Sunday, April 6, 2014

Rick Rule updates view on Platnium and Palladium

Sprott:
(skip)
In South Africa, Rick believes labor disputes will plague the industry until big miners are simply forced to shut down. These strikes and violence are symptoms of how harsh conditions have become in platinum and palladium mines as they go ever deeper to produce ore. These companies still generate insufficient cash flow to pay their workers well.
The strike itself is a result of the fact that the industry does not earn enough at current platinum and palladium prices. So the miners can't earn a living wage. Both sides are stuck between a rock and a hard place.
There are two competing unions vying for the affections of workers. Neither of these can change the underlying economics of platinum production. In fact, both probably view the workers as tools to a political end, rather than a constituency to be served.
The strikes are really an illustration of the industry itself. If platinum and palladium prices do not rise, mines will close down and workers will be unemployed. There is no way to maintain production rates without sustaining capital investments, but you can't make those investments without being profitable. Thus, the price has to go up to maintain current production.
The bottom line is that most of the mines in SA are simply too high cost to continue producing at current pgm prices. The unions in SA do not realize this as they have their judgment clouded by political concerns. If the mining companies agree to the doubling of entry level wages they will have to shutdown shafts. If they do not agree they will have to shutdown shafts. Regardless, the high cost production will have to be put out to grass and that will cause a price rise which will eventually stimulate investment in mines. I continue to like Sylvania Platinum as they have no mining risk due to the company being a processor of old mining dumps. As the pgm prices rise they will benefit as their production is relatively low cost, they have completed the majority of their capital spending, and they are optimizing operations and lowering costs. Yes the company is in SA but it has not been affected by much of this labor unrest.

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