Friday, October 30, 2009

>Strong rand puts pressure on platinum producers

Johannesburg - Platinum miners' balance sheets are under strain as the South African rand strengthens, offsetting a strong recovery in metals prices from last year's lows.

Investors, however, either haven't taken notice or are betting that as the world economy recovers, demand for platinum group metals will again outstrip supply, propelling prices even higher and ultimately boosting the profitability of the companies that dig the metal out of the ground.

"If you look at the platinum price in rand terms, it has moved relatively little over the course of this year. And that is placing pressure on the industry as a whole," Ian Farmer, chief executive of Lonmin PLC (LMI.LN), the world's third-largest platinum producer, told Dow Jones Newswires.

"A large part of the industry is not making a great deal of money right now," Farmer said.

Platinum production is concentrated in South Africa, which accounts for about three-quarters of the world's supply of the metal. That means that while revenue from platinum sales is in U.S. dollars, the bulk of expenses--such as labor and power--are in rand.

A stronger rand erodes gains from platinum prices. In the year to date, platinum is up 41% to about $1,326 a troy ounce while the rand has gained about 23%.

The parallel is even more pronounced when looking at all platinum group metals--a mix that includes platinum, palladium and rhodium--compared with the rand.

Lonmin's average basket price for the group was $918/oz in the three months to Sept. 30, the last quarter of the company's financial year, a 22% increase compared with the last three months of 2008, its first quarter. At the same time, the company saw the rand strengthen 22% against the dollar.

Shares in platinum producers, meanwhile, have risen in lockstep with the dollar price of the metal, potentially setting investors up for a correction, some analysts say.

"We think the market has not yet realized that all the recent increases in dollar-denominated PGM [platinum group metals] prices have been offset by a stronger rand. We expect PGM stocks to fall, led by Anglo Platinum and Lonmin as the market realizes this," Nomura analyst Abhishek Shukla in London said.

The share prices of Anglo Platinum Ltd. (AMS.JO) and Impala Platinum Holdings Ltd. (IMP.JO), the world's largest platinum producers, are up about 30% so far this year. Lonmin is up about 74%.

"I can't see earnings justifying the share prices," said Peter Major, an analyst at fund management and broking firm Cadiz in Cape Town. "The shares are being held up on expectations of earnings far down the road."

"The majority of the rise in the platinum dollar price so far this year has been offset by the rand strength in terms of the rand basket price that we receive," said Anna Poulter, head of investor relations at Angloplat. She said the company had no comment on the direction of its share price.

Major said the revenue of many platinum producers will have hardly budged as the rand has strengthened almost in parallel, and mining companies in South Africa are faced with cost increases of at least 15%. South Africa lifted electricity prices by an average 31% this year after a similarly sharp rise last year, while recent wage settlements have pushed pay up at least 9%.

But not everyone sees an inevitable downside to share prices.

"My view is the rand can't strengthen much more. And yet the potential for demand recovery and the fact that the platinum companies are struggling so severely to me actually paints quite a rosy picture of the future," said Catherine Raw, portfolio manager for Blackrock's natural resources equity team.

That all points to a relatively good share performance for platinum miners in the next six to nine months, she says. In the longer term, though, Raw warns that the industry faces structural challenges and it will be important to invest carefully in platinum companies; Blackrock sees Impala as best positioned to benefit from an expected rise in prices. "Our exposure is to Impala really ... it's one of our largest holdings across the mining sector."

Platinum, also used in a number of industrial processes and for jewelry, is a key ingredient for the auto industry. Auto makers account for almost half of global platinum demand, using the metal in exhaust systems in order to meet increasingly stringent emissions standards.

While auto sales have tumbled, the three major producers of platinum have been focusing on slashing costs, together shedding thousands of jobs and shutting down their highest-cost production. But they are boosting output at remaining operations and supplies aren't expected to take a big hit--Investec Securities forecasts supplies at 7.5 million ounces next year, compared with 6.8 million ounces this year.

That indicates miners are holding on for higher prices--something they expect to materialize in the coming months.

"There hasn't been a sort of grand announcement about major closures," Lonmin's Farmer said. "But I think we are starting to see early signs of demand recovery. We are expecting 2010 to be a year in which supply and demand are fairly much in balance, with price recovery in 2011."