Rule, chairman of Sprott US Holdings, has dedicated his career to the resource sector. He is commonly interviewed by prominent news sources and speaks at industry events.
On such an occasion in Palm Springs, he explained that the platinum and palladium thesis begins with the bullion thesis, which is based on the advisability of owning things that governments can’t print.
“This is a United States $20 bill,” Rule said, holding the money in the air. “This is a promise to pay. Bullion is not a promise to pay. It’s payment.” Gold, silver and platinum are payment, he said.
He noted that precious metals have similarities; for example, they can be used for jewelry and can act as storers of value.
“All those things that are true about gold and silver are also true about platinum,” said Rule. “But there are several important differences about platinum and palladium that I believe, in the near term — one or two years — make them probably superior investments to gold and silver.”
“The thesis is going to be very simple: supply and demand.”
“Most of the gold and silver that have ever been mined are still supply. When you think about it, we do a very stupid thing with it to protect ourselves from our government. We take it out of a hole in the ground called a mine and put it in a hole in the ground called a vault,” he said. “We use billions of dollars to take it out of a hole and put it in a hole.”
“We do something different with platinum and palladium,” Rule explained. “We take it out of a hole and we burn it. It either goes out of a tail pipe or up an exhaust pipe or it gets turned into jewelry. It is no longer supply.”
There is no need to consider historical supplies because there aren’t any, he said. “They’ve been used for catalytic conversion. They have been used in chemical processing. Or they have become jewelry,” he said. “They’re gone.”
That leaves only mine supply.
“The next thing you have to think about is that gold and silver are produced around the world, ubiquitously, in many countries and as by-products of other kinds of metal.”
Supply from South Africa
South Africa is the world’s largest platinum-producing nation.
“The first thing I want you to take home is that the platinum and palladium industry in South Africa does not meet its cost of capital,” Rule told the audience. “More than half the shafts are loss making.”
That is not new, he said. The platinum miners in South Africa have not earned their cost of capital in 10 years. And as a consequence, the supply of platinum group metals (PGMs) has declined 19 percent in six years.
Rule explained that platinum mining in South Africa is a labor-intensive business. The ore bodies are too thin to mechanize. Furthermore, there is political pressure against mechanization because it would to drive high unemployment rates even higher.
But in this labor-intensive business, miners are demanding more pay — and according to Rule, they deserve it.
“I have been underground in these mines personally and the labor conditions are disgusting. They are deplorable. Labor conditions must improve and the workers’ wages must go up. This is not a union slogan. This is a human truth. If you went underground and saw what I saw, you would be disgusted,” he said.
The problem is the aforementioned lack of capital.
“It gets worse,” he continued. “There is widespread consensus in South Africa — with some historic justification — that the people’s stake, the black people’s stake, from the mining sector — apart from wages — has to go up.”
There is also widespread political consensus that state stakes have to go up. And Rule said that means royalties, taxes and the secured interest of the state all have to rise.
“But it can’t go up because the industry doesn’t earn its cost of capital,” he pointed out again.
Meanwhile, industry players have stated that in order to maintain current levels of production, they have to make $8 billion worth of sustaining and new capital investments in the next five years.
“There’s just one problem — they don’t have the $8 billion. And because they don’t earn their cost of capital, we’re not going to give it to them,” he said.
Rule explained that platinum mining is also a power-intensive business. South Africa’s monopoly power supplier, Eskom, is run by the government under a political mandate to deliver affordable power to people who can’t pay for it. Meanwhile, power demand is exploding and supply is shrinking.
“The supply of power has to go up, but it can’t go up because Eskom doesn’t earn its cost of capital either,” Rule said.
He urged listeners to think about one point in particular: the PGMs industry has no [historic] supply, has a supply and demand imbalance and has a producer that produces 75 percent of the world’s platinum and 39 percent of the world’s palladium. Supplies have declined 19 percent. Wages have to go up, taxes have to go up, capital expenditures have to go up — and they can’t go up.
“What do you think is going to happen to supply?” he asked.
Supply from Zimbabwe
Looking north, Rule said Zimbabwe is a joke, not even a real country, but a so-called promised land run by a thug.
In Zimbabwe, miners couldn’t earn the cost of capital either, Rule explained.
“So Mugabe, about six years ago, said as a consequence of historic theft from ancestral blacks — which is true — we have to address that imbalance, we have to arrange for 51 percent of the ownership of the mines to be given to black people.”
“The problem is they couldn’t pay for them or wouldn’t pay for them. So the industry had to find a way to steal 51 percent of itself to benefit Zimbabwe, which they did by decapitalizing the mine. They gave the ZANU-PF cronies 51 percent of a mine that couldn’t any longer produce — pretty smart.”
Although Zimbabwe has the ability to produce platinum, Rule explained that it ultimately inherited shafts that used to be productive.
Mugabe has now decided that 51 percent was unfair after all. Rule said that the ZANU-PF leader now wants 100 percent and has announced plans to run the next election on nationalization.
“And it doesn’t really matter. 100 percent of nothing is just as egregious as 51 percent of nothing,” said Rule.
“At any rate, as a supplier Zimbabwe is irrelevant.”
Russia is key supplier of palladium. There, the issue is geological. The mines are old, the digging is getting deeper, but the grades are declining.
“So on a global basis, supply of platinum and palladium are declining. And at this price point, there is nothing whatsoever we can do about it.”
From a producer’s point of view, Rule insists that prices must go up. And he explained why they will go up.
The utility in society for platinum and palladium is extremely high and it comes down to a choice: “it’s platinum versus smog. That’s the trade off,” he said.
Rule explained that about $200 worth of PGMs are used in a vehicle. If platinum and palladium prices double to $400 per vehicle in the near term, the $200 increase relative to the median sticker price of a new car, which is $27,000 in the United States, is de minimis, he said.
“Demand elasticity with regards to price at that price point does not matter. If the price of platinum doubled, it wouldn’t make an iota of difference to vehicle demand in the United States,” he said.
The political movement in nations such as Europe, the US and Japan is to use more platinum and palladium to continue to improve the air quality, not to conserve the metal, he added.
Furthermore, frontier and emerging nations are really set to drive demand growth for these metals. As people in those countries grow richer, one of the items that they are seeking is personal transport, evidenced in large part by the fact that China has overtaken the US as the largest auto market.
Emerging countries are spending tens of billions of dollars building infrastructure, including interstate highway systems, said Rule. But in places like China and India, they use less than 10 percent of the platinum and palladium per vehicle that is used in the US. And as a consequence, their air quality is deplorable.
He said the Chinese government has identified cardiopulmonary illness as a consequence of poor air quality as one of the leading causes of death in China. Proposed air-quality standards in China would quintuple platinum and palladium loadings.
“That doesn’t suggest to me that demand for platinum and palladium is going to fall,” he said. “In summary, with regards to platinum — two things: the price has to go up and the price can go up.”
“If something has to happen and something can happen, what do you think will happen?” he asked the audience.
Securities Disclosure: I, Michelle Smith, hold no direct investment interest in any company mentioned in this article.