Lonmin is bust: It should be left to fail, but this could be a new contrarian play on platinum
On 9 November 2015 Lonmin revealed its latest $408 million grand plan save the company.
Shareholders "just" need to give the company, which has declined 97.87% in the past five years, nearly R6 billion through Lonmin's latest rights offer scheme.
Lonmin is currently worth a mere R1.2 billion.
Any investment in the company right now is throwing good money after badif you ask me…
But this revelation has opened up another opportunity.
Sure, it is contrarian. But the likelihood of making money from it is a great deal better than throwing more money after Lonmin.
Let me explain.
A big buying opportunity if Lonmin fails
Directly after Lonmin announced plans to try and rescue the company, the platinum price dropped by nearly $150. How’d this happen?
Well, ETF investors liquidated their holdings.
In fact, in the four days following November nine 572,000 ounces of palladium were liquidated from ETFs. 397,000 ounces of platinum were also liquidated from ETFs in the same time.
These liquidations represent as much as 18% of all the precious metals held by ETFs worldwide.
Combined, that’s more ounces of PGMs than the 751,560 ounces the company sold in the past year!
So why did these ETF liquidations cause a drop in the platinum price?
Well, simply, because they flooded the market with supply.
ETFs have to buy the physical