No other precious metal has a tighter supply than platinum.

Though platinum prices have remained high over the last few years, supplies are getting thinner by the day as South African production draws to a standstill. Lately, these tight supplies have helped platinum prices shoot up north of US$2,000.

In fact, platinum has climbed so high that its sister metal, palladium is becoming the new exciting speculation. Right now, palladium is sitting at 56% off its all-time high in 2001 of US$1,100 an ounce. The platinum-to-palladium differential hit its widest level in history in late May as platinum prices rocketed to new highs.

So the question is: Has the price of platinum climbed so high that industries will start switching to palladium?

The Boom in Platinum

Platinum has a variety of uses. The automobile industry uses platinum for gasoline-powered catalytic converters and it’s also widely used in jewelry.

Investment demand is also draining platinum supplies. Recently, another platinum exchange traded fund (ETF) began trading in New York. In 2007, two platinum ETFs began trading in London and Zurich, respectively, effectively draining more supply from a thinning market.

Platinum initially led the bull market in the precious metals complex earlier this decade. But now platinum has fallen behind silver (+330%) and gold (+234%). Since December 2001, platinum has recorded a 230% total return.

Meanwhile, platinum’s sister, palladium has lagged behind the other metals. Palladium also still has an abundant supply. That’s mainly because Russia dumped a large supply of palladium on the market earlier this decade. As other metals have risen in price, palladium prices have declined 54% over the last seven years.

Deficit of 480,000 Ounces in 2007, 711,000 Ounces in 2008

No other precious metal has suffered more from growing supply shortages since last year than platinum. And it’s getting worse.

According to Johnson Matthey, a metals and chemicals forecasting firm, platinum reached a deficit of 480,000 ounces last year. They’re forecasting platinum will hit yet another record deficit of 711,000 ounces in 2008.

Platinum Sails to the Moon and Beyond

This follows massive production downgrades from AngloPlatinum (OTC-AGPPY-PK) and Lonmin (LON:LMI) – two of the world’s largest platinum mining companies.

Platinum production in South Africa accounts for about 80% of global output. Just in 2007, South African production declined 4.9% to 5.04 million ounces. South African mines are facing several issues including smelter closures and a host of safety issues interrupted mining operations.

Worse, widespread electricity shortages in South Africa this year are lending to another major price increase. Still, supplies continue to shrink and extend into a major net deficit situation. South African platinum output has hit its lowest levels since 2002 and continues to contract in 2008.

Can’t Hide Production

Unlike crude oil, which has doubled year-over-year in the midst of a parabolic bull market, spot platinum is much easier to quantify in terms of overall supply.

It’s hard to hide platinum output. We know that one country mines more than 75% of all output. And if that one country can’t boost supplies, it’s an easy speculation that prices are going to rise much higher.

In short, South Africa can’t produce enough supply to meet demand. And according to Johnson Matthey, global platinum output last year fell 4.1% to 6.55 million ounces and that amount was easily absorbed by the auto industry and jewelry market.

Palladium to Benefit?

Palladium is the worst-performing precious metal this decade. But it might receive a big boost if platinum prices remain so high.

Palladium always competes with platinum in the auto industry for catalytic converters. So if prices continue to rise, the industry will have to switch to the cheaper metal — palladium.

In the absence of a significant drop in jewelry demand or a major recession in new auto sales outside of the United States, platinum prices are likely to remain high. That should help palladium, which has gained a cumulative 29% in 2008.

Palladium Starts Its Rise to the Top

Palladium, however, remains in net supply surplus heading into 2009. Unlike platinum, there are no threats to palladium’s production. Russia is the main palladium producer. And unlike South Africa, where mining output has stalled, Russia continues to supply the palladium market.

Platinum prices will have to rally significantly from current levels if palladium is to absorb market share in the auto industry. Still, judging by technical chart patterns since 2006, palladium is looking strong.

Platinum Up-Crash Ahead?

Since 2003, spot platinum prices have soared a cumulative 250% from US$594 an ounce to US$2,077 now. Platinum reached an all-time high of US$2,290 in March and sits 9.3% below that best level.

According to RBC Capital Markets, platinum demand continues to average about 3-4% annual growth. Once again, that’s mainly from catalytic converters and jewelry.

