"Get on your bike!" urges London Calling

Published by MAC on 2013-03-25
Source: Nostromo Research, Metals Report

Lifting the lid on metal's king of the road

Recycling, Not Mining, Is the Future for Securing Immediate Platinum Group Metal Supply

JT Long, interviewing Jack Lifton and Byron King

The Metals Report

12 March 2013

The biggest new source for platinum group metals just might be what Jack Lifton calls "the rubber tire mine." Noting that removing the catalytic converter from a car's emission system produces a rate of return that rivals the production rates of the South African platinum giants, Byron King agrees that recycling is the wave of the future for platinum, palladium and rhodium. Welcome to the 21st century-find out how to play it in this Metals Report interview.

The Metals Report: Jack, what is behind the predictions that the platinum supply surplus will become a 400,000-ounce (400-Koz) deficit?

Jack Lifton: Anglo American Platinum Ltd., the world's largest platinum and rhodium producer, has taken 400,000 Koz of platinum out of its 2013 schedule for its South African mines. While people might not think 400 Koz is very much, you have to keep in mind that in 2012, the total production of all of the platinum group metals (PGMs) was less than 700 tons. One ton of precious metal has 30,000 or 31,000 troy ounces of material, troy ounces being the traditional measurement in precious metals. That 400-Koz reduction equals 10-13 tons and represents as much as 2% of world production. Global production has been declining from its peak of 320 tons in 2006, and in 2012 was down to 300 tons.

This is a serious reduction in a metal that is extremely rare. Officials say this reduction is due to labor costs and unrest, but if it is due simply to declining grades then it portends a bleak future for those who will simply want to wait and see what happens.

South Africa has at least half of the world's PGM resources and reserves and produces 75% of the global total. When South Africa sneezes, the PGM market gets a cold. South Africa is sneezing a lot right now. Production is down, energy costs are up and there is labor unrest. The issue of security of supply has come to the fore for the average investor. Users of PGMs have been watching this develop for several years, as South Africa becomes politically less stable.

It is very hard to find new PGM resources, they are hard to mine and, once the market goes into deficit, it is hard to play catch-up, especially if the deficit is structural, which appears to be the case.

TMR: Byron, is this is a problem of supply due to dwindling grades and labor unrest in South Africa, or is this a demand problem?

Byron King: It's both. We are on the edge of the perfect storm for platinum, palladium and rhodium. Three things are happening. One is what Jack alluded to, the problems in South Africa: massive strikes, workplace violence and mine closures.

Two, the Russian PGM stockpiles have hit bottom. Russian PGM exports are as low as they have been since the fall of the Soviet Union. Three, there is the explosive growth of automobiles and trucks worldwide that require catalytic converters. These converters are a huge driver of demand for PGMs. Much of that demand comes from Asia, India, Russia, Africa and Latin America, where automobile sales are rising.

These three things are the trigger for a serious run up in prices.

TMR: You mentioned China as a source for demand, but if the price of PGMs goes up, will there be less demand?

BK: China makes an interesting study for PGM use because many of the vehicles made there do not have catalytic converters. Catalytic converters are a key use for PGMs. Chinese manufacturers just do not want that extra expense. Chinese buyers-especially truck buyers-don't want to pay for a catalytic converter. But this winter, smog enveloped first Northern China, then blew across the country and over to Japan, triggering alarms in the air pollution monitors. A lot of that smog was automotive truck exhaust that had not been filtered through catalytic converters.

China has motorized in the last 20-25 years, but without using catalytic converter technology for a large portion of its vehicle fleet. Now the Chinese are paying the environmental price, and the wheel has to turn toward tighter environmental requirements for catalytic converters, which will drive PGM demand.

JL: The Chinese leadership, in my opinion, is panicked. Beijing is starting to hear the people's dissatisfaction, people who, during the smog alerts this year, could not see more than an arm's length away due to the pollution. In addition to new vehicle production with mandated catalytic converters, the Chinese have to think about retrofitting existing internal combustion-powered vehicles. In addition, jewelry is very important in the Chinese culture. It is a real mark of status. Platinum jewelry is very big in Japan and it is catching on in China. The data are clear: Chinese demand can grow faster than any possible increase in platinum production.

