Platinum Market Review

Transcription

1 A-1 Platinum Market Review January 2016 Platinum Investor perceptions of slowing global demand, specifically from China, drives platinum to sevenyear low Ramp-up of SA production to pre-strike levels along with depreciation in rand sustain already abundant supplies Negative market sentiment with reduced speculative interests and increased sales from ETF holdings to limit prospects for PGM prices Palladium Slowing growth rate in new vehicle sales in China, with reports of declining sales in other major markets, could diminish demand outlook for palladium Sizable liquidations in ETF holdings, particularly from SA-based funds, weigh on metal value Rhodium Earlier hope of increased rhodium requirements for Euro 6 compliance proves disappointing Steady flow of producer selling coupled with absence of speculative buying interest and limited growth in commercial demand depress market expectations Patrick Magilligan

2 Additional Contributions from Rajesh Seth A-1 Specialized Services & Supplies, Inc. Telephone: State Road Telefax: Croydon, PA

3 Platinum Platinum prices fell to a cyclical low this month of $813 an ounce, its lowest value since December 2008, more than seven years ago; platinum recorded a cyclical/recession low of $732 an ounce just two months earlier in October With a continued strengthening of the dollar against most other currencies, persistent poor investor expectations and a relatively steady flow of new mine supplies, despite the weakness in metal values, it now appears that platinum prices will challenge the $800 mark in the near future. Global auto sales, accounting for some 40% of annual consumption of platinum, may also be signaling a slowing in the rate of growth in new registrations, which could further erode investor interest in the metal. A steadily strengthening US dollar has added further pressure on metal prices, and with additional rate increases anticipated by the US Fed through 2016 while the ECB and others are cutting interest rates, the dollar should continue to rise in value vis-à-vis most other major world currencies. Attention will now turn to the anticipated frequency of additional singlemonth increases in rates going forward. Between June 2004 and July 2006, the last cycle of rate increases, the Fed funds rate was raised a total of 17 times, reaching a high then of 5.25%. But the sub-par growth of the current US economic recovery probably could not tolerate a steady series of rate hikes like those seen in the last post-recession period. Since mid-2009, the US economy has expanded by a paltry 2.3% (2.2% in first three quarters of 2015), significantly lower than the average of the past three recoveries of 3.6% growth. Market consensus now expects additional increases in the Fed funds rate of 1% per year in 2016 and 2017, with decisions of course dependent on the strength of monthly economic data. 3

4 A stronger dollar could also affect US economic growth as higher priced exports will deter foreign demand for products. Declining speculative investment interest in the PGMs has been predicated on the market s perception that sluggish economic growth in the major economies of the US and EU countries is being further affected by the correction currently befalling China. The IMF has lowered its estimate for world growth in 2015 to a 3.1% expansion, down from 3.4% in 2014, but with a return to 3.6% growth this year. But perhaps more importantly for the metals, the IMF forecasts a steady decline to Chinese growth in GDP of 6.8% last year, from 7.3% in 2014, sliding to 6.3% in 2016 and 6% in This scenario doesn t bode well for incremental demand growth for commodities. A stream of disappointing economic data released by China is acting as a drag on further price growth, particularly for the industrial metals. China s GDP for the fourth quarter of 2015 was reported as 6.8%, its lowest quarterly gain since Total global trade with China fell by 8% in Manufacturing PMI remains weak while investments in fixed assets, which drove the Chinese economy post-recession, continue to fall away; industrial production did tick-up towards the end of 2015 as did retail sales. And China s growth in CPI for December was reported as only 1.6% year-on-year, leaving ample room for added government stimulus. The recent need of the PBOC to intervene in support of the yuan and of Chinese state funds to act to shore up its volatile equity market in the New Year have further shaken investor confidence. The Shanghai Composite Index fell 15% in the first two weeks of 2016, and 21% 4

5 from its December high. A further concern for investors is the expansion in China s debt markets since 2008 which have ballooned to an estimated $28 trillion in government, corporate and household borrowings, according to a recent paper from consultants McKinsey & Co. The importance of Chinese demand in the metals markets cannot be overstated as the chart alongside illustrates (sourced from HSBC s Metals Quarterly Q1 2016, with CRU data). The data show the significant gains in import requirements of three primary commodities, aluminum, copper and nickel, into China over the past 15 years. Similarly, a recent study conducted by the IMF further underscores the relevancy of China s crucial role in the metals trade. The report which measured a broader basket of metals which also included iron ore, lead, tin and zinc found that China s proportion of global metal consumption has grown from 10% in 2002 to 46% in It is no wonder that the uncertainty as to China s recovery continues to overhang the commodities markets. Exacerbating this structural change in the marketplace for commodities has been the substantial build in capacity in recent years that was precipitated by the growth in Chinese consumption needs and the consequent run-up in prices. The resulting glut in new supplies could take some time to dissipate as many newer projects will need to continue to produce just to service the debt accrued to develop the operations. South African platinum production, which accounts for some three-fourths of global primary supply, appears stable despite depressed metal prices, rising more than 20% over the strikeaffected 2014 period to an estimated 4.2 million ounces presently. Continued weakness in the value of the SA rand versus the dollar, down to R17.8/$, has helped to offset declining dollar PGM prices, thus allowing the mines to sustain production from all but the most uneconomic ore bodies. And with more than an estimated unofficial 40% unemployment rate nationally, closing inefficient shaft systems in South Africa is very difficult as it becomes as much a social issue as it is one of economics. Moreover, A-1 forecasts a 5% increase in secondary platinum supplies from autocat recycling in 2016 to 1.22 million ounces of additional metal. For now, platinum has widened its discount to gold and is trading steadily up to a record $280 an ounce differential. Gold has attracted some limited safe haven interest in response to the increased volatility in world equity markets experienced in the New Year while platinum has performed more like an industrial metal reacting to the prospect of decelerating worldwide demand growth. Platinum seems likely to test the $800 an ounce mark in the near-term with the possibility to re-visit the cyclical/recession low of $732 an ounce recorded in October Should the US and EU economies maintain their anemic but positive growth, and China is able to manage a soft landing 5

