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Stock: Aquarius Platinum
Code: AQP
Market Cap: $1.2bn
Recommendation: None

As record album sales and exclusive credit cards suggest, the aura associated with platinum is sometimes greater than gold. But whereas human affiliation with gold traces back thousands of years, our knowledge of the ‘white metal’ goes back only a couple of centuries. Despite being crafted by native Indian Americans over 1,000 years ago, it was not until after the Spanish conquest of the New World during the 15th and 16th centuries that Europeans got a hold of platinum’s very unique properties.

By the end of the 17th century the Spanish had discovered alluvial deposits of platinum when they were panning for gold in what today is Colombia. These pioneers thought the white metal was a nuisance as it slowed their gold mining processes. In fact, platinum was viewed as having such little value that criminals began using the metal to counterfeit Spanish gold coins.

Despite being extremely rare, the metal eventually stymied interest from European scientists only due to its extraordinary physical properties. They noticed that the metal failed to melt in fire, was heavier than gold and was virtually impossible to corrode with gases or chemicals. The metal’s fame rose and the very qualities that had for many years deemed it too difficult to work with, made it extremely attractive for industrial purposes.

During the 1780s the metal was used to make durable laboratory instruments in Berlin and it was also being used by the French to make crucibles for glass production – a use that to this day still accounts for thousands of ounces of platinum consumption each year.

From such simple beginnings, platinum’s uses have increased greatly. The white metal is still primarily used for industrial applications but it is also now incorporated into jewellery. The industrial uses for platinum have skyrocketed to include neurosurgical and dental apparatus, drugs for cancer treatment, computer and automotive equipment. In fact, it estimated that one out of every five goods manufactured either contains or is produced using platinum! One of the most essential uses for the white metal is in auto catalytic converters. Platinum in autocatalysts helps to convert pollution into carbon dioxide and water, and nearly one third of all newly mined platinum is used in this way mostly in the production of cars and trucks.

While new applications for platinum are being discovered on a daily basis, world supply is very limited with 80% stemming from South Africa and the rest usually from Russia. Intricate difficulties are associated with mining and production and only 5 to 6 million ounces are produced each year – this is less than 5% of yearly gold production. It is estimated that all of the platinum ever mined would fill a room measuring less than 25 feet each side. In ground deposits of the metal are not ‘pure platinum’. As it is occurs naturally in combination with other metals, ore bodies containing platinum are usually graded in terms of ‘Platinum Group Metals’ (PGMs). This combined occurrence makes refining the metal a challenge. Extraction is complex and takes about 6 months.

So barriers to entry for would be producers are high. But one company that has managed to gain leverage to the platinum group of metals (PGMs) and claim its own piece of the South African landscape in particular is Aquarius Platinum Limited (ASX Code: AQP). Operating four key mines across South Africa and Zimbabwe, the company is the largest Australian-listed platinum producer. However it is only regarded as a 2nd tier producer in global terms.

Aquarius has faced its’ fair share of troubles in recent years, highlighted by several unfortunate mine-related deaths in late 2007. More recent problems include US$167m worth of debt that needs to be refinanced by the 30th June, which is being made all the more difficult by the company’s reported loss of US$70m for the six months to Dec 2008. The loss was driven by lower platinum prices, which saw sales fall 67% from the previous corresponding period. The company is forecast to remain in the red for 2009 unless platinum prices pick up markedly.

To add to the company’s woes, Aquarius has been forced to suspend operations at its Everest Mine in South Africa due to ground stability issues and indications are that it will not be re-opened until significant improvements are seen in PGM prices. Due to the intricacies involved in mining, management has deemed it more beneficial to keep operations on hold at Everest until demand picks up. Everest has historically made up close to one quarter of the company’s total production and 2009 output has been slashed by 100,000 ounces to 475,000 due to the closure. The issues at Everest have added to investor concerns elsewhere in the company including the continued civil unrest in Zimbabwe and uncertainty over the mine life remaining at the Marikana operation (which makes up one-fifth of Aquarius production).

These fundamental issues have clashed with the brief recovery seen in the platinum price over recent months, which has bounced from lows of US$800/oz in October 2008 to its current level of over US$1,100/oz. Despite this short-term recovery, the platinum price is a far cry from its high of over US$2,300/oz made in February 2008 and is the primary reason why Aquarius has experienced such dramatic falls to its profitability. If the platinum price continues to rally, the prospects for Aquarius should improve, but whether this is enough for the market to overlook its fundamental challenges of late is another issue for investors to consider.

Aquarius may be one of the few options for local investors to gain exposure to platinum, but does this alone mean that the stock is set to mimic any higher moves in the platinum price? For now the jury is out, but we are keeping watch in case divergence emerges between the two.

Joshua Terlich is an analyst at wise-owl.com, one of Australia’s leading independent stockmarket research houses. Click here for your complimentary report.

 

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