May 01, 2023
Platinum has surged on an expected widening deficit, driven by supply declines from South Africa and Russia and a demand rebound, with only two larger TSXV stocks, Canada North Resources and Bravo Mining, having major exposure to the metal.
Gold dipped -0.5% to US$1,990/oz, holding around the US$1,994/oz average of the
past five weeks where the price seems to have consolidated. This was after the
sudden ramp up of nearly $200/oz in the space of a month from the last week of
February 2023 to the last week of March 2023, mainly driven by the US and EU
banking crisis. While there was key economic news released affecting gold, it was
mixed in terms of indicating a clear direction for the metal. US Q1/23 GDP showed a
growth slowdown, and US jobless claims have been coming in relatively high versus
the past year. Both these data points could give the Fed backup for easing off rate
hikes, and any clear signs of monetary easing would likely boost the gold price.
However, contrasting this was an unexpected rise in US Core PCE Inflation, which the Fed views as a key indicator in making its rate hike decisions. This could suggest to the Fed that prices are not fully under control yet and compel them to move forward with the rate hike anticipated by the market at its May 2023 meeting to be held next week. Even if the Fed were to refrain from the expected hike, it has been clear that it will hold rates at their peak for some time to ensure that inflation, and inflation expectations, have been truly crushed, and not just temporarily cooled.
One main economic indicator which could see a potentially less aggressive monetary policy from central banks has been weakening real GDP growth in both the US and Europe. US quarter on quarter GDP growth peaked most recently at 7.0% in Q4/21, but was followed by a contraction over H1/22 (Figure 4). US growth then surprised to the upside in Q3/22 at 3.2%, but has trended down over the two subsequent quarters, to just 1.1% for Q1/23, which was reported this week. Real GDP growth in Europe has been much lower, peaking at just 2.3% in Q3/21, and coming in well below 1.0% every quarter since, printing at 0.3% for Q1/23 after a -0.1% contraction in Q4/22.
Further evidence of relatively sluggish US economic growth can be seen in the US
weekly jobless claims, which have been elevated since February 2023 versus an
average 204k from August 2022 to January 2023 (Figure 5). The most recent figure of
230k from April 23, 2023 is up 19% from the recent lows of 194k from January 21,
2023, although it is down from 246k in the previous week, and the most recent peak
of 247k on March 18, 2023. Jobless claims have now also jumped materially above
the pre-crisis level average of 217k from January 2019 to February 2020 (Figure 6).
These early signs of rising unemployment are especially important given the Fed's dual mandate to maintain price stability but also support full employment. Worsening employment could give the Fed more support for a pause in rate hikes, and even reduce the amount of time that they are held at their peak. Any such signs of a more dovish monetary policy would likely be supportive of gold.
In contrast to the weakening GDP growth and US employment data, which seem to
indicate a cooling economy, is the most recent core US Personal Expenditure
Consumption Price Index, which unexpectedly rose month on month to 4.76% in
March 2023, up from 4.69% in February 2023 (Figure 7). This is a preferred metric by
the Fed to track underlying inflation, given that it excludes volatile food and energy
prices. The overall PCE Price Index, which includes food and energy, continued to
decline, reaching 4.2% in March 2023, off highs of 7.0% in June 2022.
The Core PCE Price Index has declined only over a percent from its 5.4% high in February 2023, and has actually trended up marginally from a low of 4.62% reached in December 2022. This suggests that core inflation has been more rate-hike resistant than the overall inflation number, which has benefited especially from an energy price decline. Such evidence of persistent inflation could cause the Fed to reconsider a major shift towards a more dovish stance on rates.
The gold producers were mixed and the TSXV was mainly down as gold dropped and equity markets ticked up (Figures 8, 9). For the Canadian gold juniors operating mainly domestically, New Found Gold reported drill results from the Keats West Zone of the Appleton Fault Zone at Queensway and Tudor Gold reported an updated Resource Estimate for Goldstorm of 23.4mn of AuEq Indicated and 7.4 mn oz AuEq Inferred (Figure 10). For the Canadian gold juniors operating mainly internationally, Robex Resources met the conditions for its US$35mn Bridge Loan with Taurus Mining Finance Fund 2 and the first drawdown request has been completed, and Lion One reported results from grade control drilling on the URW1 lode system at the Tuvatu project (Figure 11).
Platinum up on South Africa power cuts, Russia war, demand increase
The weekly average platinum price has surged 18.9% to US$1,077/oz off its most recent lows of US$909/oz in the week of February 19, 2023, on both supply limitations and rising demand (Figure 12). The most immediate driver has been power outages in South Africa, which accounts for the majority of platinum output, at 65.4% of the total in 2020 (Figure 13). South Africa has faced power cuts for years from Eskom, the state-owned utility, but the situation worsened dramatically in 2022, and this is expected to continue into 2023, as the company's coals plants are old and corruption is reportedly rife. These outages obviously have a negative effect on the powerintensive mining industry. There are also risks to supply from second largest supplier, Russia, which accounted for 13.5% of production in 2020, given its ongoing war with Ukraine. Given these factors the World Platinum Investment Council (WPIC) estimates that the platinum supply declined -18% in 2022 and forecasts a 13% increase in 2023.
The WPIC expects platinum demand to surge 24% in 2023E, considerably outpacing supply, driven especially by its use in autocatalysts to reduce vehicle emissions, which was 32.1% of platinum demand in 2020, where there has been widespread substitution of platinum for palladium (Figure 14). Jewellery demand, at 22.8% of the total, is expected to grow 2% 2023E, and industrial demand, at 13.5% of the total, forecast to rise 12%, while investment demand could improve on a flight to safety.
We might have expected palladium to also rise given that its supply is heavily reliant on South Africa, at 31.4% of production, and Russia, at 44.2% of the total (Figure 15). However, while platinum is up 10% over the past year, palladium is down -38% (Figure 16). This is because even with Western sanctions, palladium inventories in Russia have been maintained, while global demand has declined with the substitution in autocatalysts towards platinum. Analysts overall appear to be expecting the palladium market to shift into a surplus for 2023-2024, in contrast to the deficit for platinum. Longer-term, a shift towards hydrogen fuel cell vehicles, in which palladium plays no role, but platinum does, could further reduce demand for the former metal.
There are only two large TSXV stocks with some platinum exposure, although neither are near pure plays on the metal. Canadian North Resources is developing the Ferguson Lake Project in Nunavut, which is a polymetallic project at the Mineral Resource Estimate stage with 0.56 mn oz of platinum, but a much larger 3.20 mn oz of palladium, and large copper, nickel and cobalt Resources (Figure 17). Bravo Mining is still at the exploration stage for its Luanga project in Brazil, with drill results showing high grades of platinum group metals (PGM), gold and nickel (Figure 18).
Bravo Mining has a higher market cap, at $314mn, with Canada North Resources, at $259mn (Figure 19), given Bravo's strong outperformance since its listing in July 2022, surging over 80.3%, compared to Canada North Resources' relatively flat 4.1% gain over the period (Figures 20, 21). Bravo has been driven by strong drill results including high grade PGM+Au and a new nickel zone from Luanga, while Canada North reported an updated Resource Estimate for its project as far back as June 2022, with drill results since not driving major gains.
Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.