Investment Contrarians

Death of 44 Miners in South Africa Sends Platinum Prices Higher

By for Investment Contrarians |

Death of 44 Miners in South Africa Sends Platinum Prices HigherLike many commodities, platinum investing is based on supply and demand dynamics. While the demand portion of the equation is based primarily on world economic fundamentals, the supply side can have shocks to the system that can impact prices and affect one’s platinum investing strategy.

Last week saw massive violence break out in South Africa, at the location of the third largest platinum miner Lonmin Plc (LSE/LMI.L). A strike by miners erupted in bloodshed, with a total of 44 people killed, most of who were gunned down by police after strikers attacked the security forces with machetes. Platinum investing through mining stocks can be risky for many reasons; labor strife in unstable countries is chief among them.

There appears to be some resolution close at hand, as the company has backed off its disciplinary actions, announcing that returning workers won’t be fired. As of Monday, approximately 27% of the approximately 28,000-person workforce was back in action.

Investors interested in platinum investing should note that prices have spiked because of this violent outburst. Another important point to note is that a small concentration of mining stocks has a large impact when it comes to platinum investing. Actions or issues at these mining stocks can reverberate throughout the industry, causing ripples across the pond and hitting many firms involved in platinum investing.

South Africa extracts approximately 75% of the world’s platinum. Mining stocks in that region are susceptible to labor issues and an incident such as this current one with Lonmin’s mine has the potential to spread to neighboring operations. If that were to occur, platinum prices would continue rising substantially.

Two mining stocks that are quite different from each other but still involved in platinum investing are Platinum Group Metals Ltd. (NYSE/PLG; AMEX/PLG) and Stillwater Mining Company (NYSE/SWC). Platinum Group is a young exploration company that is in the final process of a proposed senior loan facility for $260 million. The funds are to be used for the completion of its Project 1 Platinum Mine.

 PLG stock market chart

Chart courtesy of www.StockCharts.com.

Stillwater Mining is one of the more interesting mining stocks within the platinum investing sector. Part of how the firm obtains the commodity is from recycling catalytic converters, of which process platinum is an important component.

 SWC stock market ticker chart

Chart courtesy of www.StockCharts.com.

Stillwater has clearly moved up from the bottom, as institutions are starting to look into platinum investing once again. Platinum Group hasn’t had as strong of a move, mainly because it’s a younger firm with more hurdles ahead of it. In both mining stocks, the level of supply that is removed from the world market because of the labor disruptions that are occurring will be paramount to all firms involved in platinum investing.

There are two main questions potential investors in mining stocks need to ask themselves: 1) are the circumstances short-term in nature; and 2) will the mining stocks get hit in a contagion scenario? Platinum Group does have mining interests in South Africa, and if the miners’ strike were to spread to their properties, this would have a significant impact on the share price. At an initial glance, it appears that this is a one-off strike, but the time it takes to ramp up production will be substantial. This delay will most likely cause platinum prices to remain elevated for some time to come and have a positive impact on other mining stocks in the platinum investing sector.

As is quite evident, there are many moving parts when it comes to platinum investing. Mining stocks have individual operational issues, but you also have to watch the broader landscape to determine the overall health of the industry.

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