Platinum Group Metals, Right Time, Right Place
Mike Jones formed Platinum Group Metals (PTM-TSX, PLG-NYSE) in 2000 to focus on platinum and the PGMs. The company is on the verge of starting production at their Western Bushveld Project 1 this quarter. PTM owns 83% of what they refer to as the WBJV Project 1. They finished their feasibility study in late 2009, began construction in 2010, and were granted their mining rights in 2012.
I love the company, I hate the website. Not that it’s unreadable; it simply has too much information on it. I ascribe some of the 75% decline in the price of the shares over the past year to the fact that it’s really difficult to figure out what is important and what is not.
The near production WBJV Project 1 has a 4.1 million ounce 4E P&P Reserve. 4E means platinum, palladium, rhodium and gold. So even there it becomes difficult for an average investor to understand what the value of the rock is. Instead of using the more accurate but also more meaningless figure of Reserves, I will use the more common Measured and Indicated Resource figures. Also, there are two different reef systems with different grades and tonnage, the Merensky Reef with a USD $526 cost per ounce production over the life of mine and the UG2 Reef cost of USD $774 per ounce over the life of mine.
Over the 20 years life of the mine, the combined average USD production cost per ounce is estimated at $625 per 4E ounce.
The numbers in the above two images are very important for an investor to understand. I spent hours going over the PTM website trying to figure out what the costs of production would be at the WBJV mine and I’m sure it’s buried in there somewhere among the 10,000 sets of numbers but I’m just not smart enough to find it. So here goes.
The rock in the ground in the Merensky Reef in M&I adds up to $152 per tonne. They have 21.8 million tonnes in M&I. Simple math shows that the rock in the ground in the Merensky Reef at the Western Bushveld mine is worth $3.3 billion.
And while the boffins at the TSX compliance are still sputtering in their tea at the arrogance of someone talking about the value of rocks in the ground, I do want to advise you that that doesn’t mean they can mine it at all or mine it at a profit. I mean if it all came out of the ground at Friday’s price, it would be worth USD $3.3 billion. It’s a number to use for comparison, that’s all.
The rock in the ground in the UG2 Reef in M&I adds up to USD $102.77 per tonne. They have 22.7 million tonnes. Again, simple math shows that the rock in the ground in the UG2 Reef at the Western Bushveld mine is worth USD $2.3 billion.
So between the two reefs there is a total of $5.6 billion of rock. PTM owns 83% of that. That works out to $4.6 billion US. As of last Friday, PTM had a market cap of $185 million USD. I don’t know what their figures would be for NPV but it would be probably ten times higher than that. PTM is just as cheap as platinum at present. The exploration and cost of building the mine and mill has already exceeded $407 million USD, $185 million for 83% of the WBJV is flipping cheap. The company could have deposited the $407 million in the bank collecting a negative interest rate and had a higher value that the price of the company as measured in the stock market today.
I can’t find their feasibility study and the numbers they would have used for cost predictions would be totally out of date but I can tell you that based on the hundreds of projects I have seen, their cost of mining and milling on an underground PGM mine in South Africa would be in the $50-$60 range per ton. And that means that with $152 rock in the Merensky Reef and $103 rock in the UG3 Reef, they can make money even in the pitiful state of mining in South Africa.
Their website only hints at the reason, buried among the 10,000 facts and figures. The reason South Africa is such a disaster area of mining today is because of the increasing and violent demands for higher wages from the workers. There is no right and wrong issue there, it’s not black vs. whites, the miners want more money and they are willing to get violent to get it.
Mike Jones, President and CEO of PTM, saw this playing out 15 years ago. He set out to build a company and find a deposit that would support mechanized mining techniques. He has it in the Western Bushveld Mine. His miners will be paid a lot more money but there will be fewer of them. The government of South Africa fully supports PTM and this concept. The old style of mining in South Africa was both dangerous and labor intensive. It doesn’t work in today’s world.
As I said above, Platinum Group Metals is starting production now. They intend to produce from the WBJV for 20 years at a profit without constant labor problems and the price of the shares is down 75% from the yearly high. The stock is cheap based on the 10-year price pattern for platinum that will be 64% of the estimated 250,000 ounces per year production. The price of platinum is also cheap based on the 115-year relationship between gold and platinum.
If imminent production of a metal at a profit wasn’t enough to attract investors, perhaps what I say next will. PTM has a Plan B. The Western Bushveld JV is their current production mine but once it’s up and running smoothly, their big mine will be the Waterberg JV. And there is a lot of platinum and palladium there; a combined 45 million ounces of palladium and platinum in both the indicated and inferred category.
On the 4th of September 2015, PTM released the latest 43-101 report on their Waterberg JV. Platinum Group Metals invested the first $30 million into the project and holds an even 58.62% of the JV. Their primary JV partner is investing the next $20 million into exploration. The Japan Oil, Gas and Metals National Corporation or more easily said, JOGMNC, owns 28.35% of the Waterberg JV.
The Waterberg project is going to be a giant PGM project and one of the most important in South Africa. The company estimated in a 2014 PEA production of 655,000 ounces of platinum, palladium and gold per year at a cost of about $555 per ounce for mining and milling. In the chart shown above, I calculated the value of the rock in the ground at just over $81 per ounce in the indicated category. The latest 43-101 shows 121 million tons of rock and that would show a value in the ground of about $9.92 billion in the indicated category.
In the inferred category shown above, the 43-101 reports 246 million tons of rock. With today’s prices, that is a value of $20 billion in the ground. Given the volatility of prices for platinum and palladium lately, it’s not really possible to gauge the potential for Waterberg. At some prices, it wouldn’t be viable. At other prices, it would be a license to steal.
What we can say, however, is that it will be one of the biggest PGM mines in the world. If the labor conditions in South Africa continue to deteriorate and that reduces the supply of palladium and platinum, certainly the strategy of moving to more mechanization by Mike Jones is going to pay off in a big way.
PTM is working on a Pre-Feasibility study at Waterberg and estimates it will be released in Q1 of 2016. By the end of 2016 they expect the Feasibility Study with construction beginning in 2017. At present the company has 10 drill rigs turning. JOGMNC has funded the entire $8 million 2015 budget and the first $6 million for the 2016 and 2017 budgets.
Platinum Group Metals is getting about $.50 on the dollar invested for the $407 million they have pumped into the Western Bushveld JV. The market values their 58.62% of 45 million ounces of palladium and platinum at Waterberg at zero.
Everything is worth something. PTM has excellent management, the most solid of partners and will be in production shortly at Western Bushveld. Granted, South Africa is a painful country to mine in for a variety of reasons but Mike Jones made lemonade when he was handed lemons. One day soon the market will wake up to the remarkable PGM opportunity the company offers.
Platinum Group Metals is not an advertiser. I do not own shares and have no financial relationship with the company. Basically I do not have a dog in the fight but given the absurd price of platinum I wanted to find the best PGM deal I could locate. It’s Platinum Group Metals. As always, please do take some responsibility for your own financial decisions.
Platinum Group Metals