particularly the gold and silver shares and our position in gold and silver bullion and coins, has never changed. All of the reasons for investing in this sector are even more compelling today than ever: the massive printing of monies by the FED will, we believe, lead to incredible inflation, if not hyperinflation. Now we have Japan to open the printing presses. The entire world is awash in debt with no way out except to print, print and print. This will not end well and ultimately gold and silver will become investor’s safe haven during the coming crisis.

While it would not have been unusual to experience a pullback in the markets, virtually no one, professional or individual investor, expected what has occurred. The Dark Side of the Dream, our dream and perhaps your dream, of becoming rich in the bull market in the commodity stocks is either over or greatly delayed. So which is it? 

The markets never play out the same way from one bull market to another. This interruption in the bull market in the natural resource sector will become one of the greatest head fakes of our time. A great shakeout so extreme that many investors have been so badly shaken they may never return to buy shares or long term warrants in the resource sector again. Or will they?

Emotions and investing are rarely compatible bedfellows. Strangely, investors, frequently, at the worst of times will sell out their positions because of fear, ignoring all facts, all reason, and will perhaps greatly regret their decisions. These same investors will once again enter the markets but not until they can no longer stand it as the markets are approaching their peaks. The emotions of these same investors will allow them to overstay their welcome and ride the markets down into the depths once again.

Most newsletter writers and analysts are suggesting their subscribers to be buying and buying now. However, it seems few investors are listening as they are waiting for something, but what could that be? Fact is, few investors can buy at these current outrageously low prices, they can not be a contrarian and they apparently will wait for higher prices which will be their confirmation to enter the markets. Sure, we can understand there concern but as the professionals preach, to make money, one must “buy low and sell high”. This is the time!

What are the charts telling us?

Our view is that gold is in a great long-term bull market from the chart above and is consolidating for the next up leg.  Many of the junior mining companies are listed on the TSX Venture Exchange and you can see above that this has been a nightmare for those long-term investors. The last chart reflects that the Venture Exchange is now at its lowest level relative to gold since the beginning of the bull market in 2001.

Most writers of financial newsletters currently believe, as do we, that the resource shares will eventually erupt into a rip roaring bull market before the bull market in gold and silver ends years from today.

It is always a question of investor’s perception as to when, if ever, to participate in these markets.

However, we expect to fulfill the culmination of our dream within the next 3 years and we frequently recall the words of one of the legendary analyst in the resource sector of “the day when there will be no resources stocks selling for less than $5.00”. Yes, we can wait, as we have learned that patience is a required skill in the art of investing.

For the investors with their eyes still open, we suggest the accumulation of the junior mining shares while they are still available at these ridiculously low prices. It’s your money, it’s your choice.

Visit our website, www.JuniorMiningResources.com for more information and to sign up for our email list and twitter account.

January 9, 2013

Dudley Pierce Baker

Guadalajara/Ajijic, Mexico

Email: Dudley@JuniorMiningResources.com

Website: JuniorMiningResources

Junior Mining Resources was founded by Dudley Pierce Baker to bring the best junior mining opportunities to the attention of investors through his services.

“Bull market or bear market?  Below we see a listing of the year-end cost of gold denominated in Federal Reserve Notes (these notes are now commonly called “dollars”).  From a market standpoint, we’re looking at one of the greatest bull markets in history. But ironically, referring to “dollars alone,” this is one of the worst bear markets I’ve ever seen.”

“Bear market?  Sure, back in the year 2000, for only 273 dollars you could buy one ounce of gold.  But by 2012, you needed over 1600 dollars to buy the same one ounce of gold.  The eternal value of gold doesn’t change.  It’s the purchasing power of the Federal reserve note that has changed.

The price of gold in terms of “dollars” has now risen thirteen years in succession.  But what is even more remarkable is the fact that most Americans have totally ignored (even despised) this remarkable bull market.  Let a stock rise seven or eight years in a row, and it will be the talk of Wall Street and the talk of every social gathering in the nation.

Yet this amazing bull market in gold stands alone, sneered at and almost hated.  I’ve been in this business for over 60 years, and I’ve never seen anything quite like it.  However, I do think I know something about human nature.  What I’ve learned about human nature is that it doesn’t change.  For instance, if a stock creeps up year after year, sooner or later the crowd will discover it — and then they’ll pounce on it, ultimately sending that undiscovered stock far above its reasonable price. 

