Value Fund Portfolio Manager, John Biccard, updates us on the platinum industry following the recent trading update from Impala Platinum.
Lindsay Williams: It’s about time we had a platinum update and the backdrop to the platinum update is a trading update from a company called Impala Platinum and I am going to speak to a man now who has been with Impala Platinum through thick and thin. His name is John Biccard, Portfolio Manager responsible for the Investec Value Fund.
John, you must have cheered this morning when you woke up and saw the trading update which came out I think probably about 07h30 South African time this morning. The share price immediately jumped on the opening round about 10%, maintain those levels and, if I gave you the share price history, which I will do later, it will be an astonishing story. Were you pleased?
John Biccard: I was. I mean we have been waiting for a long time for some good news on Impala. I mean it is basically we have been invested for 4 years and for 3 years and 8 months the shares basically have been going down and going up for 4 months. So it has been a long road but, as this trading update shows, there is some light at the end of the tunnel at last.
Lindsay Williams: Yes. So let’s have a look at the share price history. November 2013 I think the share peaked at R133.00 per share. You go back to September … and then there was a horrible period and then you go back to September 2018, I think it was trading at round about R15.00/R16.00 per share. Then it went by the end of September to around R25.00 per share, paused a little bit, R37.00 a share by 8 December of last year, today R42.00/R43.00 per share. It has been a remarkable bounce-back. What was the catalyst for this?
John Biccard: So you mentioned R133.00. That actually wasn’t the top. The top was all the way back in 2008 at the top of the commodities bubble, which was a bubble at the time but the share actually was over R300.00 a share at the top 10 years ago.
So basically over 10 years (it has been a 10 year bear market for Impala), it has fallen from R300.00 to exactly what you are saying. R16.00 was the low recorded middle of last year and now it has gone from R16.00 to R42.00. So I think that is the important thing, that you know the share has gone up 1.5 times in like 6 months but, if you draw the 10 year graph, it is really just a small blip towards the bottom.
So our fair value has consistently been north of R75.00 and so we started buying substantially too early, as we always do as value investors. So we started buying at R80.00 on the way down if you think of that graph and we bought more at R70.00 and more at R60.00 and more at R50.00 and then more at R16.00. So our average in price is about R35.00. So it has taken a long time to just get back to be in the money but, at least, as we saw on this trading update, there are some concrete signs of a turn-around in the company.
Lindsay Williams: Of course, what happens with a V-shaped sort of recovery like this is that we come back and make a W bottom. I don’t want to talk technicals now but that is the normal pattern of things. So 16 to 42, maybe it comes back a little bit into the 20’s or something. I don’t want to give you another sleepless night by saying that but the point is that above R300.00 – and I am just making a note to update my charting system to more than 5 years because that R133.00 is obviously misrepresentative – above R300.00 is absolutely extraordinary. What other fundamental changes, never mind technicals – the fundamental changes that have been the catalyst for this?
John Biccard: Okay, so the principal change was obviously the platinum price. When the share was R300.00, the platinum price was $2,400.00. If you look back, the platinum price recently bottomed at about $750.00. So that is the principal driver behind the 10 year bear market.
The secondary influence has been above inflation costs of producing platinum group metals, mainly in the Rustenburg mines of Impala. So 10 years of bad cost control and declining productivity, which the bad cost control came to an end about 2 or 3 years ago. So we had a number, 7 of the last 10 years, that costs increased at 10-15% per annum, which was way too high. The combination of cost-cutting by the company and a lessening of the power of labour in South Africa as a result of the 10 year bear market in platinum means that the costs are now only growing at 2% or 3% per annum. So the costs are now under control.
So what has changed? So we have had 10 years of rising costs and falling prices, which is why the share dropped 95%. So what has really changed? Well, there are two things that have changed. The first one is the pricing environment has got a lot better and that is mainly through – it is not through a recovery in the platinum price and I think this is a very important point that people would look and say, oh, the platinum price is only 815 today. So it is only marginally off its 10 year low and there is nothing to suggest that there is a turn-around there but what people are missing is there are actually 6 metals in the platinum group metals basket.
So when Impala mines an ounce of platinum, it also mines 5 other metals, of which the biggest are palladium and rhodium and, if I graph those 10 metals over the 10 year period, 5 of those 6 metals are actually in bull markets and some of them, some of the minor metals have gone up 3 and 4 times while platinum has fallen. So everyone has been looking at platinum because when you mine an ounce of PGM, so Impala mines an ounce of PGM, about half of the volume is platinum but now, because the other metals have moved up so much, they are now actually bigger in the basket than platinum.
So everyone has been watching the platinum price but these higher prices of rhodium and palladium and then minor metals like iridium mean that actually the basket price has been moving up while the shares have been moving down and this has also been helped by a weaker rand. You know the rand was sort of 10-11 to the dollar, now 13-14, 14-15. You know the rand basket is actually at a 10 year high.
Lindsay Williams: Just before you go on, John – sorry to interrupt you – just before you go on and it is difficult to do on radio but draw us a pie chart, a verbal pie chart, of the PGM basket and in the future I won’t say this is a platinum update. This is a PGM basket update in the future but just give us an idea of what platinum is in the pie chart versus the other ones, the iridiums, the rhodiums and the palladiums, please.
John Biccard: So in volume terms every single mine has a slightly different pie chart but, just generally, it is about 55 platinum and then palladium is about 35 and then rhodium is about 8 and then the other minor metals, called iridium and osmium and things you haven’t heard of, are the remaining few percent.
There was a time, if you just go between palladium and platinum, if you go back 3 years, platinum traded at a much higher price compared to palladium. Now that is switched around so now you get a much higher price. Platinum is at a substantial discount, in fact $500 below palladium. That means now palladium is nearly the same size in the basket as platinum.
