Share prices of platinum group metal producers have recently taken a significant step back. But the fundamentals of the business simply do not justify the drop, meaning investors should rapidly be moving their money into the sector.

What are Platinum Group Metals?

The platinum group metals is a collective name used for six metallic elements that cluster together in the periodic table.

The six platinum group metals are ruthenium, rhodium, palladium, osmium, iridium, and platinum. They have similar physical and chemical properties, and tend to occur together in the same mineral deposits.

The platinum group metals have outstanding catalytic properties. They are highly resistant to wear and tarnish, making platinum, in particular, well suited for fine jewelry. Other distinctive properties include resistance to chemical attack, excellent high-temperature characteristics, and stable electrical properties. All these properties have been exploited for industrial applications.  

Platinum Group Metals in the Marketplace

Throughout the present correction in the general metals market, the platinum group metals have held up far better than gold.

Gold prices lagged between April 2006 and May 2006, falling 15%. Meanwhile, platinum hit a record $1,335 and ounce on May 12, 2006. Between April 2006 and May 2006, platinum prices increased 15%.

Palladium, the second most popular investment metals of the platinum group metals, has increased 5% over the same time period. The biggest gainer from the platinum group metal family over the past few weeks, however, continues to be rhodium. Rhodium prices increased 22% between April 2006 and May 2006.

So Why are Platinum Group Metal Producers Struggling?

Companies that mine platinum group metals also produce many other metals, including gold, copper and nickel, which have both experienced a correction along with gold. This means lower revenue for companies that produce and sell copper and nickel, including platinum group metal miners who produce these metals as a by-product.

You can combine the revenue from all the metals produced by a mining company into one lump sum called a "basket price".

When all of the metals are combined into a basket, you come up with a basket price per ounce produced. For South African platinum mines, this basket would combine about half an ounce of palladium and a tenth of an ounce of rhodium, plus smaller quantities of the other metals with every ounce of platinum sold.

Henk de Hoop of Barnard Jacobs Mellet calculates the current average basket price today is ZAR 15,900 (US$2,390) per platinum ounce, a 58% increase on the basket price since January 1, 2006.

Despite this share prices of platinum companies have pulled back sharply, along with gold and other resource stocks.

Impala Platinum [JNB: IMP] is 23% off its recent high set on May 11, 2006. Anglo Platinum [JNB: AMS]is 19% down on its high reached on May 10, 2006 Lonmin [LON: LMI] is also 13% down on its high, while Aquarius Platinum [ASX: AQP] is 21% down and Northam Platinum [JNB: NHM] 15% down over the same period.

Share prices of these companies look cheap on current basket prices, though they may initially continue to drop further because of the current negative platinum market sentiment. But the bottom line is revenue.

The sell-off in shares of these mining firms is unwarranted. And if the past is any guide, this is probably an excellent buying opportunity.

Good Investing,

Luke Burgess
Managing Editor, Gold World
Investment Manager, Secret Stock Files