My belief is that somewhere ahead, the crowd will latch on to gold.  Then, as disinterested in gold as they are now, the crowd will pile into gold with the same frenzy that overtook the storied “49ers” when they packed their bags, kissed their wives and kids good bye, and headed West in search of gold.

Gold is the only item that elicits both greed and fear.  The greed factor is so well known that I don’t have to explain it here.  But the fear factor only arises when men (and women) see the “value” of their money disappearing.  Nothing concentrates the mind as dramatically as seeing the purchasing power of one’s hard-earned income and savings being ruthlessly destroyed. 

As I write, Ben Bernanke’s Federal Reserve is systematically shaving off the purchasing power of the dollar in the same way that you can peel the layers off an onion.  The US has been in the process of constructing the greatest credit bubble in history.  The world has never seen anything like it.  

This enormous bubble is now being attacked by the worldwide forces of deflation.  Fed Chairman Bernanke is terrified by the mere thought of deflation.  Bernanke will not stand for deflation.  He has said as much.  And he will attack deflation and crumbling asset prices with all the inflationary power at his command.

As the ocean of new dollars pours out of the computers of the Federal Reserve, the purchasing power of the dollar erodes.  It erodes slowly at first, but as the river of dollars turn into an ocean, slowly-rising inflation segues into a monster.  Finally, the crowd recognizes what is happening to their money.  

The loaf of bread that cost a dollar last year suddenly costs four dollars.  The cup of coffee that cost a dollar last week goes on special today for two fifty.  The college tuition that cost four thousand dollars now costs sixteen thousand and there’s the extra for a dorm. You’re suddenly paralyzed.  A light bulb in your head starts to glow.  And just as suddenly, the mad, frantic rush for gold is on. 

Old timers shake their heads knowingly and repeat the old saw, “There’s no fever like gold fever!”  And the rush for the yellow metal turns into a full frenzy.  Even as I write, the subtle but tell-tale signs of “gold-fever” are seen and heard.  New gold funds and new gold ETFs are started.  

Full-page advertisements appear in the newspapers, drawing attention to the loss of purchasing power in the dollar, and lauding the advantages of owning gold and silver.  Gold vending machines appear at airports and in European and Asian department stores.  Pressure is rising to force lawmakers to elect gold as legal tender.  

On March 29, 2011, the state of Utah passed a law stating that gold and silver will be legal tender in the state of Utah.  Imagine, just imagine — gold being treated as real money!  That alone shows us how far and how completely insane the nation’s attitude towards gold and silver has become.  Gold has been treated as money for 3,000 years.  “As good as gold” is a well-known expression.  Yet, today in the US, gold is not considered to be legal tender. 

No fiat money has lasted for as long as a century.  The US has had prior experience with fiat money — the Civil War Greenbacks, the “Bills of Credit” of the original American colonies, the ill-fated Continentals during the Civil War.  None of these have survived, and neither will the Federal Reserve notes that we now refer to as “dollars.”

I dislike falling back on the morality argument, but consider this.  I may work a lifetime for five million dollars.  Yet some academic working for the Federal Reserve can press some keys on a computer and create ten billion dollars instantly without working up a sweat.  Is the ten billion dollars he creates moral money?  Did anyone work for the money?  Did anyone take a risk for the money?  Did anyone drop a bead of sweat for it?  No, then I claim it is immoral and actually evil money, and as such it is doomed.  

The only power evil has is the power to destroy itself.  I affirm that the Federal Reserve note is doomed.  When the Federal Reserve note goes down the drain, all fiat money in the world will go down with it.  Today information travels around the world with the speed of NOW.  People around the planet will see that fiat money is a fantasy and a counterfeit fraud foisted upon them by unconscionable and unscrupulous bankers.  It is then that the crowd will turn to gold, in much the way that people turned to gold back in 1978 to 1980.

Now this may be “far out.”  I’m reading a lot about silver and its huge short position.  I hear that the silver shorts are bigger than the amount of physical silver that is readily available.  The silver mining stocks have already surged.  And I wonder if silver starts to boom, whether that action wouldn’t rub off on gold?  Hmmm, it’s a thought.”

 

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About Richard Russell

Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.

The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics –plus Russell’s widely-followed comments and observations and stock market philosophy.

There is a high probability that the correction in the gold price that started in early October at $1797 has been completed.

All the minor waves are in place and the A and C wave portions are approximately equal at -$120 each. The chart below depicts the action on Comex via the 2 month forward chart:

…..read more HERE