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Platinum: Good Prices Are Not Enough

Platinum gurus Johnson Matthey published their 2010 Interim Review of the platinum market yesterday. A big event in that part of the mining space.

The report was fairly rosy for platinum producers. JM sees the platinum market largely in balance next year supply/demand-wise, after running a slight 290,000 ounce surplus this year.

The six-month price outlook is for platinum to trade between $1,550/oz and $1,900/oz. Very decent prices.

That's the good news.

The bad news is that even at decent prices, platinum producers in the world's largest production region, South Africa, are having a hard time making money.

In annual financial filings released this week, platinum major Lonmin announced negative free cash flow. Despite its sale price of platinum group elements increasing 45% over the past year.

And analysts at RBC Capital Markets note that year-to-date cash costs for the world's top platinum miner, Anglo Platinum, are running around $1,680/oz. Leaving "little margin to fund capex".

As I've mentioned before, South African production costs are ballooning due to electricity costs, labor costs and new royalties. This is a bitter pill, given 80% of global platinum output comes from South Africa.

With high costs looking to be the norm across the platinum industry, there's a really opportunity to "poach the cost curve" (much the same as we've discussed for the uranium industry). A platinum project outside of South Africa that shows favorable costs will be a sought-after commodity.

Such projects aren't easy to find. But they do exist. And it's worth starting to look them up.

By. Dave Forest of Notela Resources




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