If platinum supplies continue to shrink, which is almost a virtual guarantee with these production problems in South Africa, we will have a much higher platinum price by Christmas.

The advent of exchange traded funds investing in platinum since last year in Switzerland and now in the United States since May will continue to suck more supplies from an already strained market. This is bad news for consumers, but great news for investors seeking the Perfect Storm in the commodities markets.

Platinum and palladium are probably two smart speculations in mid-2008. If you divide your portfolio equally between these two metals, you’re likely to get a handsome reward over the next 12-24 months.

Source: Why These Two Twin Metals Will Skyrocket By Christmas

Investors are wary — and rightly so. In these uncertain times, it’s tough predicting which way the commodities run is going.

Take junior platinum producer Sylvania Resources. This Aussie and London-listed player recently released first quarter results. By all accounts the news was pretty good. But the share price barely moved.

Clearly juniors, even if they are good, are out of vogue. And they are even less fashionable if they operate in South Africa. With all the negative news about power cuts, safety and labour issues, foreign investors are understandably cagey.

Despite all that, Sylvania seems to have done pretty well. In fact, it can barely even be called junior anymore!

Stepping up production

Take a look at its recent third quarter financial results to March. Shimmering indeed!

One of Sylvania’s key strategies has been to access platinum tailings dams held by South Africa’s big boys. This is the rubbish they discard.

Of course that is not the only plan. Sylvania is an active explorer. But CEO Terry McConnachie said last year that aggressive growth would come from extrating platinum group metals (PGMs) from chrome tailing dumps. And it seems to be achieving its objectives.

Cash costs here are lower than those of other platinum producers for a number of reasons. Less power is needed, building the retreatment plant comes cheaper than a deep mine, and so on.

That is good news in this precious metals environment. Even if prices remain high, which we think is likely for the short term at least, costs are rising. Anglo Platinum, the world’s biggest producer, saw cash operating costs increase by a whopping 41% for the year ended December 2007.

Wages are up, safety is an expensive headache. Capital costs are up. And as for fuel prices… need we say more!

But in spite of all this, Sylvania’s production is expected to meet the targeted output of 70,000 PGM oz by 2009/2010. Already production in this financial period has risen by 34% with Sylvania’s PGM output hitting over 4,800 oz.

So what has it done? Well, it has gone about improving grades and volumes at its dump treatment operations. The most successful has been the retreatment of the Samancor Chrome dumps for PGMs. Samancor is one of the biggest ferrochrome producers in the world.

And it has been pretty successful. These Samancor dump operations alone saw production rise 48%. Okay, so this was tempered slightly by lower output at its 25% owned Chrome Tailing Retreatment Programme (CTRP) (an operation is 50% owned by Aquarius Platinum). But on the whole it was work well done.

A vision for growth in dark times

The future looks pretty shiny too. In the next quarter production is expected to rise again. That is down to focusing on improving output from the dump operations. It has already improved recoveries and processes at two key Samancor operations — Millsell and Steelport.

It is not the first time treating tailings has been successful. AngloGold, for example, has done it profitably too. And, of course, the plants to retreat the tailings are not that expensive.

And by the end of this calendar year, Sylvania will complete the construction of another plant known as Lannex. That will feed a further 70,000 tonnes of feed per month, doubling the size of the existing two operations.

So, the future may look bright — but Sylvania has not escaped South Africa’s power cuts. Yet, due to the surface and near surface nature of its operations, it uses less power than South Africa’s deep mining operations.

An active explorer too…after all we do need new finds!

Sylvania is more than a one horse wonder. It’s an active explorer too.

Take the Everest North project on a farm in the eastern bushveld of South Africa. There is apparently an inferred resource of some 796,000 ounces of PGMs. Obviously more tests are needed to test the viability of the project — that is happening at Aquarius Platinum’s Everest South Mine, which is currently under construction.

It is quite a complex arrangement, which looks something like this: Sylvania pays ZAR2m to Aquarius for the privilege of testing viability at Everest South and for that gets to prospect the Everest North project area. At its own expense! If the project proves viable the two companies will apply for a mining right to be transferred to Sylvania. Sylvania will then pay Aquarius ZAR6m when the right is granted.

