In a major report on platinum group metals (PGMs), RBC Capital Markets finds that despite considerable profits destruction, overwhelmingly from major producer South Africa, output of the metals will increase this year, and that bigger listed PGM stocks are overpriced.RBCCM analysts also find that significant buying seen recently in platinum ETFs (exchange traded funds, where investors hold proxies for physical metal) is we believe, mainly based on hedge fund activity - aiming to tap into the current reflation trade. Among metal prices, platinum has staged a huge bounce from its lows in the latter part of 2008, rising by 56% to its current levels. It remains, however, nearly 50% below its highs set a year ago. The gold price has been more stable, at 29% above its recent lows, and 13% below its highs.The RBCCM analysts maintain the view that platinum demand will be lower in 2009 than in 2008 - even with the current hype around increasing car sales and ETF investing. The current high level of the ETF inventory (higher than it was at the peak in May/June 2008), represents a clear and present danger, in our opinion.Investment demand is essentially concentrated in ETF demand and at a current inventory level of about 470,000 ounces, is around 6% of 2007 demand. Even if this continues to grow, the possible positive impact it could have on the platinum price will serve to choke off jewellery demand. Crucially, over the past 10 days, say the RBCCM analysts, the ZKB ETF showed virtually no increase while the ETF Securities ETF jumped 26% from 240,000 to 310,000 ounces without having any meaningful impact on the platinum price.We find it very unlikely that jewellery and investment demand could make up for the loss in autocat demand and believe the ETF numbers to be speculative in nature - highly likely to run for the door now that the platinum price seems to have reached a resistance level.The current PGM price basket - having improved significantly from the absolute lows seen in October 2008, is making production cutbacks more difficult to execute; indeed RBCCM's analysts believe South African production will actually increase on the back of new junior miners coming on stream in 2009. At current basket price levels (about USD 800/oz, and with the rand at 9.60 to the dollar), which includes platinum, palladium, rhodium and gold, only 10% of production still makes losses on cash cost, according to RBCCM's analysts, but as much as 70% delivers negative cashflow after capital expenditure (assuming the same capital expenditure levels seen in the second half of 2008).One alarming finding, say RBCCM's analysts, is that the current metal price basket has already risen back to levels that will make shutting more production highly unlikely. Only about 8% of current production is still loss-making (just under 400koz of platinum a year).The second important finding is that capital expenditure is still too high - even at the 30% increased metal price level, we still have a third of production under water on a cashflow basis. The third fact is that a potentially weaker rand has a significant impact on the cost curve - compounding the industry's own efforts at reducing cost and potentially allowing the industry to get back to positive cashflows much quicker than what we currently expect. We believe this to be a negative for the investment case as it implies an even more lethargic response to the production cuts that we believe to be required.The longer-term analysis remains positive, argue the RBCCM analysts, but we remain convinced that this could be played better by investing in juniors that have beaten the current crunch - new producers that are fully funded, in production and with low cost (operating expenditure and capital expenditure) expansion potential. Not only are these expected to deliver significant returns as a result of being low-cost with high growth capacity if the metal price increases, but our findings here also show these companies to be significantly undervalued relative to the bigger producers. By implication then, they also represent significant value enhancing targets, in our opinion - in particular to the majors that need to cut back own high-cost production.Selected platinum stocks

Stock

From

From

Value

Tier I platinum

price

high*

low*

USD bn

Anglo Platinum

ZAR 480.01

-67.6%

37.1%

21.653

Impala Platinum

ZAR 163.10

-55.3%

88.4%

10.763

Lonmin

GBP 13.26

-63.3%

147.2%

3.089

Averages/total

 

-62.0%

90.9%

35.505

Weighted averages

 

-64.2%

56.1%

Diversified

Anglo American

GBP 12.97

-64.8%

43.2%

25.707

Mvela Resources

ZAR 28.00

-59.4%

80.6%

0.654

Norilsk

USD 6.90

-78.2%

96.6%

13.153

ARM

ZAR 124.00

-59.6%

63.2%

2.863

Averages/total

 

-65.5%

70.9%

42.377

Weighted averages

 

