Brenton Saunders: Platinum And Gold Analyst, Deutsche Bank

MONEYWEB, BY BYRON KENNEDY, 10 JANUARY 2003

BROADCAST TRANSCRIPT: Well, we switch back to our regular Friday night mining feature, and the focus this week is on platinum, which has perhaps been overshadowed to some extent by the huge interest in the gold market. Stewart Bailey from Mineweb.com is with us this evening. Stewart, the platinum price is near 12-month highs.

STEWART BAILEY: That’s right, Byron. You know, a lot of focus has been on the gold market this week, and particularly today with that price running up again, comfortably over $350. Now we’ve seen the platinum price up as high as $624 an ounce this week and that looks like it’s going to the first in a number of spikes this year. Most of those are going to be driven by speculators who are really going to have field day pushing that price around while the platinum market sort of see-saws between supply and demand deficit.

MONEYWEB: Any idea what’s actually triggered this spike?

STEWART BAILEY: Well, I think there have been a number of factors driving the price higher. Most of them are related to production-related hiccups, or the threat of production hiccups here in South Africa. And just to cover those points, we have with us on the line Brenton Saunders. He’s the platinum analyst at Deutsche Bank in Johannesburg, and he can give us some insights into what the main drivers are for the market. Evening Brenton. As Byron said earlier, platinum is close to a 12-month high. How much of that spike can be chalked down to the smelter accident at Lonmin on Boxing Day?

BRENTON SAUNDERS: Stewart, it’s difficult to say. It’s a very thin market, so it gets moved, the price gets moved around on very small bits of information or very small changes in liquidity. Certainly it seems to be too coincidental not to have had some kind of input. But, quite specifically, Lonmin has a lot of alternatives available to it and in a year’s time we’ll probably look back and see it as quite a small blip in the total production profile of Lonmin. So I would expect, if there is any effect coming through as a result of the Lonmin accident, I would expect that to be fairly short-lived.

STEWART BAILEY: Now, Brenton, just looking at the Lonmin share chart, Lonmin lost 46% last year – comfortably the worst performer out of the platinum heavyweights. What exactly drove that price lower?

BRENTON SAUNDERS: Look, I think the entire sector shed in the region of 30 to 35% on the leak of the Minerals Bill. And Lonmin, because it was coming off such a high base in terms of rating – it was comfortably rated ahead of everything in the sector – it’s underperformance was the most extreme. And I think, since then, late in the fourth quarter we’ve had this dramatic strengthening of the rand which has impacted on all of the platinum producers, and I really think it’s been a combination of those two things.

STEWART BAILEY: So is Lonmin cheap in comparison to the likes of Impala and Angloplats now?

BRENTON SAUNDERS: It’s pretty much now rated in line with those two.

STEWART BAILEY: And this smelter accident that you spoke about is going to have an impact on earnings. Is that liable to drive the price still lower in the coming weeks, or has it settled now?

BRENTON SAUNDERS: I don’t know. I just think it’s overdone. It might well go lower. There’s just, there appears to be quite a bad knee-jerk reaction to this accident, which in the longer-term valuation of the company should be almost insignificant. But clearly what it’s going to do is affect earnings for one year. But, I mean, what people must realise is this is a company with in excess of 30 years of ore reserves. It’s going to be here for a long time. So one small problem over a three- or four-month period, even if it’s that long, is quite small.

STEWART BAILEY: So if it has been overdone, probably a good time to pick it up now?

BRENTON SAUNDERS: Sure.

STEWART BAILEY: Just looking at the whole Gencor unbundling – that group looking to spin out its 46% stake in Impala Platinum. It’s been in the news a lot this week. That has been held up with the threat of compensation claims from victims of those lung diseases. It seemed earlier this week that Gencor said a settlement was on the cards. Lawyers for the claimants say no. What’s your take?

BRENTON SAUNDERS: I think there’s a fair bit of posturing still going on. Certainly, our intelligence is that the process is quite close to some kind of conclusion and, maybe, or what needs to take place to settle the whole deal isn’t nearly as extreme in terms of costs to Gencor as some of the participants in this sort of frenzy make it. I think we’ll probably see some kind of settlement sooner rather than later. It’s probably going to mean that both sides are going to have to give up some ground. But I think it will be a satisfactory outcome.

STEWART BAILEY: Now, we heard Arthur Buchner saying earlier that there seems to be some uncertainty in the market as to whether it will be positive for Impala, given that the free float is going to be expanded – or negative, given the overhang of shares or the glut of shares that are going to come onto the market. What’s the bottom line there?