TMR: What other sources of demand are there? Are exchange-traded products taking a lot of PGMs off the market?

BK: The investment community now recognizes that PGMs are a realistic investable theme. For example, the Sprott Physical Platinum & Palladium Trust (SPPP:NYSE) is buying ingots and bars and storing them in vaults. That is a whole new element of demand. It goes well beyond people buying platinum coins, which was a small play in the overall PGM arena. The PGM market is not used to anything like this Sprott idea, and doesn't know quite what to do with that yet. It adds one more factor to the insecurity.

JL: The Sprott fund has people here in Detroit quite concerned because they need platinum and do not like anybody stockpiling it just for trading.

TMR: Let's turn to the question of new supply. Can Zimbabwe make up some of what is being lost from Russia and South Africa?

BK: Even in a perfect world, if someone found a wonderful new deposit, you have to build a new mine or a new processing facility first. It would be 5-8 years before you'll see the first few grams of production. In the near term-or possibly the medium or long term-a new supply source would not change anything.

Zimbabwe has platinum resources. The Great Dyke is one of the most exciting geological features on the face of the earth. It is a storehouse of mineral wealth: PGMs and chrome, among others. But Zimbabwe is an investment basket case. You know that old saying, "Buy when there is blood in the streets"? Well, some days there actually is blood in the streets in Zimbabwe.

The one interesting company that works in Zimbabwe has been subject to a tug of war between the government and shareholders is Zimplats Holdings Ltd., which is largely owned by Impala Platinum Holdings Ltd. There are public shares available, but Zimbabwe is now nationalizing the ownership of mining projects.

TMR: Robert Friedland has a project in South Africa. Could that work? Could its cash costs be better than some of the mines that are shutting down?

JL: You mean Ivanplats Ltd. It is in both the Congo and South Africa. This too, will take years of development. A traditional PGM mine is normally a nickel/copper deposit, mainly nickel. When you take the nickel out, you get the PGMs as a byproduct, which is present in the ore at a few tens or a hundred parts per million. The point is, when you talk about a new platinum mine, you are really talking about a new, relatively low-grade nickel mine, in most cases. The development cost is in the billions of dollars.

Friedland is a very smart guy. Ivanhoe Mines Ltd. is a major, midlevel mining company. He knows Ivanplats will require years and maybe a billion dollars. He has years and billions of dollars. I would say that his getting into PGMs is proof that this is a good, long-range investment for little guys, because he is a big guy making a big, long-range investment at a time when the major mining companies are cutting back.

TMR: What about North American supplies like Stillwater Mining Co. (SWC:NYSE)? Can they help fill the supply gap?

JL: Stillwater is a palladium miner and it produces some platinum. But in fact, the company produces more platinum from recycling than from mining. By using its smelter as a recycling site, the company produced as much as 15 tons of platinum. Think about that, 500 Koz of material selling for between $1,000 and $2,000 per ounce. That is serious revenue produced from recycling.

TMR: What about the Lac des Iles mine in Canada, owned by North American Palladium Ltd. (PDL:TSX; PAL:NYSE)?

JL: I have been watching that company for a while. It is one of the few companies operating directly as an actual palladium producer. After South Africa and Russia, Canada is the third-largest palladium producer in the world.

However, most Canadian companies that produce palladium are known first for other things. International Nickel Co. and Falconbridge Nickel Mines Ltd. were both palladium plays, although you do not think of them that way. Both are now part of Xstrata Plc (XTA:LSE).

Prophecy Platinum Corp. (NKL:TSX.V; PNIKF:OTCPK; P94P:FSE) in the Yukon has a boutique of metals. Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) is operating the first nickel mine in the U.S. in 50 years, up in northern Michigan. I asked management, "Are you finding any palladium?" They just looked at me and said nothing. It is traditional in copper and nickel mining to fail to reply when asked what the byproducts and cold products are. I think there is some palladium coming out of the Upper Peninsula right now.

