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Platinum Gains From Labour Pains

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By William Mbaho, Special To The Province

 

The ongoing platinum labour crisis in South Africa’s mining industry has investors looking for producers of the metal in stable jurisdictions like Canada.

Platinum is primarily used in automobile catalytic converters that dramatically reduce harmful emissions, as well as jewelry and as an investment – including bullion coins produced by the Canadian mint. Platinum currently costs approximately $1,600 an ounce.

“South Africa is by far the dominant global supplier of platinum and the strife we have been seeing there has been building for several years,” says Greg Hall, director of Vancouver-based Prophecy Platinum.

“Recently these tensions have boiled over into tragic violence at the major platinum mines and result in significant curtailment of production,” he said.

Approximately 75 per cent of the world’s platinum production is in South Africa.

Last month a labour strike suddenly turned into tragedy at a South African platinum mine.

The trouble began when platinum miners in the rural Eastern Cape province held a strike for higher wages at the British-owned Lon-min mine.

Police opened fire on the demonstrators, killing 34 and wounding 78. Subsequent violence claimed 11 more lives in separate but related incidents over the next few weeks.

“This has pushed platinum from the business pages onto the front pages of newspapers around the world,” Hall said.

A wage deal was reached this week ending the five-week strike at the Lonmin mine, returning 28,000 miners back to work.

But the agreement has brought more political and economic repercussions for South Africa.

The strike has spread to gold and chrome mines, scaring foreign investors in Africa’s largest economy and has cost at least $500 mil-lion, according to the country’s President Jacob Zuma.

South Africa’s main trade union body has also called on other mining companies to match Lonmin’s salary increase.

“We hope that other mining companies will quickly make offers similar to the 22 per cent increase reportedly agreed between Lonmin and the unions and workers’ representatives,” said the Congress of South African Trade Unions in a statement.

In recent weeks seven other mines went on strike, including six platinum mines.

Matthew Zylstra, an analyst for Northern Securities in Toronto said, “There are other underlying factors at play too that will affect production.”

“Along with increased wage demands many of the platinum mines have been in production for decades and activities must go deeper and deeper, which is increasingly expensive. In addition, South Africa’s electricity utility Eskom has been raising electricity costs in order to upgrade a power grid in need of serious investment.”

Investors are now turning their sights to safer jurisdictions like Canada for platinum production in light of the supply disruptions in South Africa.

“Platinum has typically traded at a premium to gold, except for the past couple years, and it has made some impressive gains in the past several weeks,” said Hall, adding the labour pains have resulted in some gains for Prophecy Platinum share-holders.

“Higher platinum prices will eventually translate into higher cash flows when our Wellgreen Project is in production,” Hall said.

The company’s Wellgreen Project, located in the southwestern part of Yukon, is a very large platinum deposit that is garnering inter-national attention.

“Wellgreen will produce a significant amount of the North American supply of platinum, which rep-resents one to two per cent of the world’s supply,” Hall said.

“But with 88 per cent of the world’s supply coming only from South Africa and Russia, North American sources of supply will be of strategic importance.”

As well as platinum, Wellgreen is rich in palladium, rhodium, nickel and copper.

The mine is expected to process about 32,000 tonnes of ore per day, which will result in average annual production of 53 million pounds of nickel, 55 million pounds of cop-per and 190,000 ounces of platinum group metals and gold over a 37-year mine life.

“It is a very significant property for the Yukon in terms of revenue and employment,” said Robert Holmes, director of mineral resources with the Yukon Department of Energy, Mines and Resources.

“There are very few projects of that size that are being proposed in the Yukon.”

While the Wellgreen Project is not in production yet, extensive exploration has been undertaken and drilling is currently underway with about 20 staff on-site.

“Wellgreen is very close to the infrastructure needed for mining operations, which is expected to lower the cost to operate it,” Hall says.

The Yukon is a mining-friendly jurisdiction, and Prophecy signed a co-operation agreement with the Kluane First Nation last month.

“The Yukon government has a good relationship with First Nations having settled land claims with 11 out of the 14 First Nations groups in the territory,” says Zylstra.

“As a testament to the attractiveness of the jurisdiction, as well as the strong geological potential, we have seen an exploration rush over the past few years.”

According to the most recent Fraser Institute study, the Yukon was ranked 5th of the provinces and territories and the 10th best mining jurisdiction in the world.

“We are strong believers in Prophecy Platinum and have a buy recommendation on the shares based on the value we see in the company’s primary project, the Wellgreen Mineral Deposit in the Yukon,” said Zylstra.

“With any large mining project though, you’ll have to be patient and it will take a lot of money. The Wellgreen project won’t start producing until 2019 and it is estimated to cost almost $900 million to build the necessary infrastructure.”

Given the scale and potential of the Wellgreen project, it is very likely that major investors and global mining titans will have the company on their radar very soon, predicted Zylstra.

This content is provided to The Province by Financial Press. No information in this article should be construed as individualized investment advice.

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