Canadian PGM Projects on the Move: Prophecy Platinum

PIN: To start off with, Greg, can you give our readers a refresher course on the platinum and palladium markets?

Greg Johnson: Sure. Platinum and palladium, like gold and silver, are considered store-of-value investments. Investors, primarily of hard assets, want exposure to these metals to hedge against inflation and the devaluation of currencies. They also both have very strong industrial components to their usage.

The largest use for both platinum and palladium right now is in the automotive industry as catalytic converters. Most recently, demand has been driven by the third world, with booming automotive sales and increasing environmental standards. The automotive industry represents more than one-third of the consumption of platinum and about two-thirds of the consumption of palladium. It’s one of the biggest drivers of the fundamentals for these two metals in terms of their growth. Since about 1980, we’ve seen fairly steady, nearly year-on-year demand growth in both metals.

Combine that with the fact that most of the world’s platinum and palladium comes out of Southern Africa and Russia, where we have seen an increasing number of challenges with continuing to economically produce metal. The combination of a market that’s growing quite consistently and has a falling mine supply has really set up the sector, and a lot of investors are looking at it with interest because of the potential for significantly higher prices as these two trends continue.

PIN: As you mentioned, most platinum and palladium supply comes from regions of higher political risk, namely South Africa and Russia. A few weeks ago, there was an announcement that Russia and South Africa have signed the framework to form an OPEC-like organization. What could this type of cartel mean for the platinum and palladium industries?

GJ: Platinum and palladium are very concentrated in their production. I think for platinum itself, about 92 percent of production comes from Southern Africa – including Zimbabwe – and Russia; for palladium, roughly 37 percent of the metal comes from South Africa and 43 percent comes from Russia. Again, you’ve got over 80 percent of supply coming from these high-political risk jurisdictions. Their ability — if they begin to regulate or restrict exports — to have an impact on the supply making it into the market would be very significant. There is only about 8 percent of total production for platinum outside of those countries, globally. Stillwater Mining (NYSE:SWC) and North American Palladium (TSX:PDL,AMEX:PAL) are the two largest producers in first-world jurisdictions, but are relatively small compared to the metal that’s being produced in Russia and Southern Africa.

The impact could be quite significant in terms of maybe taking prices to higher levels. These aren’t metals that can be substituted with other materials, so automobile manufacturers would need to look at paying higher prices if that’s where the market went.

Now, to put it in context, I believe most estimates say that an average car uses about $200 worth of platinum and palladium metal. Even if this price were to double, relative to a new automobile, it’s not that high a component of any given car price and it’s not going to materially impact any economics for the manufacturers. It’s just going to mean a higher cost of their materials.

It would make a huge difference for the producers of the metal to see significantly higher prices. That’s one of the challenges that they’re seeing in South Africa — the mines are very old, very deep and very labor intensive, so their operating costs are quite high. Many of those mines do not pay for their operating costs plus their ongoing capital, to keep those mines going. They’re going to need higher prices in order to maintain viable mass producers.

PIN: As these foreign mines age further and Prophecy works to bring Wellgreen online, do you think your platinum group metals (PGMs) will be in a place to compete with those coming from producers in South Africa and Russia?

GJ: Right now, the project is a development-stage project. We are not yet in production, but we are projecting that we could be at feasibility in the next couple of years. With the current projections from most analysts for the platinum and palladium market, it would look like we would be delivering significant new metal. We could be one of the largest North American producers into the market in the next three or four years. Likely, that would contribute, but would not be enough to meet the growing needs for the market.

PIN: Okay, so now that we have a little understanding about the market you’re looking to supply, can you tell our readers what makes the Wellgreen deposit unique?

GJ: The Wellgreen project is unique in a number of ways. If we look at the production from platinum and palladium in South Africa, for instance, many of those are relatively narrow, 1- or 2-meter wide zones that are deep underground-mining situations. Wellgreen differs in that it occurs in similar type of rocks that we might see in other deposits, but it starts right from surface — it’s open-pit mineable in terms of its configuration. These are very wide zones, upwards of 200 to 500 meters in width. It allows us to look at this project like one of the modern, open-pit, large-scale gold operations we see in Nevada or other parts of Eastern Canada. That’s fairly unique in the platinum space, where many of these mines are narrow, underground mining situations.

PIN: That would also mean a more cost-effective type of deposit?

GJ: Absolutely. On a cost structure, the big difference between underground mining and open-pit mining is the scale of the equipment, which means that your unit costs are dramatically lower. These large trucks, some of them can haul 200 or 400 tons of material at one time. It’s going to bring your cost per ton or per ounce down significantly, and it’s going to make the project more competitive in terms of operating cost. In fact, our estimate is that this project would be in the lower quartile of all platinum-producing mines in the world, which would make it a very attractive project. Likely, as we advance this towards feasibility, which is your last stage of engineering, we would expect to see interest from the major mining companies increase because of the scale of the project, the scalability and the operating cost structure. This is likely to be a project of interest either for partnership, acquisition, or even for looking at offtake of the metals with some of the major smelters, particularly in Asia.

