Ushering in a new era in PGM history

There’s no denying that the events in the platinum group metal (PGM) market over the past year have been nothing short of dramatic. As a result, an important new phase in the PGM market history is being ushered in, notes John Brimelow, director of international research in a report from New York- based Keane Securities.

Not only is a period of unprecendented prosperity for the existing producers guaranteed in the immediate future, but substantial production increases are also expected over the longer run and virtually all from South Africa and mostly from the existing producers.

This should enable the producers to sustain further attractive increases in earnings and dividends, although quite possibly against a background of lower platinum prices, at least in real terms.

Bullish on American Deposit Receipts or ADRs of the South African PGM producers, especially for substantial short-term capital appreciation and sustained longer term income and capital growth, Mr Brimelow notes that intense scepticsm has greeted the mid-year surge in platinum. The shares have barely risen, he says while prior to this, they strongly outperformed both South African and North American gold shares.

What’s the cause of this scepticism? Ignorance about the character of the PGM market, answers Mr Brimelow. What is not appreciated, he says, is that the demand schedule for the PGMs has shifted and the long-run equilibrium price has risen. Attention has naturally focused on the spectacular gyrations of the spot platinum price. The earning power of the mines, however, depends on the average price realized.

Expanding, Mr Brimelow says that over the longer run the world is expanding its usage of PGMs which probably constitute the best growth market in metals. All this growth will be appropriated by South African mines, mainly producers, he says. The real long-run average price of platinum may well decline from here as production is expanded.

Rustenburg Platinum Holdings, Lydenburg Platinum and Impala Platinum Holdings are the three platinum group shares Mr Brimelow recommends. The first operates four mines which together comprise the biggest platinum production complex in the world. Reserves run decades, he notes. Moveover, it is thought to have the best expansion prospects of the South African PGM producers.

Lydenburg Platinum is a passive holder of four blocks of shares. And more than 95% of the value of its quoted portfolio is consituted by Rustenburg shares.

Impala should not be unrepresented in any significant platinum share commitment, says Mr Brimelow. He points out that since the company came into existence, fashion has swung back and forth between it and Rustenburg. Preference has never been more extreme. Impala never traded at a discount to its rival before and more usually traded at a 30% to 70% premium. He therefore feels Impala is undervalued and without a constant stream of mishaps will regain part of that premium.

Despite his bullishness on South African producers, Mr Brimelow does have something to say about non-South African PGM situations. Structures which PGMs are known to exist in North America, Australia and elsewhere in southern Africa, but so far little work has been done and mines from these prospects are many years away, he says.

Only one mine, the Stillwater Montana project jointly owned by Chevron, Manville Co. and Lac Minerals has started. It’s mainly a palladium producer, says Mr Brimelow and by late 1987 it will supply 25,000 oz platinum and 75,000 oz of palladium.

Among the Canadian land plays Madeleine Mines he says constitutes the only practical stock market access to the bulk of the Lac des Isles deposit in northern Ontario. Describing the property as interesting, Mr Brimelow adds that the deposit is very large but quite low grade, needing either a richer zone to be identified or a sustained platinum price far above levels normal until recently.

Mr Brimelow describes Fleck Resources’ Marathon, Ont., PGM property as rather low grade which, at a suitably high PGM price, could probably be operated as a modest open pit mine. The company’s recent agreement with Teck Corp. makes Fleck the most interesting speculation of the PGM land plays in the torrid circumstances of 1986, he adds.

International Platinum Corp. says Mr Brimelow, has systematically assembled the most impressive prospect portfolio outside of South Africa and thinks it could well emerge as the leading North American PGM vehicle. However, he adds at this point it is years away from a mine, whatever the platinum price.