Document 199340

Dave Forest: How to Play the Looming Platinum Supply
The Metals Report
Anglo American Platinum
Energizer Resources
Impala Platinum Holdings
Ivanplats Ltd.
Largo Resources Ltd.
Lonmin Plc
Reunion Gold Corp.
Zimplats Holdings Ltd.
South Africa, platinum mining giant, is about to fall off the investment map,
says Dave Forest of Pierce Points. Until the country sorts out its labor
politics, there is a real need to establish alternative sources of platinum group
metals, vanadium and manganese. In other words, while it's a bad time to be a
miner in South Africa, it's a good time to hold in-ground reserves. In this
interview with The Metals Report , Forest names deposits in the Americas and
elsewhere in Africa with the potential to meet global platinum needs. But he's
choosing carefully, because even in times of scarcity, Forest argues, it just
won't do to develop anything other than the best, most economic mining
Source: Kevin Michael Grace of The Metals Report
The Metals Report: You recently wrote, "Many of the global threads in the minerals
industry are today running through South Africa." How crucial is South Africa to
commodities and, especially, the so-called strategic minerals?
David Forest
Pierce Points
Tel.: (604) 417-2960
[email protected]
Streetwise Reports LLC
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 981-8999 x311
Fax: (707) 981-8998
[email protected]
Dave Forest: There may be no other country that is as important to the mineral
industry as South Africa in terms of across-the-board production share. It produces
about 70% of the world's platinum. There is no other major commodity that is so
geographically concentrated. South Africa also produces a lot of the world's
strategic minerals, such as vanadium, manganese and titanium.
TMR: Nelson Mandela was close to death recently. Many have worried that his
death will result in a civil crisis. What do you think?
DF: South Africa has so many unresolved systemic and structural issues.
Mandela's death could serve as a flashpoint. It could be a number of other things.
TMR: When you read about the president of the African National Congress (ANC)
singing "Umshini Wami (Bring Me My Machine Gun)," this suggests a high
possibility of political turmoil.
DF: Absolutely. The labor unions have been incredibly militant. The difference
between what they're asking for and what the companies are offering them is 150%
compared to 5%. That's a very big disconnect.
TMR: What is the significance of possible changes to South Africa's Mineral and
Petroleum Resources Development Act?
DF: The old minerals code has always been faulted for being vague. The
government issued a new draft code last year. Mining companies raised
somewhere in the neighborhood of 80 objections to different parts of the act and
submitted them to the government. The revised draft released this summer ignored
almost all of these objections.
TMR: When can we expect government action?
DF: Pretty soon. The government is taking comments on the revised act until Sept.
6. So we could see action this year.
TMR: How strong is resource nationalism in South Africa, particularly in
government circles?
DF: South Africa has one of the highest electric-power costs on earth. So there is a
lot of talk about coal, which is used to generate a good portion of this power, being
declared a strategic material, if not outright nationalized. This would have a major
effect on the global thermal market because South Africa is a pretty significant
swing supplier, especially in the Indian Ocean and Asian spheres.
TMR: The National Union of Mine Workers (NUM) has announced a vote on
possible strike action. How important would such a strike be?
DF: We had strikes over the last year. They had a material impact on the balance
sheets of all the mining companies involved. You're talking about losing a month or
two of production. This is especially worrisome in South Africa because it has a lot
of older, deeper mines. Once you turn off the switch, it gets harder to turn it back on.
These mines need constant maintenance. If they don't get that, you run a real risk of
permanent operational damage.
TMR: Is South Africa on the verge of killing the goose that lays the golden eggs?
DF: The question is, how long until South African mining companies can operate
profitably with the incentive to make the capital expenditures needed to maintain
existing mines and develop new ones? In the long term, South Africa is going to be
a very rich place. In the short term, we could see some significant dislocations.
TMR: How would you rate the prospects of South Africa's various platinum group
metals (PGM) companies?
DF: I think you can put most of the existing producers into the same basket. South
Africa is a pretty high-capital place to operate. We're talking deep mines to exploit
fairly restricted layers, with high labor and energy costs. The only reason that
conditions aren't even tighter is that miners got a boost from the depreciation of the
rand. PGM producers are going to have a tough time for at least the next year and
possibly longer.
I'm a little more bullish on development stories. Now is a good time to hold inground reserves. I like Ivanplats Ltd. (IVP:TSX), which has a significant in-ground
platinum reserves but isn't being forced to spend the capital to develop and operate
it now.
TMR: Any other examples of this?
DF: Zimbabwe, which was a country a lot of investors had written off, seems to be
doing better than many South African operations now. And a company like Zimplats
Holdings Ltd. (ZIM:ASE) (a subsidiary of Impala Platinum Holdings Ltd. [IMP:JSE])
might be better insulated as a result.
TMR: Do major producers such as Anglo American Platinum Ltd. (AMS:JSE) and
Lonmin Plc (LMI:LSE) have escape routes?
DF: Their only option would be diversification outside South Africa. Right now, they
don't have that, and that's as much a function of geology as of politics.
TMR: What is your advice for investors in South African PGM companies?