-70.2%

58.3%

Tier II platinum

Stillwater

USD 3.93

-79.2%

123.0%

0.369

Aquarius

GBP 2.15

-75.6%

181.1%

1.185

Northam

ZAR 25.90

-66.4%

57.0%

1.016

NA Palladium

CAD 1.79

-73.9%

57.0%

0.126

Zimplats

AUD 5.00

-68.3%

42.9%

0.384

Eastplats

CAD 0.42

-87.6%

127.0%

0.286

Anooraq

CAD 0.96

-75.8%

336.4%

0.144

Averages/total

 

-75.2%

132.0%

3.510

Weighted averages

 

-75.4%

101.5%

Developers and explorers

Platmin

CAD 0.86

-89.3%

168.8%

0.257

WeSizwe

ZAR 1.38

-85.9%

36.6%

0.088

Noront Resources

CAD 0.69

-87.5%

58.6%

0.086

Aquiline

CAD 2.54

-72.9%

252.8%

0.139

Pt Australia

AUD 0.79

-75.1%

118.1%

0.138

Chromex

GBP 0.18

-62.0%

16.7%

0.021

Sylvania

GBP 0.42

-67.6%

75.0%

0.110

Starfield

CAD 0.15

-89.5%

107.1%

0.039

Ridge

GBP 0.65

-54.7%

209.5%

0.088

PGM

CAD 1.43

-56.4%

101.4%

0.078

Solitario

CAD 1.50

-74.1%

10.3%

0.036

Colossus Minerals

CAD 2.27

-43.3%

427.9%

0.101

Jubilee

GBP 0.09

-90.1%

22.8%

0.014

Nkwe

AUD 0.17

-84.0%

70.0%

0.062

Braemore

GBP 0.02

-80.5%

110.0%

0.024

Marathon

CAD 0.40

-90.8%

58.0%

0.009

Caledonia

CAD 0.10

-50.0%

280.0%

0.038

Freegold Venture

CAD 0.14

-90.8%

28.6%

0.007

Magma Metals

AUD 0.41

-34.9%

95.2%

0.033

Franconia

CAD 0.16

-91.6%

60.0%

0.008

Cons. Puma

CAD 0.09

-94.5%

142.9%

0.004

Avalon Ventures

CAD 0.54

-72.3%

83.1%

0.030

Rusina

AUD 0.05

-84.4%

51.5%

0.009

Largo Resources

CAD 0.08

-95.3%

66.7%

0.012

Macdonald Mines

CAD 0.05

-90.1%

80.0%

0.005

Hard Creek

CAD 0.19

-77.4%

137.5%

0.009

Polymet

CAD 0.91

-79.7%

51.7%

0.101

MetalCORP

CAD 0.12

-87.4%

100.0%

0.005

Wallbridge

CAD 0.11

-79.0%

200.0%

0.008

Benton

CAD 0.30

-52.4%

172.7%

0.017

Mustang Minerals

CAD 0.07

-89.4%

40.0%

0.005

Northern Shield

CAD 0.08

-89.3%

45.5%

0.004

Platina

AUD 0.19

-74.0%

35.7%

0.008

Darnley Bay

CAD 0.11

-79.6%

120.0%

0.004

Pacific NW Cap.

CAD 0.10

-73.3%

100.0%

0.005

Niplats

AUD 0.16

-73.3%

158.3%

0.008

Starcore

CAD 0.11

-66.1%

110.0%

0.005

Huston Lake

CAD 0.31

-58.1%

47.6%

0.008

Goldplat

GBP 0.12

-18.6%

47.7%

0.020

Hinterland Metals

CAD 0.04

-86.7%

300.0%

0.002

Pan Palladium

AUD 0.04

-65.0%

350.0%

0.008

Premium Exp.

CAD 0.09

-77.5%

100.0%

0.003

Eurasia Mining

GBP 0.01

-66.7%

25.0%

0.003

Silvermet

CAD 0.05

-77.5%

200.0%

0.004

Minerva

Developer averages/total

-82.0%

126.8%

1.663

Weighted averages

 

-81.0%

107.4%

Overall averages/total

-75.0%

117.3%

40.677

Overall weighted averages

-66.7%

60.8%

* 12-month

Source: market data; table compiled by Barry Sergeant