CEO McConnachie appears to be the right guy to be behind this operation. He has 25 years’ mining experience. He has a good track record with black empowerment (crucial in South Africa). Plus, he has experience launching and listing a successful business. (He founded SA Chrome which is now Merafe Resources and the empowerment partner for mining major Xstrata.) He is also keen to keep costs under control.

Add to all of this that Sylvania is a prime takeover target and we can’t help wondering whether here is a horse worth backing!

Keep mining,

Erin and IsabelSource: Platinum Producer Sylvania Resources

Businesses are supposed to be informed when the lights will go out, but apparently the reality is quite different. The outages are random. Worse still Eskom, the state electricity supplier, has its “head well and truly buried in the sand”. Bad news for miners!

But today our musings are on the impact this is having on platinum prices. And here, at least, there may be a bit of light in the darkness! Precious metals consultancy GFMS recently released its 2008 Platinum and Palladium Survey. Its view is that the outlook for the platinum price is good – in the short term, at least. Supply and demand are tightly balanced, so at the moment “any supply disruptions will have noticeable consequences for the platinum market”!

AngloPlat proves the point

And supply disruptions are expected! Electricity is not the only problem for miners in South Africa, supplier of 80% of the world’s platinum. It now seems certain that a much tougher line will be taken on mine safety. Climate change has made weather unpredictable, too. Severe flooding has affected output at several mines. Add to this the fact that production in Russia, the world’s second biggest producer, has contracted. If it is going anywhere, the price of platinum is going up.

To prove the point, refined platinum production in South Africa slumped 18.9% in the first quarter of this year. And, surprise, surprise that was down to power shortages!

Poor old Anglo Platinum, the world’s biggest producer, was hardest hit. Its production fell a significant 24% in the first quarter, with the shortfall for 2007 coming in at around 136,500oz – or 8% of the world’s total refined supply.

That said, in spite of output which one analyst described as “shocking”, AngloPlat it is still on target to produce 2.4 million ounces this year. There is still ore in the pipeline from the first quarter. Repairs at the Polokwane smelter – shut down because of flooding – will be completed, putting that pipeline back in the picture.

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You see the forecasts also presume that there will be no safety, labour or technical problems this year. Now we know South Africans are eternally optimistic. But this might be pushing it a bit.

The only way is up up UP!

So, in recent weeks the platinum prices have fallen and stabilised as the dollar strengthened. Other precious metals have been hit, too.

But it is worth remembering that three quarters of the world’s platinum comes from South Africa. And not only does South Africa have a serious power crisis, it is also not immune to political crises! Moreover, South African supplies are dwindling. Furthermore, much of the balance comes from Russia and political tension there could herald more supply troubles.

Platinum is a rare metal and not exactly easy to mine…which all points to another platinum deficit. In 2007 there was a platinum deficit of 412,000oz. Okay so the deficit won’t be so big this year says VM (Virtual Mining) Group. But VM Group’s Lindsay Williams still reckons that mined platinum supply has “never been more vulnerable”.

So, while platinum may be overbought in the short term, the fundamentals of platinum for 2008 point to rising prices. Platinum started 2008 at $1,530/oz. Some say it could go to $2,400 by year end.

Words of warning

What goes up must come down, says Erin. You only have to look at what has happened to the fall back in all precious metals prices recently to see truth in that old cliché! What’s more, high prices could curb demand. Jewellery sales, for example, have certainly pulled back by some 268,000oz this year. And palladium could eventually replace platinum in auto-catalyst converters.

All that has not stopped investors from throwing money into platinum-backed exchange traded funds (ETFs). Just for the record, platinum group information specialists Johnson Matthey says the combined positions of various platinum funds in February 2008 was 330,000oz, up from just 50,000 oz in July 2007.

Of course, ETFs allow investors to benefit from rising (one hopes!) prices of commodities without having to take physical delivery or enter the futures markets. Platinum ETFs differ from other precious funds. There is significantly less refined above ground stocks than in, say, silver and gold. Platinum backed ETFs reduce liquidity in the market, which in turn reinforces price movements.

And there is still potential for profits, it seems! GFMS reckons that the worst case scenario will see platinum prices of $1,700 by the end of 2008. Moreover, there is “every possibility” that the price could be hovering at $2,400 by year end. Yet in current volatile markets buying in at the right time is obviously crucial!

So, for the moment at least it looks as though there is still some glitter in platinum.

Keep mining,

Erin and Isabel