6 at or near 6% GDP growth, then this $732 an ounce level may represent the trough for this cycle. Additionally, an expected series of rate increases from the US Fed should further strengthen the dollar and make a sustainable and measurable recovery in platinum more difficult to achieve. But should the correction in the Chinese economy persist into 2017, commodity prices would likely continue to suffer and the possibility of further economic contractions in the resourcebased countries would increase; the current recession in Russia, Brazil and Venezuela could deepen while Canada and Australia could see growth ease considerably. The contagion effect could also impact growth in the US and EU countries which in turn would drive commodity prices lower still. As a market indicator, the Dow Jones has already fallen nearly 10% from the start of the year. Under this latter scenario, platinum prices could depreciate further with a $630 to $650 range becoming a conceivable target. However, should stimulus measures in China begin to turn the economy in the second half of this year, and should commodities begin to show some signs of growing stability, a rally back to $900 an ounce in platinum initially may be possible in the latter months of the year or into early Platinum ('000 ounces) f 2015f/2014 Primary Supplies: South Africa % Zimbabwe % Russia % North America % Other % Total Primary Supply % Secondary Supplies: Autocatalyst % Jewelry % Other % Total Secondary Supply % Total Supplies % Demand: Autocatalyst % Jewelry % Industrial, Other % Total Demand % Surplus(+)/Deficit(-) % Source: Johnson Matthey PGM Market Report, November

7 Palladium Palladium prices continue to decline along with most commodities as investor sentiment towards the sector remains bearish. After averaging $772 an ounce in the first half of 2015, the palladium price has since trended sharply downward reaching its lowest value since August 2010 at $450 an ounce in the first weeks of the New Year. A short-lived rally in response to the reports that flowed from the Volkswagen emissions cheating scandal sent palladium prices back to a recent high of $725 an ounce on the 25 th of October last year before the latest round of selling ensued with values plummeting by 34% since then. Substantial liquidations of ETF holdings, specifically over the past quarter of 2015, have undoubtedly impacted palladium values. Just as the significant inflow of speculative interest in ETF holdings over the past four years supported higher prices for palladium, it was a steady disinvestment in these same ETFs in 2015 that was responsible in large part for driving values lower. It has been reported that more than 659,000 ounces palladium were sold from ETFs throughout 2015, approximately 22% of total holdings of near 3 million ounces at the start of last year. Liquidations from the two South African based ETFs accounted for more than 40% of the outflow of investments. A sizable recovery in primary production from South Africa in 2015, estimated to be up nearly 20% to 2.5 million ounces following 2014 s industry-wide strike, has greatly reduced the hypothesized deficit in palladium (-78.5%) to 427,000 ounces, according to the interim report recently published by Johnson Matthey. For 2016, further modest increases in new mine supplies of perhaps 5%, flowing from small additional volumes from both Norilsk and Vale, are anticipated. Moreover, the significant depreciation in recent years in the currency values of many resource-rich countries, particularly in the two largest palladium producing markets of Russia and South Africa, has largely offset in local terms the decrease in dollar metal prices, thus allowing production output to be maintained. In the past twelve months, the SA rand has lost 7

8 44% of its value dropping to a record low of R17.8/$, while the Russian ruble has declined by 32% during this period to 86/$. South Africa and Russia together produce more than 80% of the world s palladium supplies each year and as long as local currency revenues are maintained, neither will be incentivized to begin curtailing any meaningful levels of production. While global vehicle sales in the largest markets remain strong, there may be some evidence arising that the rate of growth in global sales has begun to taper. Growth in new car sales in China has slowed when compared to earlier periods, expanding 4.7% in While still by far the largest vehicle sales market in the world, the Chinese economy is going through a transition period to a more service-oriented economy with its GDP advancing by an estimated 6.8% in 2015 after more than a decade of consistent 10%-plus growth. Indications of a reduction in personal wealth across China, such as the recent slide in equity valuations, could negatively impact the pace of new car purchases in And in the US where a record number of new vehicles were sold last year, million in total, many have expressed concerns that this rate of expansion is unsustainable especially in light of the modest economic growth in the US. Another factor is the record level of motor vehicle loans outstanding which total $1.03 trillion as of the third quarter of 2015, the latest data from the Federal Reserve. Over the last five-year period, car loans have soared 47% and are now approaching the massive $1.3 trillion already held in student debt. During this same period since 2010, the proportion of subprime car loans in the US has doubled to nearly 40% of total new loan originations, according to the Center for Responsible Lending. Any discernible uptick in car loan defaults could force lenders to tighten credit thresholds on new loans especially on individuals with lower credit scores. In addition, further increases in auto borrowing and leasing rates may be anticipated in 2016 as the US Fed begins a new cycle of rate increases which would also affect potential buyers. Palladium prices had clearly underperformed platinum, gold and silver in the latter months of last year following the brief rally on the back of the VW story. The metal has lost $80 an ounce or some 15% in value thus far in 2016, but has performed better relative to platinum in the New Year. Heightened fears of a further easing in global economic growth have been accentuated by the sharp declines in equity markets that followed the exodus of Chinese investors at the start of the year, and consequently, have lowered investor expectations for PGM prices. And given that annual demand for palladium in the automotive sector has exceeded new primary supplies in each of the past four years, any further indications of a worldwide slowdown and subsequent reduction in new car sales projections could send palladium prices down to fresh multi-year lows. A break below the recent support at $450 an ounce could quickly lead to $420 an ounce for palladium, and eventually to a possible downside target of $360-$380 an ounce later in

