The precious metal hierarchy goes something like this...
Gold is essentially the "Perfect 10" of precious metals. It's the ancient metal of kings and a precursor for currency. Gold has long been a measure of wealth, and it is still coveted the world over for jewelry and wealth preservation.
Next up is silver. Silver is often said to be gold's ugly sister. Silver, of course, is much cheaper — though quite possibly a better long-term investment than gold.
Beyond that, though, two precious metals often fly under the radar, despite being less abundant than both gold and silver.
I’m talking about platinum and its close cousin, palladium.
Platinum is so rare, in fact, that all of the metal ever mined could fit into your living room. And palladium is even harder to find.
Furthermore, both platinum and palladium have industrial uses, which amplifies demand. Both have accrued large production deficits over the past few years.
Given that, it shouldn’t come as a surprise that platinum and palladium are out-performing gold and silver.
Each has gained more than $70 per ounce since the start of the year, with Palladium taking the lead as 2017’s best-performing precious metal.
And that trend is likely to continue throughout the year.
Indeed, platinum and palladium are set for a stellar 2017, and will likely finish far ahead of their more-heralded counterparts.
Here’s a closer look at what the market has to offer, as well as a few stocks to consider buying.
Demand & Deficit
There are two factors driving platinum group metal (PGM) prices right now, and they’re as obvious as one would expect: supply and demand.
First, platinum and palladium are benefiting from a huge boost in demand, mostly due to their role in auto production.
Both palladium and platinum are used in catalytic converters. And last year was the seventh consecutive year in which global auto sales rose.
More than that, it was a record year.
Automakers sold about 17.55 million units in the U.S. in 2016, edging out 2015’s high by about 50,000 vehicles.
Consequently, the PGMs rose roughly $80/oz, with palladium reaching $750 and platinum $971.
In 2017, the U.S. is forecast to see even more new vehicle sales; somewhere around 17.8 million.
Sales overseas, particularly in China and Russia, are on the rise, too.
China's vehicle sales jumped 13.7% in 2016, the fastest pace in three years, thanks to a tax cut on small-engine cars. The auto market there is expected to grow another 5% this year. China’s market is a fledgling market, too, which means recycling old vehicles does not play a large role in supplying new catalysts. As a result, new vehicle demand directly impacts new palladium supply.
Auto sales in Russia, meanwhile, are expected to rise 4%.
Jewelry and investment demand also contribute to platinum consumption. Those, too, have shown signs of vibrancy.
Investment demand was up an estimated 15% in 2016, as platinum bar and coin buying remained near record highs.
Yet, while PGM demand is rising, supplies are extremely tight. Production deficits are mounting.
2016 was the fifth consecutive year that platinum production failed to meet demand. And 2017 is already shaping up to be the sixth.
Total platinum supply in 2017 is forecast to fall 2% to 7.75 million oz, while demand will register roughly 7.85 million oz.
Furthermore, the key Above Ground Stocks measure fell to 1,875 kilo ounces last year — down 55% from 4,140 kilo ounces at the end of 2012. By the end of 2017, it’ll be at the lowest level since 2011.
Palladium is even more scarce.
TD Securities predicts the palladium deficit will double from 600,000 ounces in 2016 to 1.2 million in 2017. (The firm expects the platinum deficit to rise from 400,000 to between 600,000 and 650,000 in that time.)
“We’re positive on the platinum group metals, and we have been for some time,” said TD Senior Commodity Strategist Mike Dragosits. “We’re a little bit more positive on palladium than platinum.”
One of the major factors behind the shortfall is mining stoppages in Africa.
The two largest producers, Anglo American and Impala Platinum, are both struggling with labor issues in their native South Africa.
South African platinum mine production output fell by 10.8% at one point last summer, as striking miners closed down mines. Consequently, the country’s annual supply has fallen from a peak of nearly 6 million ounces a decade ago to a little over 4 million ounces.
Zimbabwe’s platinum production fell an estimated 22% in the second quarter of 2016.
In all, mining supply fell roughly 3% in 2016.
Long-term palladium supply is even more questionable.
Russia is one of the world’s biggest palladium suppliers, but reserves at the Russian Precious Metals and State Depository are a state secret. Analysts suspect that these reserves have nearly run out, possibly pointing to a real shortage in palladium supply in the future.
Platinum and Palladium Price Forecast
So, where does this all leave prices?
