David Franklin: During the first half of the year, gold companies booked large write-downs to assets, which they had purchased earlier in the cycle at inflated values. Then, Bernanke mentioned a potential reduction in stimulus from the Federal Reserve, which prompted U.S. hedge funds to sell large positions in gold. Soros, Paulson and Daniel Loeb each sold a large chunk of their holdings. There was just a huge amount of bad news in the whole precious metals sector and it was all priced in by the end of June.
TMR: Are precious metals in the midst of a true comeback?
DF: We have turned a corner and are now recovering as the market rebalances. The good news is that gold and silver are up more than 20% from their June bottoms. We still have huge demand for physical metal as evidenced by depleting inventories at the COMEX.
TMR: How are the junior gold miners doing?
DF: Look at the GDXJ, which is an index of junior miners: Gold stocks have recovered somewhere north of 30%. The GDX, which is an index of senior miners, has recovered in the neighborhood of 20%. Gold stocks have more than rebounded since the horrible June lows.
TMR: What qualities do you look for when assessing precious metal miners?
DF: First and foremost, I look at the company managers. I put a premium upon an executive's previous success within the industry. That is more important to me than his or her ability as a geologist or as a mine builder. Secondly, I independently assess the merits of the company's deposits, and whether a mine has a good chance of showing a profit. There are so many deposits out there that cannot become profitable. The third item I look at is the firm's access to capital. Can it raise enough money to actually build a mine and bring it into production? Frankly, finding all of these qualities together in one company at the same time is a very rare combination.
TMR: How do platinum group metals fit into the overall precious metals market in terms of industrial demand and other uses?
DF: In dollar terms, PGMs are the smallest of the precious metal markets, and these metals are used differently than gold. For example, gold is a monetary metal and very little of it is used by industry. Most platinum and palladium is consumed by industrial processes, but it is still considered a precious metal.
DF: Both platinum and palladium are used in catalytic converters, which remove carbon dioxide and some of the smog producing gases from internal combustion engines. However, platinum has a higher melting point and can be used in hotter burning engines, like diesel cars. Engines with lower operating temperatures, such as gasoline cars, can use palladium in their converters. Right now, palladium is about half the price of platinum.
TMR: What is the global supply and demand outlook for platinum group metals?
DF: South Africa is a very significant player in gold mining, and an even more significant player in platinum mining. More than 70% of the world's platinum comes out of South Africa. Right now, South Africa is entering its biannual labor negotiations and tensions are very high. The gold and platinum mining companies have offered their workers a 5% increase in wages. Depending on the particular union, the workers are demanding a doubling of wages or a 60% increase—and are threatening to strike. You can imagine how a strike could impact the price of gold, and to a lesser extent the price of platinum. Last year, the platinum price increased by 15% after striking miners were shot and killed in South Africa by government forces.
TMR: Will the new South African Mineral and Petroleum Resource Amendments make a positive or a negative impact on the current state of mining in South Africa?
DF: After the violence last year, the mining companies and the government are both trying to reach better terms with the unions. There are rumors that South Africa would consider nationalizing the mining assets. Some people in the government have been spouting this view for years now. It is remains a very volatile political environment, and any potential changes can be significant.
TMR: Why, geologically, is platinum concentrated in South Africa?
DF:. Vast quantities of molten rock from the earth's mantle were brought to surface through long vertical cracks in the earth's crust, huge intrusions created the geological intrusion known as the Bushveld Igneous Complex. Those metal veins are very thin. That makes it very difficult to do highly mechanized mining, which generates a lot of waste ore and a very small amount of platinum and palladium. Consequently, PGM miners do not rely upon mechanization, like trucks and other mining equipment. They dig the metal out by hand while lying on their backs in very cramped and hot conditions. It is impossible to get mechanized equipment into these narrow mine shafts. This method of mining is very expensive because of the amount of manual labor needed.
Consequently, at current platinum prices, about 60% of the mining industry in South Africa is not making a dollar producing platinum. The cost of producing platinum is about $1,800 per ounce ($1.8K/oz), but the market price is in the $1,400/oz range. Because the miners are losing money, they are not investing in their mines, which are increasingly in poor conditions. The bottom line is that investors should buy the metal itself.
TMR: What companies do you cover in the Bushveld region?
