From the price per ounce below the cost of production, to this dynamic that’s never happened before, the case for investing in platinum is strong…
Editor’s Note: The platinum metals group was just deemed “critical to U.S. national security and the economy” by the Department of the Interior as a follow up to a President Trump executive order.
Maurice Jackson: Joining us today is Jamie Keech of Capitalist Exploits. Today we’ll be discussing platinum. Jamie, thank you for talking with me today about platinum. First, tell us about Capitalist Exploits.
Jamie Keech: Capitalist Exploits is a blog that’s run by Chris McIntosh, who is a macro investor. He also runs a small fund called the Asymmetric Opportunities Fund, which he invests his own money in and looks for asymmetric opportunities all over the world. In the last few months, I’ve partnered with Chris and we’re launching a new service for our readers called Resource Insider. Resource Insider is going be focused purely on the natural resources sector, primarily mining and metals. We’re going to be looking for opportunities and recommendations for our readers about how to get the best rewards and the best returns in the mining and metals space.
Maurice Jackson: Since we’re discussing precious metals today, what is your thesis on stewardship of precious metals?
Jamie Keech: I was thinking about this this morning and I put precious metals into two categories. I look at them either as an investment or a store of wealth, and in terms of an investment, I look at it like any other investment. Sometimes it’s a good investment, sometimes it’s a bad investment. If you bought gold or a gold security or ETF at the top of the market in 2012, obviously it would’ve been a bad investment. Today, given the political situation in a lot of places in the world, given the economic situation, given the sovereign debt of a lot of nations, I’m starting to think of gold and other precious metals as a very good place to put money. I get exposure to that mostly through securities and I’ve invested junior exploration companies. I’ve invested in development and operating companies, as well as royalty and streaming companies.
Now, the other way to answer your question is, do you also look at gold particularly, but precious metals in general, as a store of wealth? That’s a totally different ballpark. I would make the case that any serious investor should have some part of his or her portfolio in precious metals, particularly gold, as a way to essentially hedge against catastrophe. If you lacked faith in fiat currencies, having that as a store of your money means you’re not so dependent on any one government or any one country. So the percentage you’re going put into precious metals is really going to depend on your personal portfolio, where you live, your general level of paranoia at the state of the world. But I do think precious metals, and gold in particular, are a very important part of any investment portfolio, as that underlying safety net.
Maurice Jackson: Speaking of gold and silver, that’s what a lot of precious metals investors focus on and they overlook the platinum group metals. For someone new to the fundamentals of platinum, please provide us with a 10,000-foot narrative.
Jamie Keech: Platinum’s a funny metal in a lot of ways or rather I should say it’s a funny precious metal, because it’s the industrial precious metal. Whereas gold is almost 90+ percent used as a store of wealth or in jewelry, platinum’s a lot different. Something like 40% of platinum gets used in the automotive industry, particularly catalytic converters. Another big chunk does get used for jewelry, around 30%, and then there’s 20% in the industrial space such as medical equipment because platinum’s a very sterile metal.
Only 3% of platinum is actually bought and held as an investment opportunity, compared to gold or silver, which are obviously much higher. So that’s the underlying ownership fundamentals of platinum. Now from a high-level perspective, almost all of the world’s platinum comes out of South Africa and in terms of buyers, the biggest buyers are of course the automotive industry and using it for catalytic converters for diesel cars.
Maurice Jackson: Let’s get into the supply and demand fundamentals for platinum. What can you share with us regarding supply?
Jamie Keech: As I was just mentioning, the vast majority of platinum and platinum group metals in general, that includes palladium and rhodium, comes from South Africa. That country produces somewhere in the order of 70, 80% of all platinum group metals. It holds 80% of the world’s platinum reserves. So I think totally there’s about 160,000 kilograms of platinum produced every year. Something on the order of 110,000 of those comes from South Africa. That’s followed at a pretty far distance by North America and then third would be Russia. While platinum does come out of Russia, the majority of the platinum group metals that we’re seeing from there is actually palladium and I believe that Russia is the number one or else a close number two producer of palladium in the world right now. The South African mines are starting to dry up. The cost of platinum has dropped to a level that it’s getting very hard to mine it economically and then you’re seeing these social shifts occurring right now in South Africa that’s putting the industry in jeopardy.