Shrinking and unreliable supply, coupled with firm demand, continue to drive platinum and palladium prices higher.
They rose in 2016 and have gotten off to an even hotter start this year.
Platinum prices recently hit to a two-month high at $980 per ounce, while palladium has rocketed near an 18-month high at $750 per ounce.
TD Securities sees palladium averaging $740 in 2017 and $790 in 2018. The bank looks for around $1,100 platinum in 2017 and $1,225 the year after.
SocGen has a similar forecast. The bank expects palladium to average $750 per ounce in 2017, compared to $620 in 2016. SocGen projects platinum averaging $1,040 in 2017.
If anything, these forecasts are under-selling the metals.
In a more bullish scenario we could see palladium reach $800-$900 per ounce, with platinum reaching $1,100.
Potential PGM Investments
As with most precious metals, buying the physical product is the safest way to ensure the metal you bought actually exists in full.
However, if you don't want to take delivery of or store bullion, ETFs designed to track metal prices are the way to go.
The Physical Palladium Shares ETF (NYSE: PALL) tracks palladium. It’s up 53% over the past year. The Physical Platinum Shares ETF (NYSE: PPLT) is up 18% in that same period.
Mining companies are another way to go. These companies are more leveraged to prices. So their returns can be greater, but they also carry more risk.
Ivanhoe Mines (TSX: IVN)(OTC: IVPAF) has quality assets and is ultra-cheap right now. It’s sitting on a HUGE platinum deposit — the largest such discovery in 80 years.
It's led by billionaire mining maven Robert Friedland, so you also get everything that comes with that name.
Since 2007, Ivanhoe Mining Ltd. has focused its exploration activities on defining and advancing the down-dip extension of its original Platreef discovery, now known as the Platreef Deposit, in South Africa. It owns 64% of that project, with the remainder owned by a Japanese consortium and Ivanhoe's broad-based black economic empowerment (B-BBEE) partners.
In addition to the this project, the company has:
- The 95% owned Kamoa, the world's largest undeveloped, high-grade copper deposit; and
- The 68% owned Kipushi copper-zinc project that is currently being drilled out.
The Kamoa Project in Congo is one of the world's largest unmined copper deposits at some 53.3 billion pounds, and the Kipushi Project, also in Congo, has historic estimates showing 11 billion pounds of zinc and over 1 billion pounds of copper.
However, the company is focused on Platreef, and for good reason.
The Platreef platinum/palladium, gold, rhodium deposit is characterized by its very large vertical thicknesses of high-grade mineralization and a platinum-to-palladium ratio of approximately 1:1, which is significantly higher than other PGM discoveries in the region.
The shallow depths of the deposit, thickness of useful ore, and geography of the project will allow Ivanhoe to utilize a highly mechanized process to extract the ore.
Workers will enjoy much safer working conditions and higher wages because of specialization with modern mining equipment.
A pre-feasibility study (PFS) in 2015 showed a large underground mine with initial four-million-tonne per year (Mtpa) concentrator, doubling to 8 Mtpa, and then a third expansion to 12 Mtpa.
Initial average annual production will be 433,000 ounces of platinum, palladium, rhodium, and gold, plus 19 million pounds of nickel and 12 million pounds of copper. First concentrates are expected in 2019.
Pre-production capital requirements are $1.2 billion. That would put Platreef at the low-end of the cash cost spectrum with an estimated cost of $322 per ounce of platinum, palladium, rhodium, and gold.
All this translates to an after-tax net present value (NPV) of $972 million with an 8% discount rate and an after-tax internal rate of return (IRR) of 13%. Ivanhoe owns 64% of the project.
With a mix of platinum, palladium, gold, and rhodium, Platreef has the highest concentration of PGM and gold in Africa, at some of the lowest costs.
The project itself isn't fully defined yet. Both the south and west sides are open to expansion and we can expect some more test drilling in the future.
The property will be developed, and it will be profitable. Further discoveries will only boost value.
Taking 64% of estimated NPV of $972 million, plus 95% of the $2.55 billion NPV of the Kamoa Project, you arrive at a potential value of $3.52 billion. That doesn't include any of the value at the Kipushi Project.
With 772.2 million shares out, that implies a share price of ~$4.56, compared to $3.32 currently.
Of course, this is just one of many companies that focus on platinum and palladium deposits. But we like the assets and the management of Ivanhoe.
-Outsider Club Research Team