DF: Ivanhoe Mines Ltd. (IVN:TSX) [formerly Ivanplats (IVP:TSX)] has made an unbelievable discovery in a previously unexplored area of the Bushveld. Robert Friedland, a long-time Canadian miner, is the founder and executive chairman. The company has found a previously undiscovered deposit of platinum that can be mined mechanically! Ivanhoe will be able to mine platinum at a fraction of its current cost of production. This reformation is one of the best deposits of platinum in the world; it could have a huge impact on the platinum market.
TMR: What makes it unusual?
DF: The Platreef project includes a recently discovered underground deposit of thick, PGE-nickel-copper mineralization in the Northern Limb of the Bushveld Complex, approximately 280 kilometres northeast of Johannesburg. Many platinum mines chase deep underground veins that are very narrow. The platinum in Friedland's reformation is highly concentrated, with thick veins of the metal close to the surface. It can be mined using the open-pit method, which is very cheap and unlike any other deposit in the complex.
TMR: Could Russia contribute significantly to global PGM supply?
DF: Russia does not have any labor issues, per se, but it has other problems that are impacting the palladium market. Norilsk Nickel (GMKN:RTS; NILSY:NASDAQ; MNOD:LSE) is one of the largest mining companies in Russia and it owns a nickel deposit with a palladium byproduct. Norilsk had been stockpiling the palladium from this deposit and regularly selling it on the world market. But last year, Norilsk confirmed that its palladium stores are almost depleted. That supply had been a huge overhang on the market.
TMR: What's demand look like for palladium?
DF: The primary use of palladium is in catalytic converters for cars. North American automobile production is the highest its been since 2007. Chinese car production is hitting all-time highs, with 10%, 20%, and 30% increases year-over-year. As above-ground stores deplete, the price will walk higher. Interestingly, a company recently launched a platinum ETF in South Africa and demand exploded. So now there is the concern about the diminished Russian supply, and concern that there is not enough palladium being mined in South Africa to meet increasing investment demand from ETF investors.
It's pretty close to a perfect storm in the palladium space.
TMR: Are there platinum miners outside of South Africa?
DF: At Sprott, we like Prophecy Platinum Corp. (NKL:TSX.V; PNIKF:OTCPK; P94P:FSE). It is located in Canada, which is a much safer jurisdiction than South Africa. It is exploring a deposit that had previously been mined by several other companies. The deposit contains very high concentrations of nickel, platinum and palladium. Prophecy has a shot at turning that project into a good mine.
TMR: Prophecy's stock price hasn't been doing that well in the last year. Is there an explanation for that?
DF: Prophecy published a preliminary economic assessment saying that it would cost $500–600 million to start building its mine. Everybody said, "Wow, that's a lot of money." We are living in a capital constrained world, right now. Frankly, the same thing has happened to Ivanplats. It has been a rough year for anyone who is not already producing.
TMR: Do you see that situation turning around during the next few years?
DF: We see an uptake in platinum and palladium prices. Price increases will mostly emanate from supply depletion. There are a number of other catalysts tied to this pricing trend, including some of these companies shutting down production. There is a clear increase in demand and there are very few substitutes for the platinum metals in industrial processes. Coming into the halfway point of this year, palladium was the top performing precious metal. Gold is catching up fast, but the fundamentals are very strong for investing in palladium and platinum ETFs.
TMR: Thanks for joining us today, David.
DF: Take it easy, Peter.
David Franklin joined Sprott Asset Management Inc. in 2008 as a research analyst focusing on equity research within the precious metals and materials sectors. In April 2009, Franklin became the co-author of the monthly "Markets at a Glance" articles with Eric Sprott and subsequently became "Market Strategist" in February 2010. He was named CEO of Sprott Private Wealth in March 2011 and oversaw the business unit of Sprott that provides wealth management services to high-net worth individuals, foundations and trusts. In January 2013, Franklin returned to Sprott Asset Management as market strategist.
Want to read more Metals Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Metals Report homepage.
1) Peter Byrne conducted this interview for The Metals Report and provides services to The Metals Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Metals Report: Prophecy Platinum Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) David Franklin: I or my family own shares of all the companies mentioned in this interview. I personally am or my family is paid by the companies mentioned in this interview. My company has a financial relationship with the companies mentioned in this interview. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.