9 Palladium ('000 ounces) f 2015f/2014 Primary Supplies: South Africa % Zimbabwe % Russia % Russian Stock Sales North America % Other % Total Primary Supply % Secondary Supplies: Autocatalyst % Electrical % Jewelry % Total Secondary Supply % Total Supplies % Demand: Autocatalyst % Electrical % Investments na Jewelry % Industrial, Other % Total Demand % Surplus(+)/Deficit(-) % Source: Johnson Matthey PGM Market Report, November

10 Rhodium The increased flow of year-end producer selling of rhodium drove prices to a cyclical low of $620 an ounce in the New Year, down to its lowest level since the first quarter of A combination of growing secondary supplies, a lack of speculative investment interest and mediocre industrial demand, in addition to the late-year sales, has kept pressure on rhodium prices. The metal has now declined by 50% from its high of $1,245 an ounce at the start of An estimated 80% of annual rhodium supplies are consumed in the manufacture of autocatalysts primarily for the treatment of nitrogen oxide emissions. The introduction of new Euro 6 limits in late-2014 held promise for rhodium with expectations of an increased demand for compliance with current regulations. From September 2015, all new cars purchased across the EU countries must now be Euro 6 compliant. There is no change between Euro 5 and 6 emissions standards as they pertain to carbon monoxide and particulate matter, and for gasoline engines for NOx. But regulations mandate a more than halving in NOx emissions from diesel vehicles for Euro 6 compliance, reducing levels from mg/km to 0.08 mg/km. However, the impact on rhodium prices proved to be negligible. An increasing use of urea trap systems to treat NOx emissions from diesel engines, a process which does not use any PGMs for catalysis, has limited demand for rhodium. This selective catalytic reduction process uses urea or ammonia and not rhodium to break down NOx into harmless nitrogen and water vapor. And despite a continued modest growth in the number of new cars being sold globally, more efficient engineering and thrifting initiatives have allowed for further reductions to the amount of rhodium required. In addition, the resumption of full production of the South African PGM producers through the first half of 2015, following a devastating five-month long strike in the prior year, likely also kept rhodium demand satiated. South Africa accounts for 80% of annual worldwide primary production of rhodium. At Anglo Platinum for example, the world s largest producer of PGMs, rhodium outturn in the first six months of 2015 was 142,000 ounces of refined metal, 29% higher than that in the comparable period of 2014 (110,000 ounces). 10

11 The fallout from the Volkswagen emissions cheating scandal has been a perception in the market that consumers would begin to move away from the purchase of diesel cars and instead choose similarly efficient four cylinder gasoline-driven cars, particularly in the EU where 53% of new registrations in 2014 were for diesel engine vehicles. Rhodium and platinum are the preferred metals used in catalytic converters on diesel cars and to a lesser extent palladium. In contrast, palladium is most often chosen for catalysis for smaller engine gasoline cars. This notion of the anticipated demise of diesel cars is far too simplistic and unlikely to have the ultimate effect envisioned by investors. The near-40% rally in palladium that occurred through October of last year in reaction to the Volkswagen scandal, at the expense of rhodium and platinum, proved to be overdone with palladium values now reaching multi-year lows. The recent losses in value for rhodium, falling close to a $150 differential to palladium, may start to tarnish the attractiveness of palladium for use in the manufacture of autocats with carmakers considering a greater use of rhodium in the catalytic process. However, if rhodium volumes continue to be offered for sale and industrial consumer buying fails to improve, then it would appear that the cyclical low for rhodium has yet to be reached; a further decline in value to test support at $500 an ounce remains a distinct possibility. It is interesting to note that rhodium traded below $500 an ounce in the early months of 2004 and averaged only $475 an ounce in And given that rhodium prices only dropped to $1,000 an ounce at the trough of the recession, this longer-term structural downtrend in value may not as yet have run its course. Rhodium ('000 ounces) f 2015f/2014 Primary Supplies: South Africa % Zimbabwe % Russia % North America % Other % Total Primary Supply % Secondary Supplies: Autocatalyst % Total Secondary Supply % Total Supplies % Demand: Autocatalyst % Industrial, Other % Total Demand % Surplus(+)/Deficit(-) % Source: Johnson Matthey PGM Market Report, November

