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 Metals Report 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: Your 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?
Rick Rule: 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.
TMR: Other than the above-ground supply issues, how do PGMs differ from silver, which is considered more of an industrial metal?
RR: 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.
TMR: Are the issues that would make PGM prices rise related to supply-and-demand or to its bullion characteristics?
RR: 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.
TMR: Are there substitutes for platinum in catalytic converters?
RR: 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.
TMR: 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 issue?
RR: 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.
TMR: Is there geological evidence to support the potential for discoveries elsewhere?
RR: 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.