Physical Platinum
We have over the past six months built up a large position in the underlying physical platinum metal itself. The rationale is pretty simple, at current prices, almost the entire South African platinum industry is generating negative cash flows after taking capital expenditure into account, a situation which is clearly not sustainable. At some point, either the Rand will have to weaken substantially further or the actual dollar-denominated price of platinum will have to improve.
This improvement in the dollar price for platinum could be demand-led (i.e. improving European vehicle sales) or conversely could come about as a result of a “supply” shock, as local platinum mining companies close down more marginal operations or in a worse-case scenario, a mid-tier producer such as Lonmin were to go insolvent.
Given the structural challenges and political uncertainty in the South African mining industry, we are as discussed still very reluctant to commit substantial capital to South African mining companies, even at current depressed valuations. Until policy and governance show signs of a “u-turn” from the recent experience, South Africa remains “uninvestable” to a large extent.
Given the decline in commodity prices and 50% depreciation in the currency since 2011, we also believe that transitioning our outright currency positions (which have been typically short the Rand) to long the actual underlying commodity, will ensure that we retain significant upside in the event of further currency weakness. In addition, the transition to this type of positioning will also enable us to generate positive returns even if the currency trades in a stable range ( or recovers temporarily), during periods of commodity price strength.
For the first time since 2010, and perhaps even 2006, we are no longer structurally negative or bearish on the commodity complex, but remain negative on the prospects for the currency. Intuitively, this thinking is incongruent, since the Rand has typically performed well during periods of rising commodity prices. We feel “this time will be different” and the potential exists for structural reasons for the currency to continue underperforming even in the context of a recovery in commodity prices. However, transitioning to a long commodity positioning, will offer some comfort, if conventional wisdom prevails as it has in the past.