12 PGM Demand Automotive Catalyst Demand Total Chinese vehicle sales rose 4.7% in calendar 2015 to million vehicles, up from 23.5 million vehicles last year. Vehicle sales had a strong finish to the year with a 15.3% y/y growth in December. Similarly, passenger car sales for 2015 increased by 7.3% over that of last year to 21.1 million vehicles. The sharp improvement in final quarter sales reflects the reduction in sales tax which began in September on smaller engine cars, those less than 1.6 liters which account for some two-thirds of cars, to 5% from 10% previously. The action by the Chinese government should support growth in passenger car sales in the months ahead. The last cut in the sales tax on autos was passed in 2009 to spur post-recession sales. However, current restrictions on driving in large cities such as Beijing because of severe smog conditions may dissuade some potential buying interests. Vehicle sales for 2016 are forecast to rise again to 26 million total vehicles, according to the China Association of Automobile Manufacturers, for a near-6% increase. This projected growth in car sales could be tempered by the pace of slowing of the Chinese economy which is expected to expand by 6.3% in 2016, down from an estimated 6.8% last year. In addition, a 15% decline in the Shanghai Composite Index since the start of the year could also alter consumer buying interest. US vehicle sales rose 5.7% in 2015 to record annual sales of million vehicles, up from the previous yearly high of million set in Analysts cited falling unemployment levels, steadily lower interest rates, cheaper gas prices and attractive incentive programs for the continued increase in vehicle sales throughout Sales of larger vehicles such as SUVs and pick-up trucks continued to outperform growing 10.7% and 9.7% respectively in 2015, while cars actually posted a decrease in sales of 2.2%; the top three most popular vehicles were the USmade pick-up trucks. Most economists are anticipating a moderate rise in interest rates in the US through 2016 which could affect car sales, but some analysts have already predicted this uptrend in sales to persist with a target of to 18 million vehicle sales for this year possible. In the final month of the year, sales increased 9% from the same period of 2014 to 1.64 million vehicles, higher than the 1.3 million units recorded in November, benefiting from two additional sales days. An unseasonably warm December across much of the US may have also aided in getting more buyers into showrooms. For December, Chrysler sales rose 12.8%, Ford by 8.3% and GM by 5.7%. Sales at the Japanese carmakers were also improved, climbing 18.7% at Nissan, 10.8% at Toyota and 9.9% at Honda. For the European manufacturers, sales in December were disappointing with BMW reporting a 16.6% decline for the period and Volkswagen had a 9.1% fall, while Audi had a 6% increase and Daimler was up by 2.6%. EU new car registrations rose sharply in 2015, up 9.3% to million vehicles (12.55 million in 2014), its highest level since Even stronger sales were recorded in December with new registrations gaining 16.6% over the comparable period of Low interest rates, a weaker euro, added incentives and lower fuel costs combined to motivate buyers. It should be noted, however, that sluggish economic growth across the EU countries since the recession has 12

13 resulted in a similar slow rise in car sales during the six-year period. Unlike the other major markets of China and the US, EU sales have not yet posted new highs in this current cycle. For calendar 2015, the ACEA recorded year-on-year sales gains in all major markets, including Spain (+20.9%), Italy (+15.8%), France (+6.8%), the UK (+6.3%), and Germany (+5.6%). In fact all of the EU countries posted increased sales with the exception of the smaller markets of Luxembourg (-6.7%) and Estonia (-3.0%). Total domestic vehicle sales in Japan in calendar 2015 fell 9.3% to 5.05 million units; passenger cars in the same period were down by 10.3%, while commercial vehicles including trucks and buses declined by a more modest 3.8%. Total sales in the final month of the 2015 dropped 14.5% over the same period of 2014 to 369,460 units, but were lower by only 5% from the previous month, November. In calendar 2014, total new registrations were 5.56 million vehicles. An increase in Japan s consumption tax that became effective in April had a deleterious effect on car sales. The Japanese economy is expected to grow by 1% in 2016, up from 0.6% last year, suggesting a possible small improvement in vehicle sales for this year. According to the Society of Indian Automobile Manufacturers, passenger car sales rose by 7.9% in 2015 to 2.77 million units; sales grew 10.5% in December y/y. With GDP growth forecast at 7.5% for 2016, car sales in India will likely continue to post gains again this year. Car sales in Brazil, now the world s sixth largest vehicle market, declined 25.6% in calendar 2015 to 2.57 million vehicles as the economy continues to struggle after contracting by nearly 4% last year. The government is considering an incentive program for owners of cars 15 years and older to promote trade-ins for new models. With Brazil s GDP predicted to slow by a further 3% in 2016, the national dealer association Fensbrave is forecasting a 5.9% decline in car sales for the year. Russian car sales have fallen 35.7% in 2015 to 1.6 million units, the lowest since 2009; car sales in December decreased by 45.7% over the final month of Western sanctions and a collapse of the Russian ruble, along with a 3.8% contraction in the overall economy, had a significant impact on car sales. The Russian Automobile Manufacturers Committee of the AEB is projecting a further 4.7% decline in new car sales in Jewelry Demand Platinum consumption for jewelry applications was projected to slip nearly 5% in 2015, according to the latest research from the World Platinum Investment Council/SFA, to 2.85 million ounces. The WPIC cited robust demand for platinum in the September quarter, rising 18.8% over the previous June period, as re-stocking in the major markets, especially in China, drove consumption levels higher. China is the largest demand center for platinum jewelry manufacture, accounting for more than 60% of sector offtake annually. The latest data from Johnson Matthey confirms a decrease in demand for platinum jewelry but by a slightly greater margin of 8.5% down to a requirement of 2.65 million ounces in JM goes further to estimate a near-16% fall in Chinese offtake for jewelry manufacture last year to 1.63 million ounces of platinum. 13

