Investment in metal – not miners – the likely platinum scenario

A post-strike look at the performance and structural problems of platinum mining management in South Africa makes a compelling argument for large scale institutional investors to get into the metal itself Jeffrey Christian, Managing Director and owner of CPM Group, tells Alec Hogg in this interview. Investors, he adds, are starting to re-examine the long-term prospects for the metals, he adds. Having said that, Jeffrey believes there are still some very attractive, very well managed, platinum mining stocks in South Africa – although some of the larger ones continue to face and require major restructuring. His price prognosis for platinum is that it is unlikely to run away – probably around $1600 in the short order. – GK

ALEC HOGG:  Welcome back to Power Lunch.  It's so nice to have Gugu back in the studio.  She has returned with her camera and her package from the Harmony Gold disaster.  How bad was it?

GUGULETHU MFUPHI:  It was pretty bad, but you know Mr Briggs.  He tries to remain quite optimistic, so they are trying a few things in the pipeline but it's tough, nonetheless.

ALEC HOGG:  You have to be optimistic to be a gold mining Chief Executive with all the challenges there.

GUGULETHU MFUPHI:  You have to.

ALEC HOGG:  We'll hear more about that later.  Before we take a closer look at Harmony Gold and Northam Platinum's results, we have another resources expert.  He's in town from abroad.  Jeffrey Christian is the Managing Director and owner of CPM Group.  Jeff, it's nice to have you here.  You've been talking to clients: telling them good or bad news…

JEFFREY CHRISTIAN:  Well, I think it's pretty good news.  We had suggested that the gold price would be flat in the second and third quarters with the possibility of a significant increase starting to emerge in September/October.  We're seeing all of the market metrics point in that direction.  Gold's at 1350.00 today.  I wouldn't be surprised to see it at 1380.00/1400.00 by the end of the year.  I think that's pretty good news.  It's definitely, probably above the consensus forecast.  With platinum and palladium as well: we think that now that the strikes are behind us, we've seen some dusting off.  We've seen what we think is the end of stable liquidation in both markets.  You're starting to see investors start to re-examine the long-term prospects for those metals.

ALEC HOGG:  Platinum is one that we're very confused about here, because we've had a five-month strike with a big chunk of production being taken out, and yet the metal's price did very little.

JEFFREY CHRISTIAN:  Well, I think it's a combination of things.  Firstly, if you want to look at the metal's price, go back to 2012/2013.  It really started in late 2011.  You saw stable liquidation.  You had investors who had bought several million ounces of platinum in the period 2000 to 2011, and then they started selling.   In 2012, they'd sell every time it got to 1700.  In 2013, they were just selling and that pushed the price down very low, going into the strike.  Once we got into the first half of this year, you had the biggest strike.  You had all the structural problems facing the producers behind the strike.  Once you get this settled, you have the real problems to deal with.  You have increased tension between Russia and the United States, with the Ukraine and Western Europe stuck in between, and you have a higher demand for automobiles in Europe and India, both of which are now half-diesel. 

You had many positives and the price was flat lining – because Amplats was telling people 'don't worry: we have so much platinum that we can keep the price from rising. And you had that stable liquidation continuing from those long-term investors.  Other investors said 'if you can't see prices rising in this environment, what happens when the strike settles, so I'm going to sell.  If – and it's most likely – the strike settles and the price come down, I reposition at a lower price.  I've kept some of my gains.  The second most likely scenario is that the price doesn't spike down.  I reposition at the same price or close to it' and it's highly unlikely that the price rises on a strike settlement.  The strike settled.  We saw about $30.00 drop over about two days, and that was it.  Now, people are re-buying and re-entering the market on the long side.

GUGULETHU MFUPHI:  So overall, has confidence been restored?

JEFFREY CHRISTIAN:  Overall confidence in…?

GUGULETHU MFUPHI:  In the local mining arena here in South Africa.

JEFFREY CHRISTIAN:  No, one of the things that platinum and palladium have going for them as metals, is that large-scale, institutional handover individual investors, who normally would invest in the large South African mines, look at the management, performance and the structural problems the managements are facing, and that makes an even more compelling argument to get into the metal itself.

ALEC HOGG:  Jeff, we've had at least one of our highly rated fund managers saying that platinum stocks are at a once-in-a-generational buying opportunity.  Do you think he's smoking something?

JEFFREY CHRISTIAN:  Well, it's hard to say.  I think that there are some very attractive platinum mining stocks here.  As you know, we follow the metals and not the stocks.  There are some very well managed platinum mining companies here and there's some very interesting emerging production.  However, I think that some of the larger companies continue to have problems with major restructuring that they need to do. And there's a little dichotomy there: they say that the platinum market is very bullish and then they say they want to divest some of their properties.

ALEC HOGG:  Yes.   If you had the labour problems that some of those mines have had, you might be thinking the same way.  From a platinum price perspective, everything that you've told us so far would suggest that our Fund Manager Piet Viljoen is on the right horse if the platinum price reacts the way you think it's going to.

JEFFREY CHRISTIAN:  We're not looking to see the platinum price run away.  I think the consensus is that platinum's going to go $1600 or so in short order.  Our expectation is that it's going to take longer to get there, because you do have these overhanging stocks still in the market, and you have some other issues that are coming on.  You're going to see investors internationally reconsider the whole issue of diesel vehicles in Europe using more platinum, at least on a cyclical basis.  You could see a longer, slower price appreciation – at least, initially – in platinum and palladium.

GUGULETHU MFUPHI:  Jeff, unfortunately we have to leave it there, but thank you so much for your time.  That was Jeffrey Christian joining us, discussing the current metals environment.