When Rick Rule pairs lower grades, labor strife and inefficient
mines with the relentless demand for platinum and palladium, his
result is an investment thesis that could pay off for bullion and
equity investors. In his
interview, the founder and chairman of Sprott Global Resource
Investments Ltd. compares the current platinum and palladium space
to the uranium sector 10 years ago, and predicts handsome returns
for investors willing to shoulder the risk.
The Metals Report:
Platinum and Palladium
, predicts a 915,000-ounce [915 Koz] deficit in platinum and
palladium this year. Does your investment thesis treat the platinum
group metals [PGMs] more as precious or industrial metals?
The answer to that is both. PGMs share the same investment
characteristics as bullion. For centuries, PGMs have been a means
of exchange and a store of value. Platinum and palladium enjoy the
monetary attributes of bullion, just like gold and silver. But they
also have industrial utility. Unlike gold and silver, which have
large above-ground inventories, the above-ground, refined
inventories of platinum and palladium have largely been used. There
is less than 12 months' fabrication demand left in the world
supply. Platinum and palladium go out a tailpipe, up a smokestack
or get turned into high-value jewelry. Some people suggest that
jewelry is still supply, but I know my wife does not consider her
jewelry to be supply.
Other than the above-ground supply issues, how do PGMs differ from
silver, which is considered more of an industrial metal?
They are very different in that the above-ground supplies of silver
are still fairly substantial and, in many people's minds, silver is
a precious metal. Financial investors and individuals hoard
substantial amounts of silver, particularly in South Asia, where
silver is regarded as a store of wealth. Covert or hidden supplies
do not exist in the PGM industry.
Are the issues that would make PGM prices rise related to
supply-and-demand or to its bullion characteristics?
Definitely supply-and-demand. While it will benefit from factors
that move the bullion price, notably the deterioration of the U.S.
dollar, the real case for an escalating PGM price is the supply
structure. The price also relates to the extraordinary utility
afforded by platinum and palladium, particularly with regard to
catalytic conversion. There is a social equation: platinum versus
smog. Despite reasonable progress in air quality in the Western
world, there is consistent social demand for better air quality,
which means more use of platinum and palladium.
Are there substitutes for platinum in catalytic converters?
There is no substitute at an equivalent price point. The most
directly applicable substitute is gold, which is also expensive but
much less efficient in the catalytic conversion process.
Theoretically, you could use nickel for some processes, but it is
much less efficient.
The substantial air quality advances in the last 40 years are
the consequence of small amounts of platinum. It takes only $200
worth of PGMs on a new vehicle to give us the air quality we enjoy
now. If you doubled the price of PGMs, the cost of a new $27,000
vehicle, which is the median sticker price of a new car sold in
California, would increase only marginally. The utility of platinum
and palladium is so high that the price can go up.
Looking at the supply side, the British Geological Survey gave PGMs
very high risk in terms of supply, partially because of political
issues in South Africa and reserve issues in Russia. It predicts a
possible 10% drop in world production. Is this a temporary supply
I think it is a temporary issue that will be solved by price. And
while the British Geological Survey research is forward thinking,
it is out of date. Because the industry does not earn its cost of
capital, South African production has fallen 19% in the last six
years. That is a critical statistic because South Africa
contributes 70% of the world's new mine supplies of platinum and
30% of the new mine supplies of palladium. Production is already
falling. While we have found small amounts in Canada, Brazil and
Australia, three countries-Russia, Zimbabwe and South
Africa-account for 90% of the world's new mine supply.
Is there geological evidence to support the potential for
There will be a furor associated with increasing platinum and
palladium prices and money will be made in exploration speculation
in other places. Lots of platinum and palladium is still available
in South Africa, Zimbabwe and Russia; it just requires a higher
price. It is very likely that most of the platinum that we will be
using 50 years from now will be found within the shadow of a
headframe in existing locations. There are three discoveries on the
horizon, two in South Africa and one in Russia, that will help us
with platinum supply 10 years from now. The question is how to get
from here to there.
Prices have been extraordinarily volatile in recent years. Will
that continue, or will the increase be gradual?
I expect a lot of volatility, mostly to the upside. The reason for
this is simple: the industry does not earn its cost of capital.
Look at South Africa, where the industry itself estimates it is $6
or $8 billion [$8B] behind in sustaining capital investments. As a
result, the industry has not made the investments necessary to
reach parts of the ore body that have not yet been accessed. This
has manifested itself three ways. One, production cost goes up as a
consequence of infrastructure-bound mines. Two, production
declines. Finally, mine safety standards fall, which has manifested
in increasing worker mortality in South Africa.
The South African platinum mining business is labor-intensive,
not capital-intensive. And the working conditions and the pay
workers receive are deplorable. Workers' wages have to go up, but
cannot because the industry does not earn its cost of capital. Same
thing for sustaining capital investments - there is no money.