14 The continuing slow correction for the Chinese economy could limit any expectations for any measurable recovery in demand for platinum for jewelry applications at least in the near- to intermediate-term especially in the domestic economy but globally as well. However, lower metal prices and more affordable price points on finished platinum designs vis-à-vis comparable gold pieces could act to limit further downside in platinum jewelry sales in The WIPC is forecasting 2% growth for platinum demand for the jewelry sector in Palladium jewelry demand was expected to experience further declines in 2015, falling by some 12% from comparable 2014 figures to 242,000 ounces according to JM. Palladium offtake for jewelry applications was primarily a Chinese phenomenon that drove demand for the metal above one million ounces annually in 2008, four times current levels. Palladium consumption for jewelry in 2016 is likely to remain in line with that of last year. 14

15 PGM Supply South African Production Anglo Platinum reported a 13.5% increase in group attributable platinum production in its third quarter to September 2015 to 614,000 ounces of concentrates from 541,000 ounces in the comparable strike-affected period in For a more meaningful comparison, production was reported as 5.7% better than the previous June period primarily on strong production gains made at Amandelbult, up 22.3% quarter-on-quarter to 126,000 ounces of platinum concentrates on improved tonnage and grade. Outturn from the company s Rustenburg section was 122,000 ounces in the quarter, marginally higher than June (+0.8%), Union section with 38,000 ounces of platinum concentrates was 22.6% better, while the Unki mine in Zimbabwe produced 16,000 ounces, unchanged from the previous period. Production from the open-pit Mogalakwena mine fell by 11.8% to 90,000 ounces of platinum concentrates owing to local protests. Joint Venture operations reported a 5.1% increase in platinum production quarter-on-quarter to 62,000 ounces. For the first nine months of fiscal 2015, Anglo s operations have outturned 1,722,000 ounces of platinum, 36.2% above the strike-impacted period in 2014 with 1,262,000 ounces. Management has maintained its earlier guidance for fiscal 2015 of 2.3 to 2.4 million attributable ounces, up from 1.84 million ounces in fiscal For 2016, Anglo management has taken the decision to delay investments in both growth and replacement projects until at least 2017 to conserve cash and has suspended development on its Twickenham project and Tumela 5 shaft; Union mine is still scheduled for sale or closure in The company will also write down investments in Royal Bafokeng Platinum and has written off its equity investments in Bokoni and Atlatsa In September 2015, Sibanye entered an agreement with Anglo to purchase some of the latter s mines around Rustenburg for a minimum value of R4.5 billion. An initial payment in cash or shares of R1.5 billion will then be followed by R3 billion paid from earnings of the acquired properties over the next six years starting in January Anglo will continue to process the concentrates from these mines. Sibanye will operate Bathopele, Siphumelele and Thembelani mines, which collectively produced in excess of 500,000 ounces of platinum annually pre-strike, along with two concentrator plants and Anglo s tailings treatment operation. Impala Platinum reported an 11.6% decline in Group refined platinum in its first quarter to September 2015, when compared to the prior June period, dropping to 304,000 ounces of platinum; outturn of platinum did show improvement from the post-strike period of last year, rising 8.6%. Management cited Section 54 safety closures and scheduled maintenance on its Rustenburg smelters as the principal causes of the decrease in production during the September quarter. It was estimated that a total of 54,000 ounces of platinum concentrates are locked-up in the three furnaces at the Rustenburg operation that were taken off-line for scheduled repairs. Each of the plants is expected back on stream by the end of November and the contained metal will be brought to market likely by the March quarter of Production from the Rustenburg Lease area fell 31.7% in September q/q as a result to 123,000 ounces of platinum. Guidance for the Lease area for fiscal 2016 has been set at 720,000 to 740,000 ounces of platinum, up from 575,200 ounces recorded in fiscal

