Analysis: Palladium boom gives South African miners only temporary reprieve

Platinum Metals

17/05/2019 06:00

* Palladium vs other precious metals: https://tmsnrt.rs/2WLcFct
    * Platinum supply-demand balance: https://tmsnrt.rs/2VXZOXe
    * For more stories from Platinum Week:  urn:newsml:reuters.com:*:nL5N22P2FO

    By Zandi Shabalala
    LONDON, May 17 (Reuters) - A surge in palladium prices has
thrown struggling South African mining companies a lifeline. But
it may not be enough.
    Besides patchy power supplies and high labour costs, South
African miners are saddled with ore that typically produces
twice as much platinum as palladium - just at a time a global
platinum surplus is weighing on prices.
    Russia's Norilsk Nickel (Nornickel)  GMKN.MM , the world's
biggest palladium producer, meanwhile, has emerged as the winner
from the reversal of platinum's long-standing premium over
palladium, because the ore it mines is far richer in the latter.
    Unlike South African mines, Nornickel's ore produces four
times as much palladium as platinum and the company has lower
extraction costs, leaving it in prime position to benefit from
palladium's bull run and reinforce its dominance.
    Nornickel said in November it would spend $10.5 billion to
$11.5 billion in the coming years to boost its metals output. It
plans to raise production of platinum group metals (PGMs) from
its Arctic mines by 25% from 2017 levels by 2025 - an increase
of about 860,000 ounces.  urn:newsml:reuters.com:*:nL8N1XP5M2  urn:newsml:reuters.com:*:nL8N21F69A
    Platinum and palladium are both mainly used in autocatalysts
to reduce car exhaust pollution. But while palladium goes into
gasoline cars, platinum is mainly used in diesel vehicles and it
has fallen out of favour since the emissions cheating scandal.
    "We see the current palladium premium over platinum as
sustainable in the mid-term as it is justified by higher fair
value-in-use in the automotive industry," said a Nornickel
spokeswoman.
    Palladium  XPD=  hit a record $1,620 an ounce in March, a
surge of nearly 100 percent since August. It has slipped back to
around $1,335, but is still more expensive than gold  XAU= .
    Platinum  XPT= , meanwhile, sank to a 10-year low of $751 an
ounce in August, a far cry from a peak of $2,290 in 2008.
Platinum prices are now around $850, partly supported by bets
from some investors who believe the price has sunk too low.
    "Norilsk is benefiting handsomely from the higher palladium
price and most of South African mining can't keep up," said
Nedbank analyst Arnold Van Graan.    
    
    
    'DEEP TROUBLE'
    Spending more to crank up production and take advantage of
record palladium prices just leaves South African miners with
even more platinum when the market is expected to have a surplus
for the fourth year in a row. For Nornickel, investing to expand
makes more sense given the market dynamics.  urn:newsml:reuters.com:*:nL5N22M6KE
    "Palladium is now the largest revenue source for Nornickel,
followed by nickel and copper and therefore investors like the
purer exposure to key industrial metals," said Roger Jones, a
fund manager and head of equities at London & Capital.
    According to consultants Metals Focus, higher car industry
demand should leave the palladium market with a deficit of
574,000 ounces in 2019, the eighth year of shortfalls in a row.
Platinum is expected to have a surplus of 630,000 ounces.
        
    
    Overall, the basket price of PGMs in South Africa has risen
about 30% over the past year thanks to palladium, but miners are
not generating enough returns given the composition of their ore
to boost production significantly.
    "It's a tremendous difference from a year ago but we are not
out of the woods yet as a sector," Northam Platinum  NHMJ.J  CEO
Paul Dunne said, adding that the PGM basket price would need to
rise another 20% for most South African mines to be sustainable.
    In 2018, margins for South African platinum miners were
negative on average, the industry made an aggregate loss and
capital expenditure was less than a billion dollars, said
industry group Minerals Council South Africa.
    Rising costs, including higher wages and electricity bills,
are also eating away at margins.
    "The reality is the industry is still in deep, deep
trouble," said James Wellsted, spokesman for Sibanye-Stillwater
 SGLJ.J . 
    "They might be making a little bit of money now but it's
still not high enough to justify investment in projects that
will extend the lives of the operation," he said.
    Sibanye has fared better than its rivals partly thanks to
its higher exposure to palladium after its acquisition of U.S.
mining company Stillwater in 2017. The addition of Stillwater
means it now produces an even split of platinum and palladium.
    Higher profits from its PGM operations offset a loss from
its gold mines, which were hit by five months of strikes, to
give it an adjusted core profit (EBITDA) of $12.5 million in the
first three months of 2019.
    
    OUT ON A LIMB
    Lonmin  LMI.L , the world's fifth largest platinum miner, is
being bought by Sibanye in an all-share deal to help both
weather the markets after a series of strikes in South Africa
and low prices battered Lonmin's balance sheet.
    It made an annual pre-tax profit in its 2018 financial year
after four years of losses but is sticking to its plan to cut
high-cost production and focus on its newer "Generation 2"
operations.
    "Despite the progress made, this does not provide a
long-term solution to the capital structure challenges faced by
Lonmin, as it is still inadequate to invest in the new projects
necessary to avoid shaft closures and job losses and maintain
our production profile," Chief Executive Ben Magara said.
    Anglo American Platinum (Amplats)  AMSJ.J , the top South
African palladium producer, resumed dividends in 2017 for the
first time since 2011 and raised its dividend payout-ratio this
year, but it too is shying away from major spending.
    Instead, it is focusing on incremental increases from its
palladium-rich Mogalakwena mine. Amplats is studying how to lift
PGM output from Mogalakwena by about 500,000 ounces in four to
five years from 1.2 million ounces last year.
    Mogalakwena sits in the Northern limb of the South African
platinum belt where the ore contains relatively more palladium.
    But most mines owned by the major miners sit on the Western
limb. They contain more platinum, are older and much deeper,
making them more expensive and labour intensive to mine.
    Impala Platinum  IMPJ.J , which has seen its profits rise,
is closing shafts and cutting thousands of jobs at its
Rustenburg mine to try to return it to profitability.
    Impala is reviewing an option to raise its stake in a
palladium deposit owned by Platinum Group Metals  PTM.TO  but
plans no major expansion itself. It will be cutting platinum
output by 230,000 ounces by the end of next year.
    "The fact is, we get the metal in the ratio that it was put
there and its very difficult mostly in South Africa to change
that mix," said Amplats Chief Executive Chris Griffith.

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Palladium vs other precious metals    https://tmsnrt.rs/2WLcFct
Platinum supply-demand balance    https://tmsnrt.rs/2VXZOXe
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 (Additional reporting by Polina Devitt and Anastasia Lyrchikova
in Moscow; editing by David Clarke)
 ((zandi.shabalala@tr.com; +44 207 542 5937; Reuters Messaging:
zandi.shabalala.thomsonreuters.com@reuters.net))