Play the Platinum Card

02/19/2008 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad and Yiannis G. Mostrous, editors of the Vital Resource Investor, say supply shortages in South Africa will drive up platinum prices, helping one big producer.

Commodities supplies have been affected by higher costs, labor shortages in every level, lack of equipment, and increasingly difficult conditions in the extraction process.

The latest infrastructure problem occurred in South Africa, where the country's electricity-generation capacity has disappeared. The first signs of a potential problem were visible last year when occasional blackouts started to occur. Given the chronic energy problem in South Africa, few paid attention then, although the increased frequency had some companies worried.

Enter 2008 and heavy rains forced the closing of some coal mines, while the resource industry's production was getting stronger. As a result, the country's spare capacity vanished, leading to serious energy supply disruptions.

According to industry sources, on January 25th, all deep-level underground mining stopped as more than 100 companies were asked to cut back on electricity usage. Short-term problems will remain.

There are a lot of reasons that have contributed to the country's inability to provide for its most important industry, most important being the lack of planning and the artificially low electricity prices. The problems seem to be deep-rooted and will take time for the country to repair, and as a result commodity supply will remain constrained for at least a few years.

The importance of the South Africa is that it produces big quantities of quite a few materials, [so] continuous disruptions will only work toward increasing prices.

Platinum is one of the metals that will be affected most because South Africa is the dominant world producer. Platinum companies have been lowering production numbers for some time, and more is expected. Anglo American's (NASDAQ: AAUK) subsidiary Anglo Platinum had one of its biggest mines flooded at the beginning of the year, and this should affect production levels fairly dramatically.

Because of similar incidents, it's not surprising that 2007 is expected to be a down year for platinum production in South Africa (the final number will be released in May) and industry experts are expecting a rather weak 2008. Therefore, it comes as no surprise that platinum prices remain strong and should stay stronger for longer.

We expect both companies to benefit from platinum's strength, although in Anglo's case, its subsidiary still has some cost issues with which [it must] deal.

The company supplies 40% of the global platinum market through Anglo Platinum. The metal represents 20% to 30% of overall revenues; it's growing steadily, and management is solid.

Anglo is also generally appealing because of its diversified asset base, which makes it a perfect candidate for growing through acquisitions or by being acquired. Buy Anglo American. (Its ADRs closed Friday at around $30-Editor.)

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