16 Zimplats posted a sizable increase in its platinum concentrates in the September quarter to 66,000 ounces, up 88.6% q/q as ore from the Bimha mine begins to flow once again following an underground collapse in July 2014 that caused the suspension of much of its operation. The June period was also adversely affected by a furnace outage in May. A continued ramp-up of the Mupfuti mine, which will reach steady state capacity of 90,000 ounces of platinum in fiscal 2016, along with additional open pit mining, helped boost totals in September. A lock-up of some 27,000 ounces of platinum concentrates from the June quarter smelter closure is scheduled for processing once the third Rustenburg furnace is brought up later in November. Management has maintained its target of 250,000 to 260,000 ounces of platinum concentrates at Zimplats for fiscal 2016 which will include the completion of the Phase 2 expansion program to ramp-up the Ngezi operation. The 77.5%-owned Marula reported a modest increase in platinum concentrates for the period to 21,000 ounces versus 20,000 ounces in June as a 4.1% fall in tonnage was offset by a comparable rise in grade level. A steady state target of 80,000 to 85,000 ounces annually has been maintained with a possible further rise to 90,000 ounces by Similarly, 50%-owned Mimosa mine reported production of 31,000 ounces of platinum, in line with the prior quarter, on slightly higher throughput and grade. Full year production is set at 110,000 ounces of platinum concentrates. Impala s refined platinum production across the Group in its fiscal year ending June 2016 is targeted at 1.45 to 1.50 million ounces compared to the strike-affected period of 2015 of million ounces of platinum. In its fiscal year ending September 2015, Lonmin produced 740,315 ounces of platinum concentrates with total sales for the period of 751,560 ounces of platinum; production and sales were higher by 94.6% and 70.2%, respectively, than the strike-affected period in fiscal Production of platinum concentrates was in line with earlier guidance despite a series of Section 54 closures and the emergency maintenance on both the Number One and the Number Two smelter furnaces during the second quarter. In its final quarter to September, Lonmin outturned 185,659 ounces of platinum concentrates, up 7.5% from 172,672 ounces in the previous March period. A scheduled closure of the company s Number Two furnace to replace refractory bricks and to make other design updates has occurred in the December quarter and will likely affect output. Management has also cautioned that due to the steady decline in metal prices annual production levels will be impacted by a need to curtail production from several higher costs shafts, resulting in the projected reduction of some 6,000 miners and a loss of some 50,000 ounces of platinum concentrates in fiscal 2016 and 100,000 ounces in each of the following two years. Lonmin will now concentrate its efforts on its Generation 2 mines, K3, Rowland, Saffy and 4B shafts, while closing many of the Generation 1 mines, Hossy, Newman, 1B and its open cast mine. The bulk of capex will be limited to the further development of Rowland and deepening of its largest mine, K3. The company issued a rights offering to shareholders late last year to raise approximately $407 million to refinance existing debt and to shore up its balance sheet. Each shareholder was offered 16

17 the option to buy 46 newly issued shares for every one share owned for a price of 1 pence. This extremely dilutive transaction created 28 billion new shares in addition to the 587 million already issued. A subsequent consolidation has resulted in total issued shares of 282 million. Northam Platinum reported a 15.1% increase in PGM + gold concentrates produced in its fiscal year through June 2015 with a total of 378,070 ounces of precious metals, up from 328,361 ounces in 2014 (six month results through December will be released on the 26 th of February). The company recorded sales, including purchased concentrates, of 422,630 ounces of PGMs (+6.6%) containing 253,785 ounces of platinum, 124,581 ounces of palladium and 38,430 ounces of rhodium in fiscal The larger Zondereinde mine produced 255,595 ounces of PGMs in the full year, an 8.4% increase, despite a six-week closure that began in July of 2014 for repairs to underground infrastructure damaged when a counterweight from its hoist system detached and fell, and a one-week work stoppage in January The mine is now operating at steady state with rated capacity allowing for a rise to 300,000 ounces per annum. Difficult ground conditions on the higher grade Merensky reef will necessitate an increased mining of the UG2 reef going forward. In fiscal 2015, tonnage from the Merensky reef declined 1% while throughput from the UG2 rose 15.7%. The Booysendal mine on the Eastern Limb produced the balance of 122,475 ounces of PGMs in 2015 for a 32.2% increase as that mine ramps up to full steady state status of 160,000 ounces annually likely late in the first half of this year. A feasibility study to examine mining of the Booysendal South property along with the recently purchased Everest mine will commence with completion scheduled for May The company acquired the Everest mine from Aquarius Platinum during the past year and will continue the care and maintenance program until such time as the decision is taken to re-open the mine. In its last year of full production FY2011, Everest produced 100,252 ounces of PGMs. For fiscal 2016, Northam may be expected to produce upwards of 440,000 ounces of PGMs as the Zondereinde mine improves to its rated capacity of 300,000 ounces per annum and production at the Booysendal mine rises closer to its 160,000 ounce target. Management raised R4.6 billion in the first half of the fiscal 2015 to further its growth plans as it increased outside BEE interest in the company to a 35.4% holding. Attributable production at Aquarius Platinum rose 7.7% in the September 2015 quarter when compared to the same period of 2014 to 93,513 ounces of PGMs, and was higher by 5.3% sequentially. The company s 50%-owned Kroondal reported a 4.1% gain in attributable production in the first quarter to 58,418 ounces of PGMs, while 50%-owned Mimosa increased its output by 8.0% year-on-year to 31,205 ounces. And versus the previous quarter, PGM outturn at Kroondal and Mimosa increased 4.3% and 4.0%, respectively. The tailings treatment operation at 91.7%-owned Platinum Mile posted a near doubling in attributable PGM production to 3,890 ounces which reflected the loss of outturn during the lengthy industry strike in South Africa in calendar The Marikana joint venture and the Chromite Tailings operation remain shuttered under care and maintenance; mining and processing infrastructure at the company s whollyowned Everest mine were sold to Northam in the second half of fiscal Kroondal reported a 10.2% increase in tonnage in its first period q/q despite continued ground problems at Bambanani shaft. Infrastructure improvements at both K6 and Simunye declines added to production totals at Kroondal. The Mimosa operation in Zimbabwe recorded a 2% 17

