From earth to equity: mining for tomorrow’s wealth

Capital at risk.

For context, you may recall us writing about the case for copper at the turn of the year – a valuable metal becoming more scarce. Its price is hitting record highs as I write and the positive long-term outlook for demand from renewable energy applications is slowly being realised by investors. This note outlines some of our work on PGMs and you’ll see there are some clear similarities to our thinking on copper.

Located next to each other on the periodic table, the PGMs include platinum, palladium, rhodium, ruthenium, iridium, and osmium. Some of these are among the most sought-after metals on earth; geologists can spend a lifetime working on rocks enriched in them. Formed during the cooling and crystallization of magma, most PGM deposits are found alongside volcanic rocks that move from the Earth’s mantle into the crust.

The main source of primary PGM – and by far the largest known deposit of these metals on Earth – is the Bushveld Igneous Complex in South Africa. Mining of the Complex accounts for around 70 per cent of primary platinum supply, 80 per cent of rhodium, 85–90 per cent of ruthenium and iridium, and nearly 40 per cent of palladium. Due to their properties, such as high melting points, corrosion resistance, and catalytic qualities, PGMs are indispensable to many applications. Without PGMs, you probably wouldn't be able to read this piece or use nearly any electronic device. They have also likely kept you, or someone you know, healthy; PGMs are the active ingredient in pharmaceuticals, the key elements in surgical technologies, and used in anticancer drugs. It is the properties of these precious metals that make them the material of choice for many medical applications: their biocompatibility, inertness with the human body, durability, electrical conductivity, and radiopacity.

Their versatility is clear. However, the precious metals’ largest source of demand comes from one of the most important pollution abatement devices ever invented – the auto catalyst. Accounting for well over half of gross world demand for platinum, palladium, and rhodium combined, the auto catalyst, or catalytic converter, is a key component of most of the world’s internal combustion engine (ICE) vehicles and is used to clean exhaust fumes. Without auto catalysts, air quality around most cities would be far worse than it is today. Over the years, emissions regulations have been progressively tightening to the extent that just one car sold in the 1960s would have produced as many harmful exhaust emissions as one hundred of today’s catalytic converter-equipped cars.

Central to the outlook for PGMs is the global energy transition which will require a multi-solution approach to achieve decarbonisation targets. What future energy solutions will look like is clearly still to be seen, however the critical metals that will form them are overwhelmingly concentrated in Emerging Markets. Whether that’s Chilean copper for EVs or Indonesian nickel for batteries, another partnership can be added to the mix - South African and Zimbabwean platinum for green hydrogen. Hydrogen is a clean-burning fuel with the potential to be a low-carbon energy source, depending on its production method – blue or green. The key difference between the two lies in their environmental impact: while blue hydrogen aims to minimize carbon footprint through carbon capture, green hydrogen offers a sustainable and emission-free solution by using Platinum-based Proton Exchange Membrane (PEM) technologies, or electrolysers, to break water into hydrogen and oxygen in a process called electrolysis. The Hydrogen Council (admittedly not an unbiased source) is currently estimating that hydrogen could represent 18 per cent of global energy demand by 2050.

The emergence of the green hydrogen economy could therefore offset the impact of rising electrification of vehicles on PGM demand. Currently, PEM electrolysers make up just 24 per cent of global electrolyser market share, but some estimates see this figure rising as high as 70 per cent by 2030 – which would require around 778,000 ounces (22 tonnes) of platinum per year. Indeed, hydrogen related demand for platinum is expected to double in 2024 alone.

The demand for platinum could therefore be much higher than previously considered. However, a supply bottleneck looks to be looming. Over the past few years, headwinds to supply have ranged from ongoing electricity supply shortages in South Africa (Eskom’s power issues appear, unfortunately, to be getting worse not better), to strikes, to planned closures, and safety stoppages. Mines are being suspended due to eroded profitability, as a result of the decline in PGM prices during 2023. Many mines are producing their PGMs, unsustainably, at a loss. Our long-standing clients will know that a supply demand dynamic such as this piques our interest.

One company we have recently been researching is leading PGM producer - Impala Platinum (Implats). With mining operations first established in one of the most significant PGM-bearing ore bodies in the world, the Bushveld Complex in South Africa, Implats is the second largest PGM producer in the world. The miner has since expanded operations to the Great Dyke in Zimbabwe and the Canadian Shield and contributes c.20 per cent to annual global primary PGM production. Our analysis of the peer group suggests its leverage to higher prices is high due to its fixed costs and, we believe the pessimistic view taken by many market participants towards both PGMs and Implats is overdone.

If the forecasts are correct and the demand for green hydrogen rises, Implats’ geographically diverse mineral resource portfolio will be a key source of growth for the company. As the company continues to reinvest in its business, higher metal prices should also result in higher volume growth as previously shuttered assets come back into operation. That being said, while the energy transition and green hydrogen momentum builds, one should not overlook what may be a bumpy journey. A slowdown in global economic growth, higher interest rates, and an energy transition that may fall prey to politics all have the potential to impact the precious metals’ price over the short-term. However, therein lies our opportunity: by remaining resolutely long-term, patient, and with both eyes firmly focused on the platinum-clad future, we can dig deep and unearth rich growth opportunities such as these.

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