South Africa’s PGM players brace for a wild ride

Right now, it’s hard to make sense of the platinum group metals (PGM) industry. The outlook for the platinum price has improved recently, but the prices of other metals mined as its by-product, such as palladium and rhodium, are heading in the opposite direction. Confusingly, the trajectories of lesser known PGMs, such as iridium and ruthenium, are also different. 

The challenge for industry analysts is two-fold. For a start, the outlook for primary metal supply from the world’s two largest producers, South Africa and Russia, has changed enormously. Russian PGM exports are sanctioned, though they still turn up in China. Primary supply from South Africa has been heavily disrupted by Eskom curtailments, an 80% increase in costs over the past few years, and underinvestment in resource development which could result in the closure of some cash-burning shafts.

On the demand side, there’s even less clarity. Analysts can’t tell how quickly hydrogen technology, which is PGM- intensive, might be rolled out. Questions that continue to shape its future include: does it work on an industrial scale; can it be produced cost-effectively; and how might supporting infrastructure be rolled out? 

Standard Chartered Bank precious metals analyst Suki Cooper estimates that hydrogen technology, which uses PGMs intensively, could drive 450,000oz-850,000oz in new annual PGM demand by 2030 — a significant variance underpinning the margins of uncertainty. 

Another technology, electric vehicle (EV) batteries, is already here. The question is, where does it go from now and how might it proliferate? Again, analysts can’t say with accuracy.  

Henk de Hoop, CEO of industry consultancy SFA Oxford, says uncertainty in lithium supply is a major concern for OEMs. So fragile is the lithium market that even increases in the adoption of home solar applications has the potential to disturb its balance, he says. The mines required for two-thirds of projected lithium supply have yet to be built. 

What can be said, however, is that PGMs are in for a wild ride, especially given short-term macroeconomic concerns linked to the reopening of China’s economy this year, which may disappoint, depending on the extent of its metal inventories.  

“We really think this will be a watershed year for PGMs,” says Cooper. The serial deficits that drove the palladium price to its historic highs between 2016 and 2021 are over — automakers have switched to cheaper platinum for standard autocatalyst production. The platinum market is inversely heading for serial deficits of its own, the price of which will exceed palladium by 2025, says Cooper.  

The share prices for the JSE’s major PGM producers reflect some of the market uncertainty as well as company-specific concerns. Anglo American Platinum (Amplats), for instance, has halved in the past 12 months. The share has come off a record high just over a year ago in a correction that potentially presages a new era for the company. According to Adrian Hammond, an analyst for Standard Bank Group Securities, within five years Amplats will lose its “flagship” status as the industry’s lowest all-in cost producer. 

That’s because of costly new investment, primarily the underground expansion of its Mogalakwena mine and the construction of a third concentrator. It will see Amplats pumping billions of rand into its operations at a time of high industry inflation. This search for new resources is under way elsewhere in the industry. One example is Impala Platinum’s bid for Royal Bafokeng Platinum (RBPlat), the aim of which is to extend the life of its Rustenburg division. An estimated 450,000oz in annual production could be shed if the RBPlat transaction fails.   

The Mogalakwena investment and bid for RBPlat stem from chronic underinvestment in South Africa’s PGM industry between 2011 and 2018. It means the sector is now embroiled in an urgent game of catch-up, according to RMB Morgan Stanley. The bank estimates that industry capex this year alone will top R50bn — a fourfold increase since 2016 — and could be similar in 2024, outstripping the additional stress of cost inflation. 

It’s worth emphasising that this capital spend is being undertaken  to sustain metal production rather than grow it. Primary PGM production from South Africa fell 15% last year, says the Minerals Council, and could decline another 5%-15% this year, depending on the extent of load-shedding.

Long-term, this is positive for PGM pricing. But for now high-spending South African PGM producers are low-yield and unattractive, despite recent sell-offs, especially given cost inflation. Except, perhaps, one.

Speaking at the PGM Industry Day conference in Joburg, Hammond said that in the absence of a 20% increase in the rand-basket price of PGMs, only production growth would offset cost inflation. 

“It’s the only company not shown behind me,” he said, indicating the board of conference sponsors the speakers had for a backdrop. He was referring to Northam Platinum, which said at its interim results presentation in March that it was “on the way” to becoming a 1-million ounce a year producer after registering half-year production of 393,000oz, an 11% year-on-year improvement.  

What next for Northam?

In the end, a “material adverse change” may settle who ends up with control of Royal Bafokeng Platinum (RBPlat) after a 17-month tussle between suitors Impala Platinum (Implats) and Northam.

Simply, the rhodium price — to which Northam is particularly sensitive — and the overall platinum group metals (PGM) basket have fallen too sharply and too fast to justify it spending scarce cash to wrest control.

What Northam now does with its 34.52% stake in RBPlat is anyone’s guess. Either it holds onto the asset, which it has consistently argued is a scarce and valuable PGM deposit, or it sells out to Implats , which built up a 41% stake in its efforts to gain the upper hand.

Northam could use the cash to grow its Booysendal and Zondereinde mines or pay shareholders a dividend — a benefit it withheld in the interim period, citing a “critical juncture … in pursuance of its growth strategy”.

This strategy, set out in 2015, was to produce 1-million PGM ounces annually from its own operations by 2027.

If CEO Paul Dunne is bitterly disappointed, he isn’t yet saying so. But some analysts reckon Northam has been given a handy pass.

Rhodium has come down over 40% this year but post-Covid it rallied 350-odd percent; since then it’s retraced 70%, so it was never trading at the right price

Benguela Global Fund Managers analyst Grant Nader says Northam’s decision to withdraw its offer for the RBPlat shares it didn’t own was “a smart move” given uncertainties in the global economy. “They should be thinking about preserving capital,” he says. “It’s not smart to be taking on a large asset.” 

But blaming the precipitous fall in the rhodium price may be somewhat disingenuous since, arguably, rhodium prices spiked way ahead of themselves in the first place.

Says Nader: “Rhodium has come down over 40% this year but post-Covid it rallied 350-odd percent; since then it’s retraced 70%, so it was never trading at the right price.”

Nader says the rhodium price has probably “overshot to the downside [but] there’s no way it goes back to the levels we’ve seen over the past few years”.

Failure to consummate the transaction, in which Northam was offering an effective R172.70 per RBPlat share, also leaves the company in a BEE bind. In its interim presentation, it said a deal would have provided “a unique opportunity for Northam to establish a meaningful broad-based BEE equity shareholding in exchange for a material shareholding in RBPlat”.

So far, the response of the market is telling: even though a declining PGM basket price will affect its earnings, Northam shares are up about 8% since it called off the bid.

In the past year, neither Implats (down 24%) nor Northam (down 26%) has suffered a share price decline as severe as big daddy Anglo American Platinum, whose stock is down 46%.