Investing in PGM stocks such as Anglo Platinum and Impala is expected to remain the focus of key portfolio managers, though ESG considerations have seen many managers turning to secondary PGM suppliers such as Mineworx Technologies Ltd (TSX.V:MWX | OTCQB:MWXRF).
Secondary suppliers that recycle old diesel catalytic converter units have been given the nod by the green movement. Unlikely bedfellows 20 years ago, a move towards decarbonisation and a renewed focus on ESG’s have played right into the hands of established recycling companies.
Although primary suppliers in the form of PGM miners should remain the core focus of any investment strategy, their ESG credentials often needs more meat, especially for a new generation of investors. These shortcomings can, however, be offset by increased exposure to recycled PGM’s. Companies that collect and extract platinum and palladium from spent catalytic converters are inextricably part of the circular economy. Furthermore, their contribution to a cleaner, greener world cannot be disputed.
The good, the bad and the ugly
As PGM prices hover just above US$1,000 per troy ounce, investors would be missing a trick if they do not get at least some form of exposure to platinum to spice up their stock basket.
It has been a good year for PGM’s in the aftermath of a disastrous 2020, made worse by endless lockdowns and a global pandemic. After being in the doldrums only a few years ago, platinum, palladium, and rhodium, has hit the high notes consistently for the last year or two, before Covid-19 put a lid on it. However, PGM producers enjoyed a good run in the first seven months of 2021, with mining companies in South Africa (the leading producer of PGM’s in the world) setting the pace.
After suffering a setback last year with unscheduled outages at their converter plant in the North-West province of South Africa, Anglo American Platinum Limited (JSE: AMS) returned to profitability early in 2021. Their backlog of raw material is expected to be processed during the remainder of 2021 and in 2022.
Notwithstanding a dreadful 2020, South African PGM producers like Sibanye-Stillwater (JSE), Impala Platinum (JSE) and Northam Platinum (JSE) have set the mining world alight with sterling performances in the first quarter of 2021.
Other mining companies around the world have done the same. Not all of them were as hard hit by Covid-19 as their South African counterparts though.
Zimbabwe’s platinum mines, for example, received government dispensation to operate during the country’s lockdown period. Consequently, annual PGM supplies remained stable.
In North America, it was mostly business as usual despite Covid-19 disruptions, although the Lac des Iles palladium mine (Impala Canada) and the Raglan nickel operation (Glencore) closed for several weeks during the first epidemic wave.
Sibanye-Stillwater’s mines in Montana, USA, remained open. However, the company put a halt on expansions as they reported a drop in production.
Vale and Glencore’s Sudbury nickel mines, which produce platinum as by-products, were affected and Glencore reported lower PGM output at its Sudbury operations. Maintenance programmes at Vale’s Sudbury mines and surface plants led to a dip in ore and metal production.
Beefing up the ESG equation
Investing in the primary producers of platinum is always going to be a high-risk game, pandemic or not. Very few platinum deposits (except Anglo’s prolific reefs at Mogalakwena in South Africa) are found close to surface, and it is extremely costly and dangerous to extract and process.
Added to that is the vagaries of the market. Therefore, investing in the recyclers of PGM’s, might not be such an outrageous idea. A side bet on secondary suppliers will add immense value and beef up the ESG equation.
As the world desperately attempts to curb carbon emissions and the appetite to buy new cars returns after the Covid-19 hiatus, it is expected that demand for PGM’s in catalytic converters will continue rising.
Considering that a standard catalytic converter is made up of between 3-7 grams of PGMs (depending on the manufacturer and model), and that the world will continue purchasing vehicles according to more stringent emission standards (which requires more converters) there will be a sustained and consistent supply of spent converters in the future.
The amount of PGMs to be extracted from scrap depends thus, in a way, on whether Toyota, Volkswagen, Daimler, Ford, Honda or Tesla reigns supreme in the next 10 to 20 years. A small catalytic converter from a car like a Toyota Prius or Yaris contains only half of the platinum that a big industrial catalytic converter is made up of. The units used on heavy equipment or diesel-fuelled generators are massive and contain large amounts of PGMs, which could be a boon for secondary suppliers should this equipment become part of the circular economy in the future.
PGM shortage an opportunity for secondary suppliers
Over the last 10 years or so, PGMs have been consistently short on supply. The world’s mining operations alone cannot meet or sustain global demand for PGMs. This has created space for recycling to help meet demand. Moreover, sourcing recycled metals is generally cheaper than mining and generates up to 90% less CO2.
According to Johnson Matthey PLC the recovery of palladium from secondary materials (primarily spent auto catalyst, with some metal from electronic scrap) is forecast to rise by 14% to a record 3.57 million oz in 2021.
Against this backdrop it will be worthwhile tracking the performance of established companies like North American Mineworx Technologies Ltd (TSX.V: MWX). Mineworx recently completed the construction of a pilot plant with the aim of recovering high yields of PGMs from spent diesel catalytic converter units.
The company recently partnered with Tennessee based Davis Recycling. Davis Recycling has been in the scrap recycling business for more than 20 years. It serves 13 states throughout the United States eastern coast and has established good relationships in more than 25% of the continental USA.
These relationships will allow the Mineworx/Davis Recycling partnership to secure a steady supply of catalytic converters that will exceed the commercial processing plant output of 10 tonnes per day. The plant is located on the Davis 12-acre property near their recycling facility in eastern Tennessee.
A sound business model
Mineworx (TSX.V:MWX: OTCQB:MWXRF) intends building these processing plants across the USA in the future and expects revenue of more than US$100-million annually for each unit. Moreover, the methodology of mining (sourcing) and extracting PGMs looks like a walk in the park compared to the labour intensive, complex process of gaining access to deep platinum reefs, unearthing the material, and putting it through even more complex processing circuits.
Besides the difficulty in getting the PGMs out of the ground, the entire mining process is more taxing on the environment and adds considerably more carbon dioxide to a fragile atmosphere.
Environmental benefits aside, the entire business model looks sound. Compared with physical mining, the operational costs in collecting and recycling PGMs are reduced substantially. The permitting process is a lot easier, while geo-political and security risks are mitigated to a large extent. Most of the top platinum deposits are hosted in African countries, where political and regulatory instability are inextricably linked to a company’s risk profile. With rising input costs like labour, fuel, and electricity, it becomes costly to operate a platinum mine in a country like South Africa.
With environmental concerns top of mind for investors today, it is telling that Mineworx has developed several solutions to soften the environmental impact of its extraction process. Commitment towards reducing air, water and soil pollutants is a corporate focus.
Without smelting, Mineworx will produce a concentrate for upgrading at a refinery. Recovery rates per tonne of feedstock have been forecasted at 1,500 grams of platinum and 170 grams palladium, and a fully-operational plant will be able to process 10 tonnes per day, and at current PGM prices, will generate $100+ million annually with an EBITDA of ~20%.
With demand for PGMs not waning, the outlook for platinum remains strong and expectations are that the spot price will continue moving north. With most platinum related stock, and especially recycling businesses, still undervalued, now would be a good time to track their progress.
