The Hidden Platinum Margin

One of the biggest surprises of the year hit the mining analyst community last week.

Anglo American Platinum turned a profit. A sizeable one.

Amplats turned in net income of $117 million for the first half of 2013. A big improvement from the $40 million loss the company took in the same period last year.

The solid financials were a bit of shock. Most observers had been expecting worse results on escalating costs and labor disruptions recently in South Africa.

But many analysts hadn't counted on one thing: the weakening rand.

South Africa's currency has been the worst performer amongst the majors this year. Falling about 14% against the dollar.

That makes a big difference when you sell a USD-denominated product like platinum. A fact that's giving Amplats a "hidden margin" on its mine output.

And that margin is significant. The U.S. dollar platinum price in H1 2013 was more or less flat year-on-year. But the rand-denominated price improved dramatically. Reaching R22,473 per ounce, as compared to R20,086 in the first half of 2012.

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Currency fluctuations may in fact explain a lot about why miners seem so pinched by costs these days. Unlike South Africa, most other nations have seen their currencies holding firm against the dollar lately.

Look at the chart below of the U.S. Dollar Index. From mid-2011 to mid-2012, the dollar had a strong run. Gaining about 15% against the global basket.

During this time, miners outside the U.S. would have gotten some relief from cost escalation.

The dollars they made selling gold or copper would have translated to higher amounts of the domestic currency. Allowing them to afford more local supplies.

But since mid-2012, the dollar rally has largely stalled. The buck has been mostly rangebound.

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As such, miners are no longer getting a lift from currency. And so we're hearing more about costs being high, and margins getting tight.

We may want to consider fiscal strength--not just geology--when we look at what countries to invest and operate in. And in this case, weaker may be better.

Here's to making your dollars go far,

Dave Forest