Shiny Profits Await Investors in Platinum
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It doesn't happen all the time, but sometimes it's easy for investors to make money just by scanning the international headlines. In South Africa last month, labor unrest in the country's mining sector came to the fore as a strike at a platinum mine became violent, resulting in the death of 44 people.
The country's labor unions have become more and more strident in their protests of the very unsafe working conditions (due to the depth of the mines) in many of South Africa's mines. There has also been increasing violence between members of the two main unions, the Nation Union of Mineworkers and the more militant Association of Mineworkers and Construction Union.
This news should have rung a bell for any international or commodities investor, as platinum climbed to multi-month highs, since South Africa is the world's top producer of the metal, producing 75% of the world's supply of platinum.
The violence led to shutdowns of the mine where the violence occurred, owned by Lonmin, and also smaller mines run by Eastern Platinum and Aquarius Platinum. Then just over a week ago, Anglo American Platinum Ltd. ADR (NASDAQOTH: AGPPY.PK) announced the shutdown of its entire platinum operations in South Africa. This is extremely important because Anglo Platinum is the world's largest producer of the metal, accounting for 45% of global production.
Investors should expect even more closures of mining operations in South Africa. The sector was already suffering before the strikes due to low platinum prices and higher costs due to previous strikes and other factors such as electricity rates which have been climbing at a 25 percent annual rate.
So how can investors play turmoil in South Africa's mining sector? First of all, either completely avoid or even short the country's mining sector. The labor unrest is still spreading. Evidence of that can be seen by the illegal strike at a gold mine owned by Gold Fields (NYSE: GFI). The wildcat strike, by 15,000 miners, occurred in the western section of its KDC mine in West Rand. The stock has dropped about 15 percent just in the past six months alone.
Investors should also consider doing the same with the iShares MSCI South Africa Index Fund (NYSEMKT: EZA) which has nearly 20% of its portfolio allocated to the mining industry. The South African economy has already been hit hard by the eurozone crisis and now strife in the mining sector, which contributes between 5% and 8% of GDP, is making things worse. The economic drag will further pull down the ETF as South Africa's economy sputters.
Where investors should go long is on platinum itself, through exchange-traded funds and notes. There are several from which to choose, including the ETFS Physical Platinum Shares (NYSEMKT: PPLT), the UBS E-TRACS CMCI Long Platinum Total Return ETN (NYSEMKT: PTM) and the iPath Dow Jones -UBS Platinum Subindex Total Return ETN (NYSEMKT: PGM). PPLT is probably the best choice, since it is an ETF whose shares represent beneficial interest in a trust which actually holds physical bars of platinum. The ETNs are a debt obligation of the bank issuers, UBS and Barclays Bank respectively.
Platinum will not skyrocket immediately, but should climb (up already 18 percent this year) as the unrest in South Africa continues. There is a surplus of platinum right now – 6.5 percent of total demand – and it may take 12 to 18 months of continued problems in South Africa to clear that surplus. The country's production should decline between 350,000 and 400,000 ounces according to the major Russian producer of platinum, Norilsk. After that, fireworks could ensue in the platinum market.
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