South Africa recently elected a new prime minister called Cyril Ramaphosa. He came in as a very pro-business, pro-development politician, but since that time he’s turned around on that. One of the things that he’s starting to instigate right now is I believe 30% black ownership of the mines. That’s an increase from what had previously been in place. That’s going to stir things up a little in terms of the ownership and the profitability of these mines. And then there’s also really an underlying movement right now from the EFF, which is the other prominent party. I think it’s the Economic Freedom Fighters. It wants to nationalize all land ownership and that includes mines and natural resources. In terms of supply, you’re really seeing a constraint on platinum and platinum group in general and it’s not yet been picked up in the other parts of the world.
Now obviously Russia has its own complications right now in the world and in North America, you’re just not seeing the mines or the deposits come online to fill the gap that’s inevitably going to be left by South Africa. But with so much coming from South Africa, the supply is really dependent on the political climate of that nation, and I look at platinum right now as one of the most interesting ways to be short South Africa.
Maurice Jackson: This is a perfect storm of events here, you have geopolitical turmoil, the cost of production, water shortages. It’s just leading to what could be a spectacular event here in platinum. Now what can you share with us regarding demand?
Jamie Keech: Demand is interesting and what’s going on right now, or at least what I see going on, is the concept of demand and the actuality of demand are not matching up. So the vast majority of platinum and platinum group metals goes to the automotive industry, particularly as we noted, catalytic converters for diesel burning cars and trucks. Now with the new electric vehicle craze that’s taking the world right now, the narrative’s going like this. There are going to be electric vehicles that take over the world, we’re not going need fuel burning vehicles anymore. We’re not going to need diesel because we don’t need diesel, we don’t platinum. So there’s this perception that platinum’s not going to be necessary to the same degree that we’ve seen in the past, but this doesn’t really actually match up what’s going on right now.
If you look at the numbers, there’s actually a deficit of platinum every year of a couple hundred thousand ounces. We’re seeing growth still throughout China and the third world and it’s not going to be realistic to assume we’re just going to inject electric vehicles there. I mean a lot of these places, diesel is the obvious and only choice in terms of automotive transport. Additionally, what you’re seeing with the skyrocketing palladium prices and rhodium prices, these metals have been traditionally more used with gasoline powered engines as opposed to diesel powered engines, Palladium is at an all-time high (dating back to the last 10 years) or nearly an all-time high right now, rhodium has over doubled in price in the last year. So these are getting to a price where car manufacturers are going to start thinking about using platinum instead of palladium in gasoline engines as well. In terms of demand, you’re seeing it in the automotive industry and it’s going to continue to be in the automotive industry. Beyond that, about 20 to 30% of the world’s platinum is used in jewelry, and then you have a small amount that’s used for other industrial metal as well, as we said primarily medical supplies.
Maurice Jackson: I want to play devil’s advocate here, Jamie. Palladium, can it be used in diesel engines?
Jamie Keech: I would say that it’s unlikely that it will be used in diesel engines and the reason for that is in the average platinum group deposit, platinum makes up about 60% and palladium makes up about 30%. So there’s always going to be proportionally less palladium available. I don’t know if there would be a realistic case for manufacturers switching from platinum to palladium.
Maurice Jackson: Now what are the global costs of production versus all-in sustaining costs on platinum?
Jamie Keech: Right now the platinum price is $927 an ounce. The South African cost of production, the average price of cash cost is $950 per ton or the all-in sustaining costs are $1,100 per ounce. So it’s costing $1,100 per ounce of platinum to pull it out of a mine in South Africa right now and they’re only able to sell it for $927. So obviously this is a situation that can’t go on indefinitely.
Maurice Jackson: In global relative terms, what percentage of investors owns gold, silver and then platinum?
Jamie Keech: I couldn’t even speculate on what percentage of investors own gold or silver, but I would say only 3% of the world’s platinum is held as an investment. I believe the vast majority of this is in Japan. So a tiny, tiny portion of people hold platinum as an investment.
Maurice Jackson: If I’m not mistaken, platinum is 30 times more rare than gold. Is that correct?
