Japan Moves to Secure PGMs Ahead of Potential Deficits

In March 2009 it was announced that Japan Oil, Gas and Metals National Corp. (JOGMEC) would invest an optional $10 million in Platinum Group Metals Ltd.‘s (AMEX:PLG,TSX:PTM) War Springs project. The Japanese government’s investment in South Africa’s platinum industry was described as “relatively unique.” Since then Japanese players have continued stepping up efforts to secure supplies of PGMs, which may prove strategic given the risk of supply shortfalls.

Platinum Group Metals holds a 70 percent interest in the War Springs project. Under the deal with JOGMEC, in return for an optional $10 million over five years, the Japanese company could earn 35 percent of that stake. The first year commitment was $500,000.

“This deal to me should be a signal to investors in general that there are groups around the world that have much longer-term perspective and are going to be prepared to take advantage of the rather shortsighted nature of the market at the moment,” Platinum Group Metals President and CEO Michael Jones said following the announcement of the deal.

PGMs are critical to a number of industries in Japan, and according to ITOCHU Corp. (TSE:8001), a major Japanese trading company, the government has designated PGMs as one of the most important metal categories in the national resource acquisition policy.

In June 2011, ITOCHU announced its participation in the exploration and development of PGMs with Ivanplats Ltd. .

For 22.4 billion yen, approximately $280 million at that time, ITOCHU acquired an additional 8 percent interest in the miner’s Platreef project in South Africa. The company had already spent $10 million to acquire a 2 percent stake in 2010.

The deal also entitled the trading company to production offtake rights proportional to its share. This part of the deal was intended to help secure PGM resources for Japan and its increasing interests in the resource sector, the company said.

ITOCHU said drilling had confirmed good PGM mineralization and a major high-grade underground deposit had been discovered. Platreef is located adjacent to Anglo American Platinum Ltd.‘s (OTC Pink:AGPPY) Mogalakwena mine, and ITOCHU expressed optimism that its investment could result in a major mine comparable or better to that project.

The company also announced plans to utilize a JOGMEC financial assistance scheme for further project development.

Mitsubishi UFJ Trust and Banking Corp. and Mitsubishi Corp.‘s (TSE:8058) request to launch precious metal ETFs, known as the Fruit of Gold series, was approved by the Tokyo Stock Exchange in 2010. The new fruits included platinum and palladium ETFs.

Among other things, these products “in a broader sense, allow Japan to accumulate a stockpile of physical precious metals domestically by storing them in warehouses designated by MC within the country,” Mitsubishi Corp. (MC) said.

Then, in March, MC announced another effort to help Japan get its hands on a supply of PGMs.

MC agreed to purchase shares of Stillwater Canada Inc., which holds 100 interest in the Marathon PGM project, from Stillwater Mining Co. (NYSE:SWC,TSX:SWC.U).

The $94.9 million deal consisted of $81.25 million to acquire 25 percent of Stillwater Canada and $13.6 million to meet the venture’s first cash call.

Initial projections suggest the mine will produce about 200,000 ounces of PGMs, mostly palladium, over a 11.5 year mine life, with first production around 2016. MC has the option to purchase 100 percent of the PGM production.

According to JOGMEC, the oil crises of the 1970s underscored Japan’s vulnerability as a net importer of energy and raw materials. The experience highlighted the negative impact that rapid supply changes can have on the Japanese economy, the agency says.

In a recent presentation by Johnson Matthey (JM), the unique Japanese approach to autocatalyst manufacturing was put into perspective. Compared to other techniques, it uses higher loadings of more expensive PGMs because composition is linked to mine ratio. This is a strategy that is believed to be helpful in ensuring access to the needed metals. Analysts were also told that it is indicative of the  long-term view held by the Japanese.

Industry cognoscenti have been warning that the risk of PGM shortfalls is growing. A number of them have said there is a possibility that the palladium market could move into deficit as soon as this year.

Last year, gross demand for palladium from the autocatalyst sector hit an all-time high of over 6 million ounces. This happened even though there was a decline in Japanese passenger car production due to the natural disasters that struck in 2011.

According to JM, the surplus seen in 2011 was largely attributed to an increase in recycling and to investors returning about 565,000 ounces of palladium to the market whereas in 2010 they had purchased about 1 million ounces. There was also continued supply from the Russian stockpiles.

However, last year the volumes of metal from Russia declined to the lowest levels seen since 2006. In 2012, some palladium is expected is expected from the stockpiles, but how much is unclear.

This year, JM expects recycling to be subdued, and supply from the largest PGM producer, South Africa, to be flat. There are risks that production in South Africa may fall below expectations due to labor disputes and the government’s commitment to safety stoppages. And then, there is also the unpredictable appetite of palladium investors.

Meanwhile, Japanese auto manufacturers are aiming to improve fuel economy. JM says that these attempts often result in lower temperatures of exhaust gases, which can require higher PGM loadings.

As is the trend globally, the Japanese are also looking to lower their costs and therefore increase the use of palladium as a substitute for platinum.

Japan’s efforts to ensure access could prove bullish for PGMs and palladium in particular, and may also drive further investment in exploration and development projects.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in the companies mentioned in this article.