Platinum as an investment instrument has enjoyed a strong run so far this year. Our preferred pick in the sector is Northam, an independent integrated platinum group metal (PGM) producer. For investors with a more speculative bias, the company offers a short-term buying opportunity at the current levels. Investing in Northam is in our view also the best way to benefit from the current positive outlook for rhodium.
Platinum as an investment instrument has a much shorter history than that of gold or silver, the trading roots of which trace back to ancient civilisations. However, given its strong run thus far in 2020, it has established itself as a great addition to an early investor’s portfolio.
While the commodity enjoyed a spectacular rally between 1999 and 2008, and managed to recover rather quickly after the Global Financial Crisis, it gradually shedded value from 2012 – until recently.
With a troy ounce of metal bottoming out at US$558 in March 2020 and hiking to trade at around US$840 at the time of writing, where is this precious metal heading next? Will platinum prices rise further to surpass their previous highs or will they fall off the cliff to set new record lows?
As with all commodities, the value of platinum is influenced by a complex mix of supply and demand fundamentals. However, the specifics of this particular market are rather unique. The metal’s supply is unusually concentrated, with South Africa producing around 75% of the world’s newly mined platinum.
Platinum group metals (PGMs), especially platinum, palladium and rhodium (the 3E metals), have applications in a number of industries – the automotive sector remaining a key consumer. In this sector, platinum prices are largely determined by auto production and sales figures.
Despite weaker projected vehicle sales over the next few years, PGM market fundamentals are still robust over the medium term, with higher loadings per vehicle at least partly offsetting lower sales. At the same time supply (especially from South Africa) is expected to be weak this year following COVID-19 disruptions. Most large medium-term projects in South Africa are also currently in doubt, meaning there will be limited supply growth over the next few years.
Northam Platinum is a high-quality operator with good low-cost assets and anticipated mine duration north of 30 years. Rhodium fundamentals are particularly favourable over the near to medium term, and investing in Northam is in our view the best way to benefit from the positive outlook for rhodium, which currently contributes around 9% of Northam’s 3E metal sales. Demand disruptions are predicted to be balanced by supply outages in 2020. Over the medium term, palladium and rhodium deficits will persist, but platinum is likely to remain in surplus.
Northam Platinum is up 9.46% year to date. Over the past five trading days, the stock is up 4.67% and over the past three months it has risen by 16.49%. Over the past 30 days the Relative Strength Index (RSI) is at 62. Volatility has come in over the past few days, with the 30-day volume registering 58%, but the 10-day volume is 28.27. The beta is also on the high side at 1.84.
Table: Peer comparison
For those who follow Bollinger Bands, the upper is at R137.00 and the lower at R105.00, so students of John Bollinger would probably want to wait for further weakness in the stock.
OUR SPECULATIVE BUY CASE
Investors have been reducing their US dollars over the past few weeks. The fate of the US dollar is yet to be sealed, but mounting evidence suggests that the path of least resistance will be to the downside. The materials and commodities sector behaves similarly to the energy sector – both move in the opposite direction to the greenback. Consequently, commodities and the metals basket have consistently outperformed the market during periods of US dollar weakness.
For investors with a more speculative bias, we believe Northam offers a short-term buying opportunity at the current levels.
ABOUT THE COMPANY
Northam Platinum Limited is an independent integrated platinum group metal (PGM) producer. The company operates through two segments: the Zondereinde and Booysendal mines. The Zondereinde lease area is also the location for the company's metallurgical operations, which include a smelter and base metals recovery plant. The shallower, mechanised Booysendal UG2 North mine is located near the town of Mashishing. Both the mines are located in the Bushveld Complex, South Africa.
The company's activities are integrated – from the underground mining function to the concentrating, smelting and base metal recovery processes. Its primary products are the three main PGMs: platinum, palladium and rhodium.
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