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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Low Prices And Mounting Costs Slam Platinum Producers

Signs of major problems in the platinum sector last week -- showing that low prices and difficult production conditions are finally catching up with supply.

The announcement came from the world's third-largest platinum producer Lonmin. With the company saying that it will idle a substantial portion of its operations in response to depressed market conditions.

Lonmin said it will close two of its production shafts in South Africa. And temporarily idle three others. Related: Top Factors Undermining Any Oil Price Recovery

The result will be a significant cut in Lonmin's overall platinum output. With production expected to drop by 100,000 ounces yearly.

The move will also affect a substantial portion of the company's labor force. With management saying that 6,000 employees and contractors are likely to face the axe -- amounting to about 16% of Lonmin's workers.

The reason for the closures is simple economics. With Lonmin admitting that the company is losing money on an operating basis, even before interest, tax, depreciation and amortization.

This is a sign of the times in the platinum business. With prices for the metal having dipped below $1,000 per ounce this month, marking the lowest price seen since the depths of the financial crisis in late 2008. Related: Pessimism Amongst Oil Traders Reaches 5 Year High

Miners in world-leading producer South Africa are especially feeling the pinch. With factors like rising power and labor costs making it all the more difficult for operations here to remain in the black at lower metals prices.

These cuts from Lonmin aren't huge on their own -- amounting to about 2% of global annual mine production. But if this is a sign of things to come, we could see more substantial reductions in output emerge soon. Especially if platinum prices remain at (or below) current levels.

Here's to facing the axe,

Dave Forest

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