TMR: How far off is Prophecy from production?

JL: I think it is many years off. The location is challenging. However, as geographically challenging as Alaska and the Yukon are, they are nowhere near as challenging as being in a war zone like Zimbabwe or in political upheaval like South Africa. I believe we have to take a hard look at North American supplies of all rare materials, because security has become an enormous issue.

Security is not all about war or unrest. It is also about political games. We are not at war with the Chinese, but we have a problem getting rare earths (REEs) out of there. We do not plan war against South Africa or Zimbabwe, but political unrest is stopping us. It is ridiculous for American investors to ignore the North American domestic supply market.

TMR: Are there any projects outside of Russia and South Africa that could fulfill future demand?

BK: The world is regionalizing. China dominates the REE market now, but in 10 to 20 years it will be far more regional. There will be an East Asian group, a North American group and a Euro-Asian group. The same thing will happen with the PGMs.

Duluth Metals Ltd. (DM:TSX) is promoting itself as a future PGM player based on a copper-nickel play in the old iron range of northern Minnesota, west of Duluth. It's an intriguing geological feature-a billion-year-plus, ultramafic intrusive. Overall, the project is several years away from building a mine and running ore. Still, I think the company is on to something. The immediate problem is getting permits from every government entity under the sun. This is America, after all-every layer of bureaucracy gets a chop at you, anybody can say no and nobody can say yes. So Duluth has to raise funds and spend a lot of money along the way without ever turning a shovel of ore. It needs patient investors.

That gets me thinking about the mining industry's development model. The North American stock-market approach is driven by well known metals-gold, silver, copper, lead and zinc-for which there are global markets. A company can sell its project at any stage: a patch of ground, a bunch of drill holes, a preliminary economic assessment or bankable feasibility study, an actual mine, the rocks and ore or the concentrate.

The more exotic metals are different. There are only a few people who can buy uranium, for example, and who know what to do with it. During the last three years, REEs have been the exotic metals play. You know the drill: Companies acquire some acreage, drill it up and then try to sell the project as a drill-hole play. But lately, that approach has failed for a large fraction of the companies that tried it.

I think the next big thing will be PGM promotions. Some of the usual suspects will advertise every piece of black-stained rock as some sort of ultramafic play, filled with PGMs. You will see companies raising money at $0.05 a share to go out and drill more holes and allow their management teams to live in the manner to which they are accustomed. I would beware of this.

The point is, PGMs are hard, geologically, technically and chemically. The markets are really tight, controlled by a small number of people. The Johnson Mattheys of the world squeeze this market like you would not believe. And on the user side you have big industrial users-General Motors, Ford and Toyota-that know how to buy this material.

Be very careful about buying into an idea marketed by a management team looking to move from its busted gold play to a busted uranium play to an REE play, and now to a PGM play.

JL: Investors are completely ignoring what is happening in the U.S. and in Western Europe. There are 275 million (275M) cars on the road in North America. Together, the U.S. and Canada scrap 15M cars a year. If we recycled those cars here instead of exporting them-and their catalytic converters-we could be independent of South Africa for all PGMs. We have enough platinum and palladium and rhodium in what is called the rubber tire mine to meet present and future demand for vehicles and vehicle replacements. A catalytic converter is far richer in PGMs by weight than any mine ever devised by man.

BK: Exactly, Jack. The great North American platinum mine is rolling around on our highways and streets. From a U.S. perspective, the future is less a question of digging rock and more a question of efficiently and deliberately recycling. This is a national security matter of very high importance for the U.S. and Canada.

JL: A U.S. Geological Survey calculated that, as recently as 2004, only 16% of catalytic converters were recycled domestically. We are exporting a lot of recyclable materials. Japan's Sumitomo Corp (8053:TKY; SSUMF:OTCPK) is a big buyer of our catalytic converter scrap. The Chinese are beginning to buy it. The U.S. could be largely self-sufficient in PGMs for industrial use by collecting, not exporting, PGMs for recycling.

TMR: Is recycling cost effective? Who is taking this approach?

