The "Other" Precious Metal

When you hear the term “precious metals,” you likely think of gold and silver. That’s what the Spanish conquistadors had in mind, of course, when in the 15th and 16th centuries they trekked inland from their beachheads on the sands of the New World.

But there are other metals of great value besides gold and silver. In the two centuries after Christopher Columbus landed in the New World, the Spaniards seized the gold of the Aztecs in what’s now Mexico, and took that of the Incas, as well, further south in the Andes Mountains. But this was just the beginning, because the men from Iberia had developed a bad case of gold fever. They wanted more.

High in the mountain streams of New Granada – modern-day Colombia – the Spaniards panned for gold and found plenty. They followed the shows and traces. They looked for the mother lodes, where they located even more gold, and in those mountains they also found silver. Over many decades, the Spanish treasure ships went home heavily laden.

But as the Spanish searched for gold and silver, they also found another substance, and at the time it was quite a nuisance. There were smallish, dense white nuggets mixed in with the nuggets and flakes of gold.

These small particles were difficult to separate. They wouldn’t oxidize. They were dense, and in the sluices they dropped out with the gold. The particles had a high melting point and wouldn’t separate even in the hot crucibles from which the smiths poured gold bars at the refineries that dotted the Andean landscape. A few early chemists even tried to dissolve the white particles in acids, to no avail.

After a while, the Spanish named the white nuggets “platina,” a diminutive of the Spanish word plata, meaning silver. The metallurgists of the time – alchemists, as the term was used for many centuries – thought that the dense metal was a form of “unripe” gold.

Yet the substance wasn’t gold, and it wasn’t silver, and no one had any idea of what to do with these nuisance contaminants. Thus, for many years, the platina had no value.

By the mid-18th century, European scientists were applying an early form of scientific method and deciphering the nature of many metals and other elements. In 1751, a Swedish chemist named Henrik Scheffer was experimenting with a small sample of platina. At first, he wanted to take the “unripe” gold and upgrade it to the real thing. Based on his knowledge of gold, professor Scheffer added arsenic to the mix.

Lo and behold, professor Scheffer melted the platina, which he at first called “white gold.” But then, after a few simple tests based on density and hardness, professor Scheffer realized that he was dealing with an entirely new element. He named it platinum.

In 1802, it was the turn of an Englishman, a medical doctor-turned-chemist named William Wollaston, to develop a process to recover platinum in commercial quantities. During his research into platinum, using primitive electrical methods pioneered by the great American experimenter Benjamin Franklin, Dr. Wollaston and his collaborators also discovered the element palladium, followed in 1803 and 1804 by the elements rhodium, iridium and osmium.

At the request of the French Academy of Sciences, in 1879, Johnson & Matthey created what became the standard meter for nearly 80 years – a rod made of an alloy of platinum-iridium. Looking back, in 1799, the international meter was originally defined as one ten-millionth of the distance between the North Pole and the equator, at the longitude of (where else?) Paris. Later, in the 1880s, the Johnson & Matthey rod redefined the length of a meter based on the distance between precision marks on a new X-shaped rod composed of 90% platinum and 10% iridium, cooled to 0 C. The French Academy of Sciences used platinum-iridium alloy because it doesn’t oxidize, is hard, can be highly polished and expands or contracts very little with temperature changes. This particular bar served as the international standard of measurement until 1960, when the meter was redefined in terms of the wavelength of light emitted by the krypton-86 isotope.

Over the next several decades, any number of European, Russian and North American scientists pursued studies into the nature of what became known as “platinum group metals” (PGMs).

In particular, in England, there was a metallurgist named Percival Norton Johnson. He ran a mineral assaying business. One day, he received a shipment of exotic ore from Russia, and that led Mr. Johnson to work on refining PGMs. In 1838, Mr. Johnson teamed up with another metal-man named George Matthey, eventually giving rise to the famous partnership of Johnson & Matthey.

Over time, the Johnson & Matthey group pioneered and perfected numerous techniques to separate and refine PGMs. Eventually, Johnson & Matthey developed methods to melt and cast pure homogeneous platinum ingots. Johnson & Matthey is still a famous name in the metals world today.

So now you know the modern history of platinum, but let’s approach things from another angle. What is platinum, really? What’s the big deal? Why is platinum important? What makes platinum the basis for an investment idea?

The basics are that platinum is a soft, dense, ductile metal. As we’ve seen above, platinum is very resistant to corrosion. These days, you’ll find platinum in high-end jewelry, exotic forms of wire, electrical contacts and nonreactive laboratory vessels.

Platinum also plays an important role in industries as divers as chemicals, plastics, oil refining and pollution control and more. Beyond industrial demand, there’s also a strong market for platinum in the jewelry business, as well as in bullion form, for investment. Platinum jewelry has experienced strong growth in demand, due to its purity, color, prestige and basic value. Meanwhile, the ongoing decline in the value of the dollar has led to strong demand for platinum as an investment, particularly in the form of bars, coins and other collectable items.

Looking ahead, there are entirely new uses for platinum in the fields of medical technology, exotic alloys and other forms of technology and nanotechnology.

It’s all good, right? So what’s the downside? The problem for future platinum users is that the global supply of platinum is tightening. It’s an expensive substance to mine, separate and refine. During a recent trip to South Africa, I heard story after story from senior mining executives about the difficulty of expanding production.

One mining engineer with a long track record of success told me, “When you look at the demand trends and how hard and expensive it is to expand production, there’s no way we can avoid shortfalls over the next two years and more. There’s not going to be enough platinum from any source to meet demand. I expect prices to shoot up in 2012 and beyond.”

How do you play the tightening platinum market? In my view, the best large-cap company to own is South Africa-based Impala Platinum Holdings Ltd. (IMPUY:PINK SHEETS).

The company goes by the name of Implats, and it’s a South African blue chip. Implats shares trade on the Johannesburg Exchange, the London Exchange and as American Depository Receipts (the Pink Sheets) on the OTC market. About 60% of Implats shares are owned by South African people and institutions, with 40% owned by others across the globe. For OI tracking purposes with Implats, we’ll use the OTC.

Impala is big and substantial. Implats produces about 25% of all the PGMs that come out of South Africa, using about 54,000 workers, including contractors, with 49,500 in South Africa and 4,600 in Zimbabwe. With production numbers and employment rolls like that, the company carries clout in political circles.

In 2010, Implats’ revenues were $4.4 billion, with $821 million net. After adjustments, Implats’ profit margin was 18.6% in 2010, with operating margins over 29%. The current Implats share price is just over $24, which is down from a recent high near $34. The lower share price is due to the general market swoon, based on fears of the world economy drifting into a double-dip recession. With the pullback, Impala has a market capitalization of $15 billion, and is selling for less than 10 times next year’s estimated earnings.

I like this entry point. Implats is a “Buy.”


Byron King,
for The Daily Reckoning