BRENTON SAUNDERS: For me it is the most important thing for Impala. It would enable anybody or any big company that may be looking to take a [indistinct] stake in the South African platinum industry, to have, for the first time, a serious look at Impala, with the parent company out of the way. And it would also pave the way for Impala to do a host of other sort of corporate transactions that should be value-accretive to it, the likes of addressing the Longplat stake and some of the other minority holdings that they have within the business. So for me it is really the key to quite a good period for Impala.

STEWART BAILEY: Now, my colleague David McKay and I were discussing earlier whether Impala’s shareholding structure and their minority holdings could be described as sprawling or intricate. We didn’t really come to a conclusion there, how imperative is it for them to streamline that structure?

BRENTON SAUNDERS: For me it’s quite important. I think as long as you don’t own the cash flows the market is quite reticent to rate you for those holdings. But I mean, it has been a very key part of Impala’s strategy and it has secured them offtake agreements for one of their sort of more secure divisions, the Impala Refining Services. So it’s a strategy that’s been in place for some time. It’s definitely been successful. It has probably matured now and needs to be addressed again.

STEWART BAILEY: So, essentially, a lot of headroom for them to unlock a lot more value this year and perhaps the year after.

BRENTON SAUNDERS: Sure.

STEWART BAILEY: Now, Brenton, also some broader issues affecting platinum stocks, and I suppose chief among these – it has been a theme on the programme over the last few days – has been the strength of the rand. Now, how big an impact is that going to have on platinum share earnings?

BRENTON SAUNDERS: The strength of the rand is very important. Look, I mean, we think about the six months to December, the platinum price in dollar terms is actually up 10%, and it was actually down in rand terms. You know the PGM basket for the PGM producers in the second half to December was actually down 7% or 8%, almost solely as a result of the stronger rand. So it’s absolutely imperative for the whole resources industry. Certainly if we see a continuation of the rand in the R8 or R9s, we’re going to see earnings come under pressure.

STEWART BAILEY: We heard Peter Major say that he’s confident the rand’s either going to strengthen further or stay flat for quite some time yet. Where would you be putting your cash?

BRENTON SAUNDERS: We’ve certainly got a view that it is structurally stronger. It’s being helped by what is a very weak dollar and a very strong euro. And I think, I mean, people say the rand is really strong, but I think it’s interesting to point out that the dollar has weakened by sort of 28% to 30% over the past 18 months. So a lot of it has got to do with dollar weakness as well. We think the rand will probably be around R10 by year-end.

STEWART BAILEY: Now just to put you on the spot, just one last question. I know you also look at gold stocks as well. Gold versus platinum – which is the sector to be in this year?

BRENTON SAUNDERS: I think in the short term, probably gold has got still some momentum, for as long as it takes to sort out the sort of political situation in the Middle East and certainly as long as it would appear that the US economy is still quite undecided. But from there I would have to say platinum. You know, it has much more quantifiable, justifiable fundamentals behind it and certainly the stock prices are not even half as demanding.

STEWART BAILEY: That’s Brenton Saunders. He’s the platinum and gold analyst at Deutsche Bank. And that’s everything you ever wanted to know about the platinum market but were afraid to ask, Byron.

MONEYWEB: Thanks very much to Stewart Bailey from the mineweb.com. Stewart, you’ve been asking a number of analysts about their choices for the year ahead. Which are the stocks that, from a resource perspective, come to the fore?

STEWART BAILEY: Thanks for putting me on the spot there, Byron. I think among my picks would be Impala Platinum. I’m convinced that there’s enough urgency behind Gencor to sort this unbundling out, and I think the re-rating for Impala is going to be fairly extreme. I think, after that, one of the black empowerment mining companies, probably ARMgold, is set to do quite a good deal this year, given that there is a new urgency in doing empowerment in the mining sector. And then I just have to say that my other two picks would be outside the resource sector, and I’ve got a big bet on SA Inc this year, and one would be Tourvest. I think we’re just really on the brink of a big tourist boom here, and I’d say the other would have to be Mr Price.

MONEYWEB: Four stocks that Stewart Bailey likes for 2003. Mr Price, Tourvest, ARMgold and Implats. Stewart Bailey from mineweb.com talking to Brenton Saunders from Deutsche Bank.

Posted in Market commentary

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