Platinum Producers Continue to Favor Payouts Over Capex

Despite the recent surge in the price of platinum on commodity markets, major miners are still wary of investing in new projects until the current price increases display signs of staying power. At the moment, platinum is going for just over $2,000 an ounce, having recorded tremendous gains over recent months. Last year, the metal surged 127% to reach new peaks.

During a mining conference that was recently held in South Africa, executives expressed a desire to remain cautious at this time as platinum continues to surge. They were of the view that rising costs and previous missteps have taught them to think through any decision before committing to any production increases via reopening mothballed projects or starting new ones. For now, shareholder payouts will continue to take precedence over new investments.

Major producers like Valterra Platinum and Impala Platinum expect their annual profits to grow by over 100%, but this doesn’t signal that these companies are rushing to spend on new projects.

Craig Miller, the CEO of Valterra, commented that they are focused on maintaining discipline within their operations and paying out profits to shareholders during this time when prices have gone up significantly. The company intends to keep honoring its policy of paying out 40% of its profits as dividends.

Miller added that the current prices make a case for viably starting new platinum production projects, but the firm is choosing to wait and see whether the prices stay at their current levels for longer before committing to new production projects. He points to previous booms that led miners to invest in new greenfield projects, only for those investments to become unsustainable. For example, from 2005 to 2010, price increases led to 20 new projects being started. Today, only two of those projects remain operational after prices slumped and remained deflated for more than a decade.

Echoing similar caution, Richard Steward, CEO of Sibanye Stillwater, said they wouldn’t be restarting their mothballed project in the U.S. based on short-term price movements. Their decision would be influenced by long-term price projections, especially with regard to palladium.

Palladium and platinum are mainly used in the automotive sector to make catalytic converters. Demand for these metals tanked as the industry shifted to electric vehicles, but recent headwinds in the electrification movement have turned around the fortunes of internal combustion engine (ICE) vehicles, boosting demand for these metals.

South Africa is the main producer of palladium and platinum, and this jurisdiction has faced rising labor and energy prices that have driven miners to institute various measures to keep costs manageable, including layoffs. The current price increases have therefore come as a relief to these pressured miners and they are in no hurry to begin new projects at this time when costs are running high while price increases aren’t assured.

It remains to be seen how miners like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) view the long-term prospects of platinum and how that could influence their operational decisions.

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