Finally, there is widespread political and social acceptance that
the government's take by way of taxes, royalties and rents, has to
If you take those three factors - deferred sustaining capital
investments, increased worker compensation, and increased social
take - the industry finds itself between a rock and a hard
What price would enable more capital investment and higher
We think a move in the platinum price from $1,650 to $2,700-3,000
would allow the South African platinum industry to earn its cost of
capital, provided the increase in the social take was
The difficulty is that the demand for platinum is so high that
the price will overshoot in the near term. Making the $6-8B in
capital investments to maintain production in South Africa would
take six years. These long lead times in a capital-intensive
business underscore the likelihood of extraordinary price
When might we reach or overshoot that potential price?
I think it will happen in the next two years, given that we have
used up the above-ground inventory and that we need to maintain the
current auto fleet.
Once the price reaches $2,700 in the course of five years, would
you expect the additional revenue to go back into South African
mines? And would supply then increase to meet demand?
I cannot guarantee that in five or six years, but I can guarantee
that the problem will solve itself over 10 or 15 years, which
suggests that this investment thesis has a lot of running room.
Given that the industry does not make its cost of capital, how are
the mines staying open? Which are making enough money to continue
production through this timeframe?
The big players are Anglo Platinum Group (AGPPY.PK), Impala
Platinum Holdings Ltd. (IMPUY.PK), Lonmin Plc (LNMIF.PK) and the
big Russian company, MMC Norilsk Nickel (NILSY.PK).
Norilsk clearly earns its cost of capital. Its problem is that
as you get deeper into the Norilsk ore body, the concentrations of
palladium in the ore decline. Stalin opened these mines 80 years
ago and the problem is technical: As you get deeper, the platinum
and palladium run out. But Norilsk is profitable.
The other three-Angloplats, Implats and Lonmin - do not earn
their cost of capital. Angloplats has some highly profitable
operations, but they are dragged down by deep traditional
narrow-vein operations, which cost money.
Sylvania Platinum Ltd. (SAPLF.OB) is a small South African
junior that produces probably 60 Koz/year. It is a tailing
reprocessor, not a primary producer, but it earns its cost of
capital. But it is a small company, probably $40-45M market
capitalization. While not an efficient investment vehicle, it is a
Two companies on the horizon have made large discoveries in
South Africa. Both have the right geometry and geology to be
mechanized as opposed to labor intensive. Speculators who are
willing to be involved in South African social turmoil and who
believe the PGM thesis might want to look at Platinum Group Metals
) and Ivanplats Ltd. I own both, so I am talking my own book in
What are their market caps and what stage are they?
Platinum Group Metals has a CA$600M market cap. Ivanplats is much
larger, with a market cap near $3B. Because these companies are
highly mechanized new builds, they would effectively be immune to
challenges of sustaining capital and labor costs. However, they are
not immune to South Africa's social instability. But when built,
both deposits could generate substantial amounts of free cash.
Both are discoveries made over the last two or three years.
Platinum Group Metals' project is under construction and should be
producing in two years. Ivanplats has what is probably the most
important PGM discovery since the Norilsk 80 years ago, but it will
not be in production for about six years.
Is there still an investment opportunity with Norilsk in Russia,
despite declining grade quality?
Norilsk represents a very reasonable risk-reward tradeoff for
people who are willing to participate in Russia and to accept the
volatility in base metals prices. It is a jewel box of nickel,
copper, cobalt, platinum and palladium.
It also has another deposit in Northern Siberia, remote even for
Russia and far from any infrastructure. It is a nice deposit that
will probably take $3B and 10 years to put into production.
Does Ivanplats have enough cash to bring the mines into
No, not now. However, given the quality of its three world-class
ore bodies and knowing Ivanplats is run by Robert Friedland, it
should be able to raise the substantial capital needed.
Does Platinum Group Metals have the money in the bank to bring its
mines to production?
Yes. It raised the money in an ugly financing this last year. The
debt package is in place.
How do these two compare to Sylvania?
As a tailings reprocessor, Sylvania has very limited ongoing
capital requirements. It has done some exploration, with mixed
results. Assuming it does not continue with aggressive exploration,
it will generate substantial, distributable cash relative to its
market cap. I expect it will discontinue exploration and become a
vehicle for distributing surplus cash from tailings reprocessing
With Platinum Group Metals coming into production in the next three
years, and Ivanplats right behind, will that satisfy the demand
issues to the extent that the Norilsk project would not be
Not even close. That is the other part of the thesis. We do not
have enough platinum to meet current Western demands, and demand
will grow. Unless the Western economies drive off a cliff, we are
due for a big rebound in automobile sales, which have been stalled
since 2008. And when automobile demand increases, so does demand
for catalytic converters.
Second, the Western world is clamoring for stricter emission
standards for autos, refineries and chemical plants, all of which
use platinum and palladium. Remember, it takes only $200 worth of
platinum and palladium to give us the air quality we enjoy now in
the Western world. But the real growth in the automobile market is
in the frontier and emerging markets, in particular India and
Gasoline engines in China currently employ catalytic technology
that uses less than 10% of the platinum and palladium loadings that
Western vehicles do. As a partial consequence of that, air quality
conditions in urban parts of China are deplorable. The Chinese
government estimates that 500,000 Chinese die each year of
cardiopulmonary illness as a consequence of very poor air quality
standards. The Chinese government has proposed air quality
standards over five years that would quintuple the loadings of
platinum and palladium in gasoline engines in China.