In this current market, companies need to be open to asking, “what are the different ways to fund the development work and eventually bring these mines to production?” and “what are the trends we’ve seen?” In particular, in the copper and base metal space, the need for these smelters to secure supply of product to run their smelters has had them doing some more innovative financing approaches. For instance, approaching companies with development-stage projects like ours, forwarding some of the funding to help get those projects in production so they can secure the concentrate product that they run through their smelters to produce the end metals. That can be a win-win situation where these very profitable operating businesses with access to capital can help bring on new deposits to support the life of their facilities long term. At the same time, they can meet a need in the current equity markets, where we see access to capital as one of the bigger challenges that companies are facing.

PIN: Wellgreen also hosts “exotic” PGM elements like rhodium, iridium, osmium and ruthenium. To what extent do these metals make the project stand out? Is there much demand for them?

GJ: Those are smaller markets than platinum and palladium, but some of them can be quite valuable. Rhodium at some points, historically, has traded in the many thousands of dollars per ounce, for instance. The Wellgreen project was operated as a mine by Hudbay Minerals (TSX:HBM) back in the 1970s, and it was really noted for its rare PGMs and the concentrations of those metals. We’re right now studying in our next round of metallurgical test work to understand how much of those metals we are going to be able to recover. It’s likely that they could contribute a significant, additional component of value and of PGM metal to our current predictions, which are really only focused on platinum, palladium and gold.

They’re much smaller markets and they’re not priced daily in the newspaper like gold and often platinum. You can easily find what the current price is, but they can be significant for a project like ours because as we’re mining that ton of ore, it’s containing the platinum, palladium, gold, these minor PGM or rare PGMs, as well as nickel and copper. Your costs are largely covered, in our project anyways, by the value those other metals. That would mean that on a by-product basis, you would basically be producing your platinum and palladium for free. On a co-product basis, where you’re weighting the contribution of each of those metals, it would be one of the lower-cost platinum-producing projects in the world.

PIN: Wellgreen is located up in the Yukon, which is typically perceived as a more challenging location. Can you tell us about Wellgreen’s infrastructure?

GJ: Yeah, you’re absolutely right about that perception, but typically when people think of projects in the north, they’re often thinking about projects in the extreme north, where there’s no infrastructure. There’s no question that if your project is located someplace that has no road access and is subject to very short seasonality with barging and so forth, that can be a challenge and an additional component to your operating cost and the cost to build the project.

We’re fortunate with Wellgreen in that it’s just a short distance by road from the paved Alaska highway, which gives us access to two different ports, one in Skagway and in Haines, Alaska. We’ve been speaking with the state of Alaska through their industrial development bank, which owns the port facility in Skagway. They’re doing a major expansion this year because of the activity in the Yukon, the increasing amount of mines coming onstream. They’re looking at the expansion of Haines as well. If you were looking a northern project, Wellgreen is in many ways as good as they get with great access, infrastructure and the ability to ship its products out through ports that are already in existence and accessible via a paved highway. I think it’s going to be a real benefit for us, both for the permitting process as well as for keeping our costs low for this exploration and development phase, and ultimately during the construction phase.

I think the Yukon is also making some strides to recognize that mining is a key part of its future. There are about 10 projects that are currently in the permitting phases. There are three new operating mines in the Yukon in just the last couple of years, and four or five projects at feasibility. If we look around North America, the Yukon is being seen as one of the most promising emerging mining districts in North America. A lot of people are recognizing, for instance, the recent Fraser Institute ratings, which upped the ranking for the Yukon to number eight in the world. It really highlights that the permitting regime, the regulatory framework and the ability to, particularly in areas such as ours, where you’ve got resolved land situations with First Nations, really make these attractive areas for companies to look at exploration and development.

PIN: How is Wellgreen positioned?

GJ: When we consider all the elements that you’d like to see in a project in terms of aiding the permitting process and moving it forward, with Wellgreen, all these elements appear to be in place. It has good infrastructure; it was a former operating mine; we have an agreement in place with the First Nation who settled their land claims. Because of the support of the Yukon government, we don’t see any major obstacles at this time that would impede our ability to expedite this project forward. I think we’re sitting in a great position to be able to advance the project and to be able to be delivering new updates to investors as we progress.

We also have a second project in the portfolio, which is located in the Sudbury District. The Shakespeare project was a former operating mine, and the opportunity for our investors is that we are looking at potential for restart of this project and the cash flow from this could be significant enough that it could allow us to fund our development activities at Wellgreen. The combination of the two projects could be a very nice fit, and it could address some of the concerns about access to capital in the market if we’ve got our own ability to generate cash flow and to advance our development ourselves.

PIN: What needs to be done at Shakespeare in order to go ahead with this plan?

