Shares: Glittering prospects: South African platinum producers promise high returns

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The Independent Online
RECOVERY in worldwide car sales could be good news for South Africa's platinum producers.

The rest of the decade may produce strongly rising platinum prices. If that happens then investments in the world's two dominant producers, Rustenburg Platinum, at 102 South African rand (pounds 14.121 2 p)and Impala Platinum, at 102.5 rand (pounds 14.183 4 p), could prove rewarding.

The shares are easier to buy than the metal for most investors, and high operational gearing means that a rise in metal prices has a disproportionate impact on profits.

The effect of gearing is striking, especially given the low price at which platinum was trading in the early 1990s.

Calculations are hard to do because the companies are secretive about their operations. But one stockbroker has worked out that Impala, the world's second largest producer, has operating costs around dollars 350 (pounds 230) an ounce.

The largest producer, Rustenburg, is not too different. Between 1991 and 1993 the free market price of platinum often dipped below dollars 350 an ounce, effectively eliminating profits.

Since September 1993 the price of platinum has climbed from dollars 350 to just under dollars 420 an ounce. If those higher prices are sustained, profits will rise sharply over the next year or two.

Most stockbrokers' estimates suggest that profits for Impala should double over the next two years.

In terms of US dollars this would mean earnings per share reaching around dollars 1.90 in 1996 against a current dollar share price of dollars 22 for a p/e of 11.5. The mines typically pay out in dividends any money left over after meeting capital spending requirements. So earnings at that level would probably mean a dividend of 4 per cent plus.

Added spice comes from the possibility that the platinum price could continue to climb from present levels. The fundamentals look promising. In the last platinum boom in 1986, the price topped dollars 650 an ounce.

The bullish factors were a booming Japanese economy (the Japanese love platinum jewellery), fast growth in global car sales and legislation in the US and Europe requiring new cars to be fitted with platinum-based catalytic converters.

Platinum prices fell heavily in the early 1990s as car sales collapsed and the Japanese 'bubble economy' burst. The platinum price, which was nearly 1.7 times the gold price at the peak, dropped to parity last year. But now it is on the rebound as car sales pick up strongly and the Japanese economy shows stirrings of recovery.

Another bullish factor is that as a result of the price collapse in the early 1990s, the companies have cut costs and delayed expansion plans.

Impala has cut its workforce by 25 per cent, and even the more efficient Rustenburg has been trimming costs.

Expansion planned in the late 1980s has been shelved, so little new production is expected to come on stream after big increases in the past two years.

The market research director at Johnson Matthey, the world's leading platinum refiner, said recently that he expected the global supply surplus to disappear in 1995.

Potential investors may be concerned about the risk of South African mining stocks. But there is safety in the overwhelming dependence of the market on South African supplies. Impala and Rustenburg produced 80 tonnes in 1993, more than 55 per cent of platinum supplies from all sources.

Any sustained disruption of their output would send the platinum price into orbit, ensuring that any losses would be rapidly made up once production resumed.

Any changes to the complicated financial and commercial rand arrangements should also be beneficial for investors.

At the moment foreigners buy South African assets via the financial rand market, in effect giving them a 20 to 25 per cent discount. Dividends are paid at the higher commercial rand rates.

The plan is for the rates to merge, eliminating the financial rand, which could bring a windfall to overseas shareholders.

The snag to the bullish case for South African platinum shares is that it is already at least partially discounted in share prices which have moved up strongly with the platinum price this year. Rustenburg has just reported profit figures and Impala is due to report tomorrow. But I believe that what is not discounted is the possibility that as rising demand meets static supply in the mid and later 1990s, the platinum price could move much higher. This would mean a profits bonanza for the two giants and would also be good news for Lonrho, at 136.5p, which, alongside its many other activities, is the world's third largest platinum producer.

(Photographs omitted)