Well, it depends on the region, mine and company (e.g., whether it is a junior or a senior company), and it varies over time. For example, the recent socio-political shifts in South Africa have increased the production costs. As of September 2018, they are about $1,100 per ounce in South Africa, the main producer of platinum (producers in South Africa account for about 70 percent of the world’s mined platinum).
What does make up the cost of platinum production? First, the mining company has to discover mineable platinum deposits, conduct exploratory drilling and extensive geochemical analysis. Later, the company has to buy an exploration license and meet environmental and other regulations. Then, it can establish the site, buy all the equipment and physically extract the platinum ore. And after the mine is tapped out, the mining company may be required to rehabilitate the site to pre-mining conditions. As one can see, the platinum production costs go well beyond the mere act of pulling the metal from the ground.
This is why we have different notions of platinum production costs. Traditionally, the industry used cash cost, which focused only on the mining and processing costs incurred. But in 2013, the WGC published a guidance note on all-in sustaining costs and all-in costs metrics. The former concept is an extension of the existing “cash cost” metrics and incorporates costs related to sustaining production, while the latter notion includes all additional costs that reflect the varying costs of producing platinum over the lifecycle of a mine.
OK, so how can we use the data about the platinum production costs in investing? The all-in sustaining costs are about $1,110, while the platinum price is about $754 per ounce (as of September 2018). It means that it is importantly below the production costs. It implies that platinum mining is unprofitable right now. Obviously, such a situation can’t go on indefinitely. The investment implication is to avoid investing in platinum miners at current unfavorable difference between the price and the costs. Unless, of course, investors strongly believe that the platinum price is likely to rally soon. However, as we argued in the August 2017 edition of the Market Overview, the future for platinum is rather bleak due to the rise of electric vehicles and weaker demand for diesel engines which use platinum catalytic converters (although lower prices may help the metal).
Platinum Production Costs and Platinum Prices
And what is the link between the platinum production costs and the price of platinum? Some analysts claim that the platinum production costs constitute the floor for the platinum prices. Well, in the long run, they might be right. Only about 3 percent of the world’s platinum is held as an investment and most of the metal is used in the industry. Hence, the price below the costs should decrease the production. The falling and rising demand (due to low prices) should then help the prices to recover. However, this mechanism does not necessarily work in the short-run, as mining companies try to not close the operating mines, as it costs a lot of money to resume production. They rather do not open the new mines and sites, but it takes some time to exert significant effect on the supply.
Just look at the data. The chart below shows the price of platinum. As one can see, it dived below the $1,100 level in 2015. And now it is below $800. It means that the production costs create only an imperfect floor for the prices – the precious metals investors shouldn’t forget about it.
Chart 1: Platinum prices (London P.M. Fix in $) from 2013 to September 2018.
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