The Chinese government has also asked the China National
Offshore Oil Corp. to begin selling diesel at Western quality with
regard to sulfur loadings that would permit the introduction of
catalytic converters on diesel engines in China. These two things
would represent an absolute sea change in platinum demand in a
market that's already undersupplied.
If just one year of reserves remains, and demand is growing,
someone will not get the metals it needs. Who would that be?
I believe the major automobile manufacturers that have the balance
sheet flexibility - Toyota and Mercedes-Benz, for example - will
become hoarders this year and next. I suspect the auto
manufacturers or the fabricators that lack the balance sheets to
hoard platinum will be left out in the cold.
That is why we established the Sprott Physical Platinum and
Palladium Trust. We raised $280M last December and bought equal
dollar amounts' worth of platinum and palladium.
Technology and innovation seem to balance out when you have a sharp
gap between supply and demand. Could technology develop an
alternative to the traditional catalytic converter that does not
rely on PGMs?
I welcome that kind of development, but right now, platinum and
palladium are so cheap relative to the effective job they do that
there is no incentive for new technology. Over time, the markets
will work in the platinum and palladium sector. The price will be
high enough and people will be scared enough that we will find more
of the metals. The problems in Russia, South Africa and Zimbabwe
will sort themselves out over the next 10 or 15 years.
This thesis plays out in a 1-5-year timeframe, and I do not see
anything that would derail it, with the exception of a 2008-style
liquidity event that destroys Western demand.
Would the average investor be better off investing in the metal
through the trust or equities?
Whether you buy physical platinum and palladium, an exchange-traded
fund [ETF] or the trust, if you think the price of the metal will
rise, buy the metal. We chose a trust instead of an ETF because,
assuming that the thesis is right, the Sprott Physical Platinum
Trust is taxed at the capital gains tax rate while
or physical metals are taxed at the collectible or income rate.
You buy a company because you believe something intrinsic in
that company will make its share price go up. In that thesis, the
commodity price increase is the icing on the cake after taking
financing and operational risk. You are taking greater risk than
just buying the metal, and you should get a greater return.
I believe that a rising price will float all ships, but it will
float them unequally. There is risk that if the price increase is
deferred, some companies will not survive until the price does
rise. Thus, people who are speculatively inclined and willing to
buy the companies should only buy companies that would survive at
the current price point, in other words, companies in the lowest
cost quartile on a global basis. Those speculative companies would
be Norilsk, Platinum Group Metals and Ivanplats. Sylvania, as well,
but that is really not for the faint of heart.
Are there any other perspectives on the PGMs our readers should
I would urge your readers, first of all, to regard PGMs as bullion
and to own them for the same reasons they own any bullion. But they
should understand that the supply-and-demand thesis for platinum
and palladium is compelling and simple: The price must rise because
the industry does not earn its cost of capital, and the price can
rise due to the incredible utility the metals deliver.
Putting on my skeptical hat, is that the same argument made for
uranium back in 2008?
The argument was made in 2008, and I made the argument for uranium
in 2000, when we made the stuff for $20 per pound [$20/lb]. We sold
it for $8/lb and tried to make up the lost $12/lb on volume. The
price of uranium had to go up or there would not be any more
uranium. And the price of uranium could go up because the utility
it afforded to users was the same. When its price rose to $100/lb,
the industry was making it for $40/lb, a $60/lb margin.
After the thesis had been proven, everybody signed on to it
despite the fact that the thesis was no longer true; the validation
had invalidated the thesis. People will sign on to the platinum and
palladium thesis when the price of platinum goes through $2,600 or
$2,700/oz, when the price does not have to go up anymore, just like
they did in the uranium business.
Being contrarian, getting into the thesis early on and riding it
rather than waiting for it to be proven is what works.
Absolutely, and I expect it to be true in platinum and
Rick, thank you for your time and your insights.
This interview was conducted by Karen Roche of
The Metals Report
and can be read in its entirety
, founder and chairman of Sprott Global Resource Investments
Ltd., began his career in the securities business in 1974. He is
a leading American retail broker specializing in mining, energy,
water utilities, forest products and agriculture. His company has
built a national reputation on taking advantage of global
opportunities in the oil and gas, mining, alternative energy,
agriculture, forestry and water industries.
1) Karen Roche conducted this interview for
The Metals Report
and provides services to
The Metals Report
as an employee. She or her family own shares of the following
companies mentioned in this interview: None.
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The Metals Report:
None. Streetwise Reports does not accept stock in exchange for its
services or as sponsorship payment.
3) Rick Rule: I or my family own shares of the following companies
mentioned in this interview: Sylvania Platinum Ltd., Platinum Group
Metals Ltd. and Ivanplats Ltd. I personally am or my family is paid
by the following companies mentioned in this interview: None. My
company has a financial relationship with the following companies
mentioned in this interview: None. I was not paid by Streetwise
Reports for participating in this interview. Comments and opinions
expressed are my own comments and opinions. I had the opportunity
to review the interview for accuracy as of the date of the
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