18 decline in tonnage during the September period q/q as work was slowed following a fatal accident; the mine also experienced poor ground conditions which required a drawdown of surface stocks to benefit production output. The Platinum Mile tailings operation in Rustenburg recorded a more than doubling in production (+112.5%) over the comparable strike-affected period of 2014 to 3,890 ounces of PGMs. Management had earlier offered a target of 4,800 ounces of PGMs quarterly once a full ramp-up is completed. Sibanye Gold announced a takeover bid for the shares of Aquarius Platinum for the equivalent of some R3.9 billion ($294 million), offering $0.195 per share. The transaction has the support of Aquarius management and is expected to be accepted by a shareholder vote this month. Approvals to proceed with the merger will then be required from the SA Competition Commission and Competition Tribunal which are expected to respond by the end of March; the completion of the acquisition is scheduled for the end of April. The company could benefit from certain synergies of operation between Aquarius Kroondal and neighboring Rustenburg shafts recently acquired by Sibanye from Anglo Platinum. Separately, the sale of Aquarius Everest mine to Northam, which had been first announced in February of this year, was finalized by the end of the September quarter. Royal Bafokeng Platinum (RBPlat) reported a 3.1% increase in production of PGMs+ gold in the third quarter to September 2015 when compared to the same 2014 period to 82,900 ounces, but rose substantially (+28.5%) from the 64,500 ounces of concentrates outturned in the June period. A number of Section 54 safety-related stoppages during the second quarter along with declining grades encountered on the Merensky ore impacted results previously. Despite a 5.2% decline in underground tonnage, throughput at the BRPM mine was higher by 6.5% as above ground stocks and an initial feed of development ore from the Styldrift I expansion project were processed in the period. In the first nine months of fiscal 2015, RBPlat produced a total of 204,900 ounces of PGM concentrates, on pace to match management s earlier guidance of 275,000 to 285,000 ounces of PGMs for the full year. To conserve cash in the current market of depressed PGM prices, management has decided to reduce expenditures and construction activities on its Styldrift I Project located near BRPM s North Shaft. Styldrift I was slated to build to steady state production of 350,000 ounces of PGMs in the first quarter of 2019, more than doubling current output totals. Capex on the Phase III extension of North Shaft decline will also be reduced as the project is ahead of schedule with completion still expected in Phase III will supply mostly replacement ore from the Merensky reef. The Styldrift II feasibility study has been deferred. 18

19 Russian and North American Production Norilsk, the world s largest palladium producer, reported a 1.7% decline q/q in its palladium production in the third quarter through September to 714,000 ounces, while platinum was marginally lower (-1.1%) at 173,000 ounces in the period. Management cited a reconfiguration of infrastructure at its Polar division and a reduction of low margin tolling at its Kola division for the adverse impact on production. In its first nine months, Norilsk produced million ounces of palladium, 1.6% lower than the comparable period of last year, and 514,000 ounces of platinum (+0.4%). Palladium outturn from the larger Polar division fell by 5.8% in the ninemonth period while production from Kola division rose 10.5%. Cumulative production to date indicates that Norilsk is on pace to meet earlier guidance for the full year of 2.7 million ounces. Management has advised that only marginal per annum growth is to be anticipated in the near-term with a target of 2.84 million ounces of palladium set for fiscal Brownfield development projects underway in the Polar Division s Taymirsky, Oktyabrsky and Komsomolsky mines will collectively raise PGM output during this period. The company had stated earlier that it will reduce spending on investments and certain longer-term projects, placing development of its Maslovskoye deposit and the Severnity project on hold Stillwater Mining reported a 4.1% gain in its PGM production in the third quarter through September to 128,100 ounces, up from 123,000 ounces in the comparable period of 2014, and only slightly higher than the 127,000 ounces of PGMs in June. The company produced 99,000 ounces of palladium and 29,100 ounces of platinum from its underground operations in the September period. The smaller East Boulder mine continued to post solid growth with a 10.8% gain in production in the third quarter year-on-year on a 14.4% increase in tonnage, while outturn at the Stillwater mine was even with that of the same time last year. East Boulder has benefited from management s earlier decision to defer production from less profitable areas of the mine and to then concentrate additional miners on the more profitable sites, as well as contributions from the Graham Creek area, adjacent to its western border, which came on stream in mid Total metal sold during the third quarter was lower by 10,800 ounces of PGMs as these ounces were added to inventories but are expected to be sold in the fourth quarter. For the first nine months of fiscal 2015, the company produced 388,400 ounces of PGMs, 2.2% higher than the comparable period of 2014, and consisting of 300,500 ounces of palladium and 87,900 ounces of platinum. Management has maintained its full year guidance at Stillwater at 500,000 to 515,000 ounces of PGMs for fiscal 2015, in line with the 517,700 ounces of PGMs recorded in fiscal The recycling operation at Stillwater continues to expand, increasing by 36.8% in the September period to a total of 161,000 ounces of PGMs. The company had announced the signing of a longterm supply contract with two counterparties which commenced during the second quarter. In the first nine-month period, Stillwater recycled 421,300 ounces of PGMs, 19.2% above totals for the same time in It was noted that the proportion of toll processing in the recycling operation had risen when compared to the total of purchased ounces. Stillwater processed 469,400 ounces of PGMs in fiscal 2014 from its Columbus, Montana smelting complex. 19

