If South Africa Was Canada

If South Africa was Canada, do you think PGM production would be greater?

You bet your informed PGM buttocks it would!

South Africa produces 70% of the world's platinum and along with Russia, dominates the production of platinum group metals. Platinum group metals are not complicated. They are the rarest metals on planet earth. They have properties like no other element on the periodic table. These properties are extraordinary, unique, remarkable, and have proven essential in a modern civilization. There are no substitutes. You don't have your needed PGM? Then you don't have the component you need to make your product, period! And you do not need to be Elon to project future demand. 

This stuff is in the ground, rare as it is, in a few place. In South Africa. In Russia. In Canada. In the United States. In Australia. But the vast bulk of PGM reserves are in Russia and South Africa. 

If South Africa had the risk profile of Canada, and that supportive mining profile, I can assure you investments in mine expansion, as costly as they are, requiring long projections without hurdles, would occur apace. We would not be in the brine we currently are. Said differently, the world is in a pickle. 

So what is the difference between Canada and South Africa? Let's start with a challenging political environment in South Africa which can be unpredictable, unfair, and uninformed in its decisions. Contrast that with Canada, perhaps the most aware and supportive mining environment on the globe.

Let's add into the brine the issue of power. ESKOM, in South Africa, was once a first world, highly modern and efficient utility, and the hope and model for Africa. Today, it has been rife with corruption, poor management, poorly maintained plant and equipment, and an inability to provide consistent power. Where industry has wanted to build its own power sources at its own expense, to insure its ability to produce - thereby keeping its workers employed and its products flowing, benefiting the country, government has illogically blocked such projects. Contrast that with Hydro Quebec or Ontario Hydro, or any of the ultra-modern and efficient power generation companies in Canada.

And what about labor? There IS great mining talent in South Africa, and if fairly treated, can be a wonderful and productive partner to a mining company. Sibanye Stillwater's approach, as it has expanded and taken over companies with a tough labor past, is to work very hard in this direction, winning awards and recognition. Yet, there have been deeply acrimonious, highly disruptive labor disputes in South Africa that have led to long strikes and violence, very often a function of power-centric, selfish, narrow mindedness on the part of the SA labor leaders. Canada, on the other hand, has a very deep bench of supportive labor, without this more challenging history.

The bottom line is that in this environment, funding projects requires much more expensive capital given an investor's perception of these risks, including a significant level of uncertainty around the future, whether it be power, regulation, or labor. And the net result? Projects that would have excellent economic merit in a more stable mining jurisdiction do not get funded. And, the implications are that the supplies of PGMs coming down the pike, are far less than they would otherwise be. 

It also means that mining companies are doing what they can to create geographic diversification. Sibanye Stillwater bought the prolific Stillwater palladium mine in Montana. Impala bought North American Palladium in Canada. Anglo American has divested of important South African assets. And this means that the highest and best choice for the development of PGM supply, if everything was equal, (ie if South Africa was equivalent to a Canada as a "safe jurisdiction") is not being made.

But this has created opportunity. The PGM market is tight and getting tighter and tighter and tighter.  PGM prices are going higher. Sibanye Stillwater, the largest PGM producer in the world, and a stock, that, in full disclosure, I am long, is deriving more than half their revenue from the US based Stillwater mine, and has excellent optionality around future developments at the Stillwater complex. It also has the potential to increase its stake at the exciting Generation Mining site in Canada (with similar topography as Stillwater)  from currently 20% to 51%, upon option exercise. (I am also long Generation Mining, and incidentally, Impala as well.)

Now I also want to be clear that though the South African producers find themselves in this brine, and in certain ways, "in a pickle" they have all worked proactively to be model, productive South African citizens, and there certainly is an effort within the government and the system, to move all of this forward positively. There remains, it appears to me, enough good intent on both sides to help solve these challenges. But they are endemic, long seated, and require long resolution solutions. 

In the meantime, I am very long all of the platinum group metals in various forms, physically as well as thru PGM stocks.


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