GJ: The project operated from 2008 to 2012. It was shut down because of low metal prices, particularly low nickel prices in early 2012. We are going in — our chief operating officer, John Sagman, spent 20 years of his career working for Xstrata (LSE:XTA) and Vale (NYSE:VALE) in the Sudbury District. We’re negotiating a new processing agreement with the Tooele smelter and are also looking at some alternative transportation routes that could significantly reduce our operating costs. Our objective is to reduce the costs so that we can get the project to be cash-flow positive at today’s relatively modest prices for nickel, copper and the PGMs. We want to position it so that it’s generating cash flow and could fund Wellgreen because we think there’s opportunity that those metal prices could move significantly higher.

PIN: Do you have a timeline for the restart of the Shakespeare project? Or is that just really up to the prices?

GJ: At this point, we’re doing our studies. Over the next couple of months we’ll be understanding whether or not we’re going be able to reduce costs significantly enough to go forward at current prices. We’re hopeful over the next couple of months to know whether or not we’ve got a project that we can restart now or, if not now, at what metal prices we could turn that on.

We’re quite optimistic and right now it looks like this could be a positive cash-flow generator based on the current level of study; hopefully we will see that continue with our current studies. I think if we could demonstrate that the company’s got its own support cash flow wise and operating wise, that would really allow us to stand out from the marketplace.

PIN: One of the most notable elements about Prophecy Platinum is its management team, which has successfully raised hundreds of millions of dollars during this tough market period. Can you help our audience understand the importance of having a good team? And tell us a little more about the good people behind Prophecy?

GJ: I think we’ve really put together a great team. I started out my career with Placer Dome, which later became Barrick Gold (TSX:ABX,NYSE:ABX), the world’s largest gold producer. This is my third public company as a smaller company. I was also one of the original co-founders at Nova Gold and spent several years down in South America as the present CEO of South American Silver (TSX:SAC).

John Sagman, our chief operating officer, has been involved in all elements of mine operation, design and construction, particularly, as I mentioned, his experience in the Sudbury District with Xstrata and Vale is very relevant. His most recent company was Capstone Mining (TSX:CS), which built one of the three new mines in the Yukon. He’s got that direct Yukon experience.

Our chief financial officer, Jeffrey Mason, brings a career working with Hunter Dickinson in the mining group, and has been involved with a number of successful projects there. We’re building up the project team as well, and we’re quite excited to see things coming together, technically advancing our three-dimensional geologic model, and as I mentioned earlier, we’re quite excited to test some of these new targets that are adjacent to our existing resource to determine their potential.

I’m quite excited to be here, and to be working in a location like the Yukon with all the benefits of access, permitting and low geopolitical risk. We’re excited that this is a real opportunity for investors as well.

PIN: Are there any misconceptions that you find yourself having to clarify to investors?

GJ: I think the platinum market is not as well understood as gold; there are literally hundreds of development-stage gold names. I think we are starting to educate and provide materials so that investors understand how the platinum market works, its similarity with gold.

One of the things that we often hear when we meet with investors is talk about the process of “how do I value a company in the resource stage, in general, in the sector?” Many groups in the gold space use the analogy of: as you advance your project through the various stages, you typically see a re-rating in the valuation of those assets. For instance, if you use an enterprise value, the total value of the company divided by its ounces in the ground, you get a valuation per ounce that companies trade at. In the platinum market, we see that same kind of valuation. If we look at the producing companies — that would be Stillwater and North American Palladium — they’re trading right now at about $170 per ounce in the ground, so that’s the market value of the companies divided by their resource base.

If you look at the advanced development stage, they trade around $30 an ounce. You can see they’re at a significant discount, even at that advanced development stage, over what those assets are worth once they’re up in production.

At the earlier development stage, where Wellgreen is, we see a drop again, with a $3 average valuation at that stage. Part of the business model, part of our message, if you will, that we’re taking out to investors, is that if you identify high-quality assets at that early stage, where valuations are quite low, and if those assets are able to successfully move into the advanced development stage and eventually into production, you’ve got the opportunity, that’s quite rare in general in the market, to see valuations move, on average, from $3 an ounce to $30 an ounce to $170.

Those multiples on your investment are quite significant. We think that’s really one of the key opportunities for investors. Once you’ve taken that risk off the table of identifying a world-class resource, a lot of the technical risk has been addressed in the project.

At that point, it’s really about access to capital, the team’s ability to advance the project and get the types of engineers and the type of engineering work that needs to be done, and to progress that project into an advanced development stage and eventually into production. We think that’s the opportunity investors have to participate in with Prophecy Platinum.

PIN: Well I’m glad you clarified that. It’s a valuable lesson for investors to understand. Thank you for speaking with me today.

GJ: Thank you, my pleasure.

Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.

Prophecy Platinum is a client of the Investing News Network. This article is not paid-for content.

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INN Video: Greg Johnson of Prophecy Platinum on Exploration in the Yukon