Platinum Group Metals pushing forward on Western Bushveld (May 27, 2011)

Vancouver – In a sector dominated by old-school majors with ever-deepening mines, Platinum Group Metals (PTM-V, PLG-X) stands out as being anything but.

The decade-old Vancouver-based junior is in the midst of constructing a relatively shallow platinum-palladium-rhodium-gold (4E) mine on the northwest tip of the prolific Western Bushveld of South Africa, home to 70% of the world’s platinum production.

The company has elbowed its way into a space controlled by the likes of Anglo Platinum (AMS-J), Impala Platinum (IMP-J), Lonmin (LOM-L) and fellow Canadian Eastern Platinum (ELR-T). Platinum is the name of the game on the Bushveld.

Platinum Group Metals is developing its 74%-owned Western Bushveld JV Project 1 on the complex, with initial production expected in 2013. Site infrastructure and a decline are already underway as part of an initial US$100 million budget for Project 1, paid for by a $125 million equity financing it completed last October at $2.05 per share.

Overall the company plans to finance the US$443 in capital costs with roughly 60% debt and 40% equity, leaving US$266 million in debt to be worked out this year and its 74% share of US$77 million in equity remaining to be funded.

The company will be tapping into proven and probable reserves on the Merensky Reef of 18 million tonnes grading 5.51 grams 4E per tonne for 3.2 million oz. On the lower-grade UG2 Reef, the company has a further 13.5 million proven and probable tonnes grading 3.4 grams 4E for 1.5 million oz. 4E.

Once fully operational, Platinum Group expects to produce 200,000 oz. of platinum and palladium a year or 275,000 oz 4E.

What makes Platinum Group Metals’ mine stand out on the Merensky Reef is that most mines on the reef have been operational for quite some time and companies are having to push deeper and deeper, with most pushing past 1,000 metres depth to keep producing. Project 1, meanwhile, will be mined at around 300 metres depth.

“This is really the last big piece of Merensky Reef under 1,200 metres,” said company president and CEO R. Michael Jones at a recent investor presentation.

The shallower reefs help make for cheaper mining, with life-of-mine average cost coming in at US$526 per 4E oz., using 8 South African Rand to the US dollar. Close by, Impala Platinum’s #20 Shaft, mining at more than 1,000 metres deep, produces 4E at US$853 per oz.

A 2009 feasibility study update projected that on an after-tax basis Project 1 has a net present value of US$583 million with a 5% discount, and an internal rate of return of 18.94%.

The study was based on the 8:1 exchange rate, plus US$1,343 per oz. platinum and US$322 per oz. palladium. Current platinum prices, however, are hovering around US$1780 per oz. and palladium prices around US$750 per oz.

Jones sees prices staying high, since production has largely stagnated while demand, driven by car sales and a total lack of substitutes, is increasing.

Platinum plummeted from a high of over US$2200 per oz. in early 2008 to a low of US$800 per oz. by November of that year, closely following the plunge in auto sales that year.

But despite the rebound in platinum prices, and Platinum Group Metals’ progress towards opening a major precious metals mine next year, the company’s stock has not rebounded along with platinum. Currently trading at around $2 with 177.5 million shares out for a $355 million market cap, Jones points out that the share value is far less than the company’s net asset value and the market is clearly under-appreciating what will be a more than 200,000 oz. per year producing mine.

“This would be a spectacular Canadian gold mine,” said Jones.

The problem is South Africa, with the steady background chatter of nationalization, the electricity issues, the sometimes unclear Black Economic Empowerment legislation, and most recently violent labour protests at Eastern Platinum’s Crocodile mine and Lonmin’s forced firing of 9,000 workers at its Karee mine after an illegal strike.

Jones said the problems are overblown, and the company has worked diligently to ensure they don’t affect future operations. Platinum Group has its empowerment issues resolved with Wesizwe Platinum holding 26% ownership, it has a long-term power guarantee with the state provider and, while it currently uses mostly contract labour, it is already proactive in community and labour relations. As to nationalization, Jones said that elected officials and unions are against it, concluding that “the whole idea is less than half-baked.”

Going forward in 2011, the company will continue to develop the WBJV Project 1 as it looks to secure bank financing and continue with permitting, but with a number of high-profile acquisitions and takeovers on the Bushveld recently, Jones is not ruling out selling.

“We’re open to a deal on the company, and we’re also prepared to drive the project forward,” said Jones. “When I say all options are open to realize shareholder value, I mean it.”

Jones has had experience making such decisions before. As co-founder of both MAG Silver (MAG-T) and West Timmins Mining (with Platinum Group’s CFO Frank Hallam), he helped make the call that for West Timmins it was the right time to sell and for MAG Silver, which has doubled in price since it received a bid, it was not.

Platinum Group Metal’s other assets include the 2 million indicated oz. 4E Project 3 near Project 1, earlier-stage projects on the North Limb of the Bushveld Complex, and exploration projects in northern Ontario.