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Crosscurrents Swirling in South Africa Are Bullish for Platinum


Newly reelected President of South Africa, Cyril Ramaphosa, is a good guy. He has a legitimate agenda to address endemic challenges in South Africa. But... this is a tough hand. 

First, Phakamani Hadebe, head of ESKOM, resigned, commenting on "unimaginable pressures" he faced. Then, Vuyani Jarana, head of SAA, South African Airways, resigned. Both are critical to the smooth functioning of the country, and there are no easy solutions. Then, Ace Magashule, a leader of the ANC, creates confusion around the charter of the Reserve Bank, taking a position that was unacceptable to international investors. 

In the meantime, the Rand has weakened. On the one hand, mining companies, whose expenses are in Rand, and revenues resulting from mineral sales are in dollars, have the benefit of better margins. Those better margins however will not lead to increased production, in my view, but rather further retrenchment given that the weaker rand is primarily a function of challenging domestic politics. With rising fuel costs a direct effect, any borrowing in foreign currency costing more, incremental pressure on ESKOM leading to inexorably higher electricity rates, and overall a picture of seemingly intractable problems, SA companies find themselves operating in a challenged state. 

And, with all of that, South Africa produces 70% of the world's supply of platinum, yet platinum, in my book, is trading at the moment at the stupidly low price of $813. Though the market doesn't seem to understand the context of tiny supply and critical need that I have been discussing now for months, sooner or later market's come to their senses, and platinum can easily find itself at $1200. Yes ultimately, I continue to feel the platinum group metals are mispriced by multiples of where they are trading today.


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