So people have kind of been watching the wrong thing and in the meantime the money that they receive for the whole basket has been moving up steadily for about 2 years now while the share continued to fall.
Lindsay Williams: Let’s not go into the technicalities of substitution but we have to say to ourselves at what point does palladium start to be substituted by platinum or is the latest demand for palladium not substitutable, if you see what I mean?
John Biccard: No, they are substitutable. So that is a very important thing, that the reason why it has been so strong is palladium is principally used in petrol cars and platinum principally used in diesel cars and also in Chinese jewellery and diesel cars and Chinese jewellery have both been very weak markets whereas petrol cars, driven mainly by Chinese demand, has been very strong.
So palladium has gone from a $300 to $400 discount to platinum to a $500 premium, which is an enormous premium because actually they are both similarly efficient in taking out emissions. So there will be a point where people start substituting and putting platinum instead of palladium but this is further complicated by the fact that electric cars mean that the motor manufacturers are maybe not as happy because it takes a number of years to switch and they are also now switching to electric cars, so the water has been muddied a bit.
In the past, in 2001, when the premium got to $500, substitution did start occurring between palladium and platinum. So somewhere down here there will be switching but the key point is for Impala it doesn’t really matter. You know, as an investor, I don’t really mind if palladium goes up or platinum goes up because together they are 80% or 90% of the basket and so what has been driving it has been palladium but I am equally happy if it is platinum, in fact probably marginally more.
The most important key take-away (because, as you say, it gets very technical) is between the two of them we have a deficit. In other words, we have got a small surplus in platinum because of the weakness in diesel and the weakness in Chinese jewellery and a massive deficit in palladium. You add the two together, you have got a big deficit in the two. So the prices might diverge and there might be substitution coming but net-net the basket of the two, there is a deficit and the prices should move up in dollars.
Lindsay Williams: So by owning one stock or a couple of stocks you have actually got a diversified portfolio because of the different metals that are doing different things at different times, very exciting times and, apart from the Impala Platinum, is there going to be a knock-on effect for companies like, for example, Anglo American Platinum? Are they in the same situation?
John Biccard: Yes. Well, Anglo American is a much lower cost producer. So Anglo Platinum has been moving up actually for 2 or 3 years whereas Impala only for the last 6 months. So they are a much lower cost producer and they have rationalised and got rid of their higher cost production and so they have streamlined and they are sort of the high quality player in the sector but that share has already tripled and had already tripled before Impala started moving up but Impala is a higher cost producer and is actually more geared to rising prices now than Anglo Plats and, most importantly, the market says Anglo Plats is worth R170 billion and Impala Platinum, even after it has gone from R16.00 to R42.00, is still only R30 billion, which doesn’t make any sense to us because Anglo Plats, they are actually a similar-sized company. So just Anglo Plats has got one very low cost producer in Mogalakwena, which is very valuable but, you know, you just can’t justify that Anglo Plats is worth 7 or 8 times the value of Impala. So we expect that gap to continue to narrow.
I think a very important thing is we have spoken a lot about the prices but as important as the prices in this set of results is, if you just go back to the history of Impala, Impala has got three big operations – it refines the metals in South Africa, it mines the metals in Zimbabwe and it mines the metals in Rustenburg. Zimbabwe has been a fantastically steady producer because it is a really low cost reducer and the refining business is a nice, steady earner.
The real problem has been at Rustenburg, which is the high cost South African producer, and not only have they had a pricing problem, they have had a problem with production there, safety problems on their deep level mines and productivity problems. What is the most encouraging about this result is production from Rustenburg rose 10% over the 6 month period and that is the first meaningful increase we have had really in 5 years. So under Nico Muller, who is the new CEO who has been there I think now 18 months, there are some concrete signs that the costs and the production are fine now. He is getting them under control…
Lindsay Williams: How does he get on with the unions?
John Biccard: So far, so good. You know there hasn’t been any problems. I mean obviously there has been – we are in-between wage negotiations and wage negotiations start the middle of this year again so that will probably be the real litmus test but so far it has been good. Most importantly, he has been able to reverse basically a 7 or 8 year decline in the productivity at Rustenburg, which is very important because prices are important but productivity and the amount you produce and the costs are just as important.
Lindsay Williams: We rarely speak these days, John, because you are so busy but, while I have got you on the line, apart from the platinum producers, the PGM producers I should say, what else do you like in the Investec Value Fund at the moment? How are you positioned?
John Biccard: So we don’t like much else. You know 35% of our fund is in platinum still and then we have got a lot of mid-caps. Outside of mid-caps, in South African mid-caps and platinum and offshore we own very little. We have been bearish on all the big SA stocks, which is starting to come right.
So we have bought a whole lot of mid-caps, things like Nampak, Tongaat and recently we bought a big position in Mediclinic, which had fallen from 210 down to R50.00 and Mediclinic is quite an interesting one because it is not often we get a chance as value investors to buy (and here I put it in inverted commas) “quality” because it is no longer seen as quality, Mediclinic. When it was R200.00, it was the highest quality share in the market. At R50.00, it is no longer considered quality but Mediclinic is still the same hospital it was when it was R200.00. The only difference is it traded on 30 times and now it trades on 8 times earnings and that is a stock we really like at R50.00.
The Value Fund is really offshore, platinum and then about 40% in these mid-cap shares which have been really beaten up even worse than the retailers or the banks in South Africa.
Lindsay Williams: John Biccard, thanks so much for your insight, fascinating stuff. That is John Biccard, who is the Portfolio Manager responsible for the Investec Value Fund.
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