Saturday 3rd December 2016

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Industrial-strength bullion

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Yet platinum miners work at a loss. Implats, South Africa’s second-largest platinum miner, averaged $1,766 an ounce in production costs over nine months last year, Franklin said. As of June 4 platinum sold for $1,497.

Costs are further imperilled by union contract negotiations. “They’ve indicated they’re going to ask for a 60% increase in wages,” Franklin pointed out. “Greater than 70% of the cost of an ounce of platinum is in labour.”

For the first time ever there’s more platinum bought in China for jewellery purposes than there was in Europe for automotive purposes…. So we’re starting to add these new sources of demand to platinum that will only exacerbate these deficits.—David Franklin, market strategist with Sprott Asset Management

With strikes causing last year’s production deficit, South Africa faces “a highly, highly volatile situation.”

The situation contrasts with 1999 to 2002, “the heyday for platinum mining,” when SA miners earned 20% of their capital, and 2006 to 2008, when they made more than 20%. “Last year with the strikes they had a minus-0.6% return on capital. In 2013, using the same methodology, it’s expected to be zero and then, up to 2017, in the 1% to 2% range. So the miners are destroying capital under their current structure. Something’s got to give. It reminds me a lot of the silver market back in ’03 or ’04. Remember back then you could buy silver for $5 an ounce but the cost of producing it was $6.50, as high as $7. So you can see that the price had to come up or the production had to come off.”

Franklin anticipates more strikes in the coming months. “All those numbers I gave you for deficit projections assume that everybody’s working. So once people stop working, all bets are off.”

Additionally, “for the first time ever there’s more platinum bought in China for jewellery purposes than there was in Europe for automotive purposes…. So we’re starting to add these new sources of demand to platinum that will only exacerbate these deficits.”

Franklin pointed out that a South African platinum ETF was launched in April, quickly accumulating about 355,000 ounces. “Perhaps they see something that we’re not seeing.”

He provided “one more wild card”—Russia and South Africa have announced their intentions to form a platinum OPEC. “They’ve agreed to co-operate to control the flow of platinum around the world.”

And getting back to palladium, until recently Russia held a stockpile from which it would dump metal on the market when prices were propitious. “Last year they said the supply was finished. That’s part of the reason for a million-ounce deficit in an eight-million-ounce market.” Existing mines, meanwhile, have been finding lower grades.

In December Franklin’s company launched the Sprott Physical Platinum and Palladium Trust TSX:PPT.U.

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