South African PGMs On The Up For Now

Peter Major – Mergence Corporate Solutions Director: Mining

When COVID-19 began spreading globally in February 2020, South Africa’s platinum mines started showing excellent prices for their metals.

After working through four years of slightly below-average metal prices from 2015-18, alongside tough strike action, and labour, community, electricity and regulatory hurdles, South Africa’s platinum group metal (PGM) industry finally found itself entering a period of good PGM prices and relatively calm labour and community relations in 2019. This was even better in 2020.

Their average run of mine (ROM) contained metal had witnessed its dollar/tonne value rise by 40% in 2019, from the average prices of the previous four years. In early 2020, that ROM dollar/tonne value jumped again – this time from $250/t to $350/t between January and March. Everything seemed just too good to be true, not just for SA’s PGM miners, but for their fellow PGM miners the world over. The environment just couldn’t be better. Or could it?

COVID-19 emergency measures by the South African government shut down most of the country’s PGM miners by April 2020, just as the basket ROM value fell from $350 to $250 per tonne. But neither situation persisted more than a few months. By October 2020, SA’s PGM producers were nearly back to normal production, while their ROM ore value was almost back to $350/t.

But the good news wasn’t about to stop there. By late February and early March, the PGM ROM basket was over $500/t, hitting a high of $560/t. PGM producers were now showing profit margins that until then had only existed in the sportswear and information technology industries, with ROM $/t value up from an average of $140/t from 2015-18. The benefits to the producers were almost incalculable. They had all pared capex way back and taken on heavy debt loads during those four lean years.

Furthermore, most of them had been hedging and streaming their by-products – usually about 10% of total revenue – for many years. Some producers had even been hedging and/or selling forward parts of their mainstay palladium and platinum production as well, just to survive.

Whoever could have imagined that COVID engulfing the world would have provided such a boon to PGM producers, raising the price of their metals by multiples over their long-term averages? Palladium hitting $3 000 an ounce from its 80-year average of $550. Rhodium hitting $30 000 an ounce from its 80-year real average of $3 100. And iridium trading at $4 000 an ounce with its long-term real average at $1 000.

The way ahead

At those prices, rhodium was responsible for 55% of South Africa’s platinum industry revenue, with palladium coming second at 22%. Platinum was a distant third at 14%, with other metals making up the remaining 10%. Essentially, one could say that South Africa’s PGM mines are making 72% of their revenue from just rhodium and palladium.

The start of the war between Russia and Ukraine has sent metal prices racing up again, although this time more for palladium than rhodium.

Russia produces just over 38% of the world’s newly mined palladium, translating into 23% of world demand per annum. Remember that recycling provides 3.5 million ounces of palladium annually, compared to Russia’s 2.6 million ounces. Russia produces only 8% of the world’s newly mined rhodium annually, compared to South Africa’s 83%. South Africa also produces 73% of new mine supply of platinum and 39% of newly mined palladium.

So the question is – where do we go from here? After all, Russia’s contribution to world PGM demand is not going to fade, let alone disappear. Its mines will continue to produce and their production will still find its way into world offtake demand, albeit for far less in price than they would have received before being sanctioned, and now having to channel sales though avaricious middlemen who are always willing and available to help a metal trader in a bind.

The PGM prices we are seeing today are, in fact, too good to last. Reversion to the mean is nearly as powerful and hard to get away from as gravity itself.

And while PGM prices may not revert back and “settle” at their long-term averages, it beggars belief that these prices will “settle” at current levels that are exponentially greater than their 80-year averages. Even the market seems to believe this.

After all, the higher these PGM prices rise, the larger the price earnings ratio (PE) discount to “the market” the PGM producers trade at. Currently the SP 500 PE is 25, the ALSI 40 is 12.5 and all of SA’s producers are at single digits – from Impala, Tharisa and RBP on six PEs, and AMS on 8.5, to Northam and Sibanye at about 9.5. The market sees great profits and margins right now.

However, these PEs suggest much lower metal prices, profits and margins, and hugely increased mining costs in around six to 12 months. Only time will tell, but expecting a third rise for the industry this year seems to be a bridge too far.