Jamie Keech: That’s close. Platinum that has been mined is about 30 times more rarer than gold, so extracted platinum. It’s actually very similar to the level of gold found in the earth’s crust, but the deposits are harder to find and we’ve been less successful at extracting it previously. I believe platinum wasn’t even really discovered until the 18th century and that’s when it was thought to be a combination of gold and silver. It was discovered by Conquistadors in South America and for the longest time, what limited us from accessing and extracting platinum effectively was the processing methods for it.
Maurice Jackson: Now is there a catalyst that will change the supply and demand fundamentals for platinum?
Jamie Keech: I mean we’ve touched on this earlier, but the biggest catalyst is political changes in South Africa. If the mines are nationalized, all of a sudden, the platinum market is going to explode. We’ve seen grumblings of this already. Sibanye, the South African platinum miner, is one of the biggest in the world. Sibanye Gold recently bought, I believe in December 2016, the Stillwater mine in Montana for $2.2 billion. This is one of the biggest platinum miners in the world. It’s in South Africa, the biggest platinum producer in the world, the most reserves and resources in the world, and it is actively looking for deposits outside of the country. I’d say that tells us a lot, that even the companies that are most familiar with this market are aware of the risks in South Africa, and they’re trying to hedge that right now. In terms of EV, electrical vehicles, of course this can have an effect and if everyone’s driving electrical vehicles, there is going to be a lesser demand for platinum, but that’s not realistically five years out, that’s not realistically even 10 years out. And at today’s prices, miners cannot keep mining. It doesn’t make sense. They’re losing money on every ounce they produce on average. So something has to change.
Maurice Jackson: When we say something has to change, how long do think it’ll take for that change to occur? And I’m referring to the price change that we should see in platinum.
Jamie Keech: The real answer is I don’t know, but if I had to guess, I would guess within the next 12 months, and the reason for that is there’s been a deficit the last several years in platinum produced versus demand. That deficit is expected to increase right now and I assume it’s only a matter of time until people start to clue in on this. The other aspect is we’ve seen a big run in both palladium and rhodium; I mentioned this before. Palladium had an all-time high last year, rhodium more than doubled in price and platinum has just continued to be in the doldrums, and I think it’s going to start to follow suit soon. I couldn’t give an accurate date of when that will be, but I would say sooner rather than later.
Maurice Jackson: Relative to the price of gold, how often is platinum below the price of gold?
Jamie Keech: I think platinum has actually only been below the price of gold two times or so in the last 30 years and the last one was in the late 1990s or early 2000s and then now, where we are today. So generally platinum’s almost like the opposite of gold. Gold thrives on volatility and uncertainty and the price of gold spike in those events, whereas platinum has traditionally thrived in stable economic environments. And one of the big reasons for this is the fact that platinum is a functional commodity, so it’s used in building cars primarily. So in good environments, more people are buying cars and we’re seeing more platinum be used. But that’s not happened over the last few years and it’s very out of whack to what traditionally we would be seen. So it’s an unusual occurrence.
Maurice Jackson: With regards to platinum, I see anomalies and distortions because it’s below the price of gold and more recently below the price of palladium. How often does that occur?
Jamie Keech: For both to happen at the same time? I’m not sure that’s ever occurred or not in recent history.
Maurice Jackson: Jamie, you survived the storm. Last question here for you. What did I forget to ask?
Jamie Keech: I would say the question you forgot to ask is the best way for people to get exposure to platinum. And I’m in a way glad you forgot to ask that because I’m not entirely sure yet and that’s something we’ve been looking at Capitalist Exploits, finding promising deposits run by good companies with great management teams outside of South Africa, outside of Zimbabwe, outside of Russia. And there are not very many there. So that’s something we’re going to have our eyes peeled on the next few months and we’re looking for opportunities then.
Maurice Jackson: If investors wish to get more information regarding Capitalist Exploits, please share the contact details.
Jamie Keech: Please check out our website, which is capitalistexploits.at or you can find me on Twitter, which is jamie_keech, and I’ll respond to any questions you might have.
Jamie Keech of Capitalist Exploits, thank you for joining us today on Proven and Probable.
Maurice Jackson is the founder of Proven and Probable, a site that aims to enrich its subscribers through education in precious metals and junior mining companies that will enrich the world.