The blistering pace of gains that has pushed South African platinum stocks to the highest in more than 12 years looks likely to be sustained as an upswing in demand and supply constraints fuel the rally.
Johannesburg’s index of platinum stocks has soared 30% this year, leaving the other sectors in the local equities benchmark trailing in their wake. Over 12 months, the FTSE/JSE Africa Platinum Mining Index is up an eye-watering 230% as of Tuesday’s close, thanks to surging prices for palladium and rhodium, dug up with platinum and used in vehicle pollution-control devices.
Disruptions at No. 1 global palladium miner MMC Norilsk Nickel PJSC have added to worries over production of platinum group metals. Last year, the platinum market experienced its biggest annual supply deficit on record. Palladium rallied the most since January on Tuesday as Norilsk Nickel cut production targets after flooding at two of its sites.
“Given the Norilsk situation, I think PGM prices could rise further near-term,” David Aserkoff, a London-based JPMorgan Chase & Co. equity strategist, said in emailed comments. JPMorgan has an overweight recommendation on the South African platinum sector, with Sibanye Stillwater Ltd. among its top 10 picks for Central and eastern Europe, Middle East and Africa, while Impala Platinum Holdings Ltd. is among the leading selections in South Africa.
Estimated dividend yields on the platinum index have surged as earnings expectations are ratcheted higher, jumping to 11.5% from 4.3% at the end of 2020.
“Earnings expectations have increased quite significantly for 2021 due to the higher basket price,” said Seleho Tsatsi, an investment analyst at Anchor Capital in Johannesburg.
Analysts have also revised their 12-month earnings-per-share projections by 100% since April, as climbing metals prices drive increased profits in the sector.
Royal Bafokeng Platinum Ltd. has gained the most among its peers this year, soaring 75% as of Tuesday’s close. Anglo American Platinum Ltd. is up 44% and Impala Platinum up 38%. Northam Platinum Ltd. has gained 19% and Sibanye 17%.
Investors may continue to be drawn to the sector by the supply constraints and other indicators that suggests the stocks remain inexpensively valued, despite their spectacular ascent. The index’s 12-month forward price-earnings ratio is at 5.85 times, below its three year average of 12.66 times. The price to book ratio is at 0.98 times, below the three year average of 2.06.
The index climbed 2.2% on Tuesday, snapping three days of retreat, after Norilsk Nickel said it will take at least three to four months to fully reopen two Arctic mines affected by flooding.
“I would be surprised if any pullback lasted longer than a month or two,” JPMorgan’s Aserkoff said, citing supportive longer-term factors such as energy transitions, the low valuation multiples and the sector’s role as offering investors protection against weakening in the rand. “Moreover, given that the majority of global PGM production is in South Africa, any local issues, typically power or labor, will also push global PGM prices higher, a nice hedge.”