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Technology Stocks : 400 --Just count'em

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From: IngotWeTrust4/20/2007 3:08:35 PM
   of 348
 
PLATINUM GROUP METALS PGM BOTTLENECK
The PGM devil’s in the smelter

The key to unlocking value in the ballooning junior platinum sector lies in solving the ore-processing conundrum.
Author: Barry Sergeant
Posted: Friday , 20 Apr 2007

JOHANNESBURG -

In a major new report on global platinum stocks, Mark Smith of RBC Capital Markets has addressed the investor-critical issue of bottlenecking smelter and refining capacity in the global platinum group metals (PGMs) sector.

Global platinum output is anticipated to increase from 8.3m ounces this year to 9.8m ounces in 2017. The vast majority of the increment is to come out of South Africa, supplemented by an increase in scrap supplies from about 900,000 ounces this year to 1.4m ounces in 2017.

In South Africa, existing processing plants are found only at the historic players,
Anglo Platinum,
Impala Platinum,
Lonmin and
Northam.

Junior producers have to live with onerous terms and punitive conditions typically levied by third-party toll treatment providers. The conundrum deepens when considering that if all possible new South African PGM mines come on stream, global platinum output could rise from 8.3m ounces this year to as much as 15m ounces in 2017.

PGM smelters and refineries are incredibly expensive.
RBCCM states that as a rule of thumb, production in the order of 250,000-300,000 ounces of platinum a year is required to justify the capital cost
--smelter: $150-$250m;
---refining facilities: $500-$700m), and
----operational costs of a smelter.

If this was not all, such is the complexity of processing PGM ores that "lock-up" (the value of PGMs effectively locked up inside a processing plant) can exceed plant capital cost.

The future of PGM smelters in South Africa also hinges on evolution in the mining of three distinctive horizons in South Africa's Bushveld igneous complex:
--the Merensky reef,
---UG2 reef and
----the Platreef.

In the Merensky reef, virtually all PGM content is associated with base metal (nickel and copper) sulphides.

In the UG2 reef, only 70%--80% of PGMs are sulphide-associated. These ores are rich in rhodium and chromite, but relatively light in base metal sulphides.

The Platreef is similar to Merensky reef ore, but higher in copper and nickel content.

While Merensky stands as the historical mainstay of the sector, UG2 is coming into its own, and, so far, only Anglo Platinum has mined the Platreef.

RBCCM states that Anglo Platinum has no known processing expansion plans beyond 3.5m ounces total capacity. As such, Anglo Platinum will have to run its Polokwane smelter at full capacity to process the 0.5m ounces of mainly UG2 ounces expected to come on stream over the next few years from in-house and joint venture projects in the Eastern Bushveld.

Impala Platinum is targeting the internal production of 2.3m ounces of platinum a year by 2010, which would require short-term expansion of smelting capacity from 2.0m ounces to 2.3m ounces. Even then, its smelters would be running at capacity. Impala has long-term capacity expansion goals of 2.5m ounces and then 2.8m ounces.

Lonmin intends to expand smelter capacity to 1.5m ounces of platinum by 2010. To this end, its Merensky furnace will be upgraded from 8MW to 20MW. Lonmin is also considering a third 20MW furnace to replace its Pyromet furnaces around 2010, which would lift smelting capacity to 2m ounces. However, refining capacity will need to be upgraded.

Northam appears to possess the ability to double processing capacity (to 0.4m ounces of platinum a year) by running its smelter at 15MW instead of the current 8MW, potentially allowing Northam to play an important role in the processing of expansionary ounces.

RBCCM reckons that South Africa presently operates sufficient capacity to accommodate new PGM projects in the short term - to 2010 - but argues that expansions are needed to meet market needs in the long term.

There are many questions; for example, will Lonmin and Impala require a mixed ore feed for their expansions? More than half of new potential supply will be from the UG2 reef, "which poses technical challenges", says RBCCM.

As such, RBCCM believes there is a strategic opportunity for the establishment of an independent UG2-targeted PGM smelter in South Africa, to cater for the new supply; in addition, greater base metal refining capacity will be required to enable efficient processing of Platreef ore.

From RBCCM's analysis, "there appears to be just enough unallocated platinum supply from the juniors to justify an independent smelter; however, the majors' stranglehold on the juniors is getting tighter".

Given known capacity constraints, RBCCM has attempted to model four scenarios:

• Scenario 1: If there are no smelter expansions, the South African PGM sector would require additional smelter capacity in 2011.

• Scenario 2: If Impala and Lonmin continue with smelter expansions, the South African PGM sector could accommodate all new supply (potential and possible) that has been signed up for toll treatment.

• Scenario 3: If additional (unallocated) new supply comes on stream with no smelter expansions, the South African PGM sector would require new smelter capacity in 2009.

• Scenario 4: Where new supply comes on stream, and Impala and Lonmin expand their smelters, the South African PGM sector would require additional smelter capacity in 2012.

However, RBCCM describes two possible routes where the shortage of PGM smelting capacity in South Africa could be resolved independently of existing smelter operators.

First,
construction of shared UG2-targeted smelter/refining facilities as a joint venture by a consortium of junior platinum producers.

Second,
establishment of a UG2-targeted processing facility by a "new entrant" to the PGM industry.

There is a further opportunity in new processing facilities, and new technologies.

Conventional PGM matte smelter technology is some 30-40 years old, and was designed primarily with low-chromite Merensky ore in mind.

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COMMENTARY:

Interesting peek into the future 10 years for the supply side of the S&D dynamic at work in the Pt industry, ETFs offtake not withstanding.

G&Pt_T
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