DF: I think if you're a value investor, and you look at the margins that the sector as a
whole is making—which translates into cash flows versus valuation—you probably
wouldn't want to be in the majority of those companies right now.
TMR: Should South African PGM mining become unproductive, where else in the
world will we see major efforts to find PGMs?
DF: This is where it starts to get really interesting. You would expect to see a large
demand for exploration prospects outside South Africa. But the known alternatives
are Russia and Zimbabwe, not the most attractive destinations for capital. Beyond
that, we know of a few places where lower-grade platinum is found, and we're
talking an order of magnitude lower. There's a real need for exploration teams that
can come up with new ideas about where richer platinum reserves might be found.
TMR: What about PGMs produced as byproducts from mining of other metals?
DF: The platinum produced as byproducts by companies in Ontario's Sudbury
district are probably the best prospects. But they are less likely to have a material
impact on the supply balance because the amounts of PGMs you're talking about
are relatively small.
TMR: There is quite a divergence of opinion about Ontario's potential, in places like
the Ring of Fire district. Some say it will be a huge development for decades to
come, while others say it's hype. What do you think?
DF: Ontario has some of the more interesting magmatic-sulphide deposits on the
planet. It has potential. But you're talking about a system that's more linked to the
fates of metals such as chromite and nickel. I don't see it being a significant player
in terms of platinum group elements (PGEs).
TMR: If South African production of vanadium and manganese becomes
unproductive, which regions will step up as replacements?
DF: Three countries—South Africa, China and India—produce most of the world's
vanadium. Unlike platinum, we do know of a few places on earth where we have
South African-like deposits of vanadium. A company like Largo Resources Ltd.
(LGO:TSX.V) in Brazil is probably in a good position. It is developing a magmatic
iron-vanadium-titanium deposit, which, interestingly, also has some PGMs. This is a
near-term producer in a geological terrain similar to that which has been proven
around the world. That's a pretty interesting combination. And Brazil has a very
well-developed mining sector, which means it also has pretty well-developed
infrastructure, which adds to the economic viability of the project.
TMR: What about Energizer Resources Inc. (EGZ:TSX.V; ENZR:OTCQX) and its
vanadium project in Madagascar, just east of South Africa in the Indian Ocean?
DF: Energizer's Manga Vanadium project is a different type of deposit, but the
grade and size look like they would be comparable economically. The biggest
question there is the economics of the infrastructure, and we haven't seen the scale
of development yet that would give us a complete indication of what that's going to
look like. But, certainly, if that aspect of the project can be managed, Energizer
could be a very viable source of vanadium supply.
TMR: What about alternative sources of manganese?
DF: None of the alternative areas are as proven as South Africa. That doesn't mean
they won't work, but it means we don't have a full understanding of what their
production economics would look like. I would probably lean more toward Guyana
and Reunion Gold Corp. (RGD:TSX.V), as the geology is similar to South Africa's,
and the costs are quite a bit lower than in North America.
TMR: Do you believe that the U.S., Canada and other western countries need to
further the development of home-grown strategic minerals so that high-tech and
emerging technologies are not so dependent on countries such as South Africa,
China and the Democratic Republic of the Congo (DRC)?
DF: I think the market actually does a pretty good job of ensuring supplies of
strategic metals. We may get short-term dislocations, but as an investor in mining
companies, I would rather see higher prices for metals that are in short supply
benefit companies that are developing the best new projects in the world. What
tends to happen when you declare something "strategic" is that governments invest
money in projects that are often very marginal. So you tend to reward people who
are not developing the best projects in the world. I'd rather see capital go where
we're going to get the most supply, rather than to projects that will shuffle along for a
couple of years and then shut down.
TMR: Mineral production everywhere is afflicted with rapidly rising costs. Do you
think that anything can be done about this?
DF: For a while, the fad was to invest in sectors like mining. So we had a lot of often
indiscriminate investment, a lot of capital going to a large variety of projects, some
good, some not so good. All that new money bid up prices for mining services pretty
significantly. What should happen and what is starting to happen now is that the
less well-conceived projects are dying off, being put on hold or just not being
developed. That's easing some of the cost pressure. I think if we get back to
developing only the best projects, only the projects that make sense, we will see
less money being spent on services, and we'll see less cost pressure, which would
be good for the people left to develop the best projects.
TMR: If the production prices of industrial commodities can't be controlled, doesn't
this suggest a possible significant decrease in production, which would have
significant consequences economically?
DF: Yes, and we might be at that juncture right now. Look at the gold sector. We
went from a focus on rapid expansion a few years ago to the reverse, which we're
seeing now. Investors are now asking companies to end their development capital
spending, rationalize existing operations and focus on cash-flow projects.
That will probably translate into a smaller gold development pipeline, which means
less gold being taken out of the ground for the next couple of years. That should
stabilize prices and stabilize the industry.
TMR: Dave, thank you for your time and insights.
Dave Forest is chief operating officer of Condoto Platinum NL and managing
geologist of Pierce Points, a free weekly e-letter covering the natural resource
sector and commodities markets. A geologist, he has worked for over a decade in
the oil and gas, mining, and environmental sectors.
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1) Kevin Michael Grace conducted this interview for The Metals Report and provides services to The Metals Report as an independent contractor.
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