Platinum market update:The supply crunch remains a mirage

Deutsche Bank Markets Research Global Metals & Mining Industry Platinum market update Date 16 February 2016 Industry Update The supply crunch remains a mirage The fundamentals are not strong enough to break the Rand influence ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Grant Sporre Research Analyst (+44) 20 754-58170 grant.sporre@db.com Patrick Mann Research Analyst (+27) 11 775-7282 patrick.mann@db.com Top picks Aquarius Platinum (AQP.L),GBP12.50 Buy Impala Platinum (IMPJ.J),ZAR33.50 Buy RBPlat (RBPJ.J),ZAR40.00 Buy Source: Deutsche Bank Companies Featured Aquarius Platinum (AQP.L),GBP12.50 Buy Amplats (AMSJ.J),ZAR306.00 Hold Impala Platinum (IMPJ.J),ZAR33.50 Buy Lonmin Plc (LMI.L),GBP79.00 Sell Northam (NHMJ.J),ZAR36.68 Sell RBPlat (RBPJ.J),ZAR40.00 Buy Sibanye Gold (SGLJ.J),ZAR48.20 Hold Source: Deutsche Bank PGM prices have recovered since their mid January lows inspired mainly by a rally in gold and the Rand. The fundamentals for platinum have improved, but not to the extent that there will be significant deficits drawing down the ample liquid stocks. The fortunes of platinum remain inexorably linked to the Rand and a permanent price recovery is still dependent on SA producer discipline which is still limited. We therefore forecast a Rand basket price which tracks the 90th percentile of the South African cost curve. Given our bearish view on the Rand over the next three years, we have cut our USD price forecasts for all three PGM metals by 7 – 13% for the next three years. The fundamental outlook has improved since the end of last year... The supply demand fundamentals for platinum have improved modestly. The outlook for European and Indian passenger vehicle sales remains robust; Chinese buying and jewellery demand has recovered in Q4’15 and some supply from the Autocat recycling supply chain has been held back as prices fell. We think the withholding of supply will be temporary, but the improving fundamentals have been reflected in the tightening of the sponge – ingot spread which is now in positive territory for both platinum and palladium. We forecast a small deficit for platinum in 2016/17, and a decent deficit in palladium. Despite the better fundamental balance in palladium the plateauing of US Auto sales and the volatility of Chinese Auto sales has dampened investor enthusiasm for the metal. ...but the price recovery has been driven by gold and the Rand The main driver in the PGM prices has been a recovery in gold prices and the Rand. The Rand has recovered post the recent interest rate hike, but we still think there are some further headwinds, which means the benefit may be temporary. Likewise gold has rallied as expectations of a Fed hike have diminished, and an equity market sell-off has seen an increase in safe haven buying. The options market is however pricing in zero probability of a March rate hike, suggesting that there is little upside for gold. Investor interest in gold (as seen by ETF flows and long positioning on the Comex) has far outstripped that of the PGM’s enforcing our view that the recent price recovery is driven more by non fundamental factors. A potential primary supply crunch, but not until 2019 At the moment, PGM supply “discipline” is being driven by necessity, and SA operations are being starved of capital. Monetizing developed reserves can only take you so far, and we can see a potential supply crunch coming in 2018/19, as some of the marginal producers will be forced to play catch up in sustaining capex. Balance sheets may however constrain their ability to do what is required. An opportunistic closure of 14 shaft in the Lease area, post the fire and a closure of Union by Amplats instead of the current sale preference may bring forward supply curtailments. As too will a long duration strike as we head into wage negotiations in the middle of this year. The relatively muted rhetoric from the major unions in South Africa suggests that the appetite for another long duration strike is fairly low. In the meantime, we forecast Platinum supply to grow by 1.6% as ramp-ups offset closures in SA. 16 February 2016 Metals & Mining Platinum market update Page 2 Deut