JL: I am aware of three companies that recycle here in the U.S. I mentioned Stillwater already. A company in Texas called Techemet Inc. (private) recycles 1M catalytic converters a year. But the company is South African owned, so the parent company decides where that recycled material ends up. Then there is MultiMetco Inc. (private), an American company that operates a smelter in Anniston, Alabama.

We are on the cusp of some major developments. One stand-out example is a company in Québec called Ressources Minières Pro-Or Inc. (POI:TSX.V). It has developed a new recycling technology, called the Pro-Or process, that efficiently recycles catalytic converters without a smelter and uses chemical processes instead.

Forty years ago, when catalytic converters were first required for domestic American cars, I tried to recycle that material using an ancestor of the Pro-Or process. I could not make it work, but when I saw it again last year, and it was working, I knew immediately what the company had done.

Of course, Pro-Or is up against the smelters. A company that has spent hundreds of millions on a smelter will not be excited to hear about a replacement device at about 1% of the cost. But for my money, the chemical approach to recycling catalytic converters as developed and patented by Pro-Or, is the 21st century; smelters are the 19th century.

BK: Let me throw some numbers at you. In South Africa, if I ask Anglo American or Impala how much platinum they are mining, they will answer 2-4 grams per ton (2-4 g/t). On a really good seam, they might get 5-8 g/t.

If you remove the catalytic converter from emission system of a car and crush it up, you are looking at PGM-types of ore in the range of 2,000 g/t-1,000 times better than what is being mined in South Africa.

The technology to recover platinum from catalytic converters will evolve quickly in the next couple of years, despite massive resistance from entrenched groups that have billions invested in existing technology.

JL: I predict that when Pro-Or, and maybe others like it, gets underway, it will be able to process thousands of tons of catalytic converters. I would bet that within the decade, the last PGM smelter will have been built because other processes are so much cheaper.

TMR: We have covered the complete cycle of supply and the different ways to meet demand, including recycling. How are you adjusting your portfolio to take advantage of these developments?

BK: As you know, part of writing a newsletter is educating people. But how much chemistry can I get away with? Only real metallurgy wonks want to read the details and mass-balances of the PGM extraction processes. Heck, many people don't even realize that the cars they drive contain PGMs in the catalytic converters.

But investor awareness of PGMs is growing. You can feel the tires biting the road on this one. One opinion leader is Rick Rule, who is extremely bullish on PGMs-he bangs that drum every chance he gets. I have used my newsletter, Outstanding Investments, to get people interested in the Sprott Platinum and Palladium Trust. People who get in early have plenty of time to ride the PGM train.

TMR: Jack, where do you see the best opportunity?

JL: I do not give investment advice. What I do is a lot of due diligence, so I can tell investment groups whether a particular company will be able to profitably produce what it claims.

I think recycling is the hidden value in the PGM play, especially in the U.S. and Europe. New production is horribly expensive and long term. I am looking for existing companies with new or existing technology that can make a profit.

For a long time, the mining industry as a whole had absolutely no interest in the processing and refining industry. That is no longer true. In the 21st century, the mining industry is noticing that the refining industry has moved forward by leaps and bounds, noticeably in recycling REEs and PGMs. The mining industry is waking up to the tremendous advances in chemistry and metallurgical engineering. Ladies and gentlemen, this is the 21st century.

TMR: Byron and Jack, thank you for your time and your insights.

Byron King writes for Agora Financial's Daily Resource Hunter. He edits two newsletters: Energy & Scarcity Investor and Outstanding Investments. He studied geology and graduated with honors from Harvard University, and holds advanced degrees from the University of Pittsburgh School of Law and the U.S. Naval War College. He has advised the U.S. Department of Defense on national energy policy.

Jack Lifton is an independent consultant and commentator, focusing on market fundamentals and future end-use trends of the rare metals. He specializes in sourcing nonferrous strategic metals and due diligence studies of businesses in that space. He has more than 50 years of experience in the global OEM automotive, heavy equipment, electrical and electronic, mining, smelting and refining industries.

--

Want to read more Metals Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Metals Report homepage.