time to get back in?

S. African platinums surge to fresh highs

By: Shirley Kemp


Posted: 2001/12/31 Mon 13:41 ZE2 | © Miningweb 1997-2001


JOHANNESBURG - The year-end run in South African platinum stocks, Anglo Platinum and Impala Platinum, is not yet over according to South African analysts who have been feverishly computing fresh earnings estimates for the counters. This follows a dramatic decline in the rand and uncertainty over the timing of Russian exports of platinum group metals (PGM). These twin effects have inspired a 20% appreciation in Johannesburg's platinum index in December to a record high, when it appeared at the beginning of the month that the sector might end the year flat compared to last year's close.
Anglo Platinum closed 2001 at R444 while Impala ended at R556.20.

Metal prices for platinum group metals, platinum and palladium, have softened this year after touching record highs. In addition, clarity on the timing of Russian metal exports for 2002 – a perennial uncertainty in the PGM business – appeared to have stabilised prices at lower levels. But rand weakness and jitters among Russian sources that PGM exports would not proceed as planned – have provided South African PGM producers with more potential upside.

Since September 11, the platinum sector has rallied 46% as a direct consequence of the plunging rand and producers raking in dollar denominated revenues, while rand costs have dropped in relative terms. The sector's two largest players, Impala Platinum (Implats) and Anglo Platinum (AngloPlats) both reached new 12-month highs on Friday, alongside Impala's majority shareholder, Gencor.





The rapid change in economic fundamentals in the last three months of 2001 may be a catalyst bringing the top of the resources cycle nearer. In addition, the run in resource stocks could see investors turning away from the 'safer' rand hedge stocks towards the more cyclical underdogs in the New Year, and resources stocks may find that profit taking becomes the order of the day.

On the other hand, SCMB analyst, Justin Pearson-Taylor, believes the sector remains attractive - due in part to the broking company's forecast that the rand will continue to weaken against the dollar, and that the severity of the global recession is smaller than they had expected. A recovery in the US in early 2002 could bring improvements to the luxury goods market as well as increased demand for auto-catalysts.

In addition, SCMB has revised its forecast platinum prices slightly upwards on the back of positive news coming from Russia. "In contrast to the nineties when privateering of state assets was rife in Russia, there now appears to be a co-ordinated policy on Russia's presence in the global PGM market".

Adding to the metal's potential upside, an article by John Helmer on Miningweb last week, says that last-minute lobbying inside the Russian government against the adoption of export quotas for platinum group metals may be behind the recently climbing platinum price. The price rise has been further fueled by speculation that there may be a delay in Russian export shipments of the platinum group metals in the New Year.

Pearson-Taylor maintains that "Even though we do expect an oversupply situation for the next few years, the rand hedge properties of the sector (and the fact that Russia seems to act in a way to try and stabilize price) lead us to believe that the sector offers value and should be at market weighting in portfolios".

He also reminds us that we must bear in mind that if the rand continues to decline against the US dollar, it will have a significant impact on the basket price received by South African PGM producers.

Looking specifically at the giants of the sector, Pearson Taylor says AngloPlats' share buyback programme, and Anglo American's willingness to increase its stake in the company, will help underpin the share price, but he has concerns about thinly spread management and cost increases taking place at the same time as numerous expansion projects will come on line.

He is more bullish on the prospects of Impala Platinum, and says Gencor is essentially a cheaper entry into the company (Gencor owns 49% of Impala). Impala could still do well from its Impala Refining Services, its strategic alliances with Zimplats and Aquarius amongst others, and its 27% stake in Lonplats, says Pearson-Taylor. The potential unbundling of Gencor in 2002 together with the possibility of corporate action also adds significant appeal to the share.

To a large degree, the call is one on the future direction of the rand. If Russian exports decrease in the early part of 2002 and the rand depreciates further against the dollar, then these companies will continue to offer spectacular value.

If, however, you are of the school that believes the rand's value has gone as far it will for the short-term and that the top of the platinum cycle is drawing near, then it's probably time to be looking elsewhere for the best equity investments on the JSE.