20 Vale reported a sharp drop in PGM outturn in the third quarter through September as the planned maintenance on the Sudbury mill in August impacted totals. Palladium production in Q3 declined by 49.6% from the same period last year to 56,000 ounces, while platinum fell 46.7% to 29,000 ounces. When compared to the previous June period, palladium and platinum totals were lower by 48.8% and 38.1%, respectively. The mines did remain fully functioning during August, however, with the build-up of underground ore to be processed into the 4 th quarter. PGM production at Vale for the first nine months of fiscal 2015 were down by 9.1% to 378,000 ounces, comprised of 262,000 ounces of palladium and 116,000 ounce of platinum. Production in the fourth quarter should rise significantly as stocks held during the August smelter shutdown are processed and Vale continues to benefit from the added contribution from the reopening of the company s Totten mine. Consequently, production at Vale for the current year appears likely to exceed last year s PGM outturn of 497,000 ounces, and a target of 600,000 ounces of PGMs possible for fiscal 2016 with palladium totals potentially rising above 425,000 ounces per annum. North American Palladium announced a significant recovery in its third quarter production, rising 77.9% above the comparable period of 2014 to 57,914 ounces of palladium from 32,560 ounces earlier. Moreover, palladium outturn in the September period was more than one-and-ahalf times that in June when the discharge of higher levels of contaminants in water flowing from the tailings treatment facility necessitated the closure of its milling operations for most of May and June. An accumulation of some 225,000 tons of underground ore was processed during the third quarter which allowed for lower blending of low grade surface stocks. It was noted that seismic activity adjacent to current mining areas did reduce regular production in the September quarter which was more than compensated for by the unprocessed ore from the prior period. Management stated that given the current weakness in palladium prices, low grade surface stocks will no longer be processed. In addition, all environmental issues concerning the tailings treatment facility have been remedied. In its first nine months of the year, NAP has produced 126,444 ounces of palladium, a gain of 10.5% from the 114,424 ounces in the same period of Management had cautioned that given the seven-week shutdown of its milling operation, declining metal values and added costs associated with the water quality remediation, 2015 guidance will likely be adjusted lower. NAP s earlier production target was set at 185,000 to 205,000 ounces of palladium for the full year at its Lac des Iles mine, but total outturn for the year will likely be closer to the 174,194 ounces of palladium (13,072 ounces of platinum) produced in fiscal It was also reported that even though exploration capex has been reduced, drilling will continue to assess deeper areas of the Offset Zone from its underground shaft extensions at both the Offset Zone and the Roby Zone, and the possibility of mining an area adjacent to the Roby open pit. 20

21 Secondary Supplies PGM prices dropped steadily throughout 2015 with each metal recording significant declines in value: platinum lost 25% of its value in calendar 2015, palladium 29% and rhodium 50%. The sharp depreciation in metal values over the past year has had a considerable adverse effect on automotive salvage efforts as scrap yards are less motivated to sell catalytic converters and more willing to hold and speculate on higher prices. Steel scrap prices have also suffered offering further justification for local collectors to withhold material from the market. But smaller collectors and scrap dealers may not be able to suspend their cash flow indefinitely and may have already been burned by a PGM market that has not mounted a sustainable recovery since the start of 2015 but has instead only moved lower. In addition, by not taking fresh cash out of the market, these locals assume the risk of losing market share as they postpone the purchase of new material on offer. Some market analysts have lowered estimates of autocat recycling totals for 2015 to reflect the weakness in underlying metal prices. In its recent interim report, Johnson Matthey quoted an average decline in recycled PGMs from the automotive sector of more than 9% in 2015, year-onyear, but has projected double digit gains for 2016 as salvage converter stockpiles find their way to market. GFMS reported increases in recycled platinum and palladium from autocats of 10% and 8% respectively in 2015, and anticipated gains of 11% and 6% respectively in The World Platinum Investment Council in its third quarter release saw a 4% rise in recycled platinum in 2015 to be followed by a much larger 13% expansion this year. The publicly-traded Stillwater Mining reported a sizable 19% increase in recycling feed in its first nine month period of 2015 citing an increase in toll refining business. The overriding reasons for the substantial advances in recycling at Stillwater may be largely company-specific, but do suggest some level of growth in PGM recycling in the US market, nonetheless. As long as the pace of global vehicle sales remains positive, then some measure of autocat recycling growth would be expected to continue. In a study that was cited in our last report conducted by the Polk Company and the National Automobile Dealers Association in the US, it was posited that the average annual total of passenger cars being scrapped in the US represented on average 92% of new car sales during the period of 2001 through US passenger car and light truck sales for 2015 reached a record million units It has been estimated that as many as 90 million vehicles will be produced worldwide in 2015 according to the International Organization of Motor Vehicle Manufacturers. Rising global auto sales should lead to a consequent escalation in the number of end-of-life vehicles and further increases in recycled autocats. And with more than one billion vehicles now on the roads globally, as estimated by industry consultants Ward s Auto, even a small percentage of retired cars of say 4-5% annually amounts to a significant and growing trove of prospective PGM supplies. Acknowledging the influence of depreciating metal values on salvage automotive converter totals, A-1 had earlier adjusted its estimates of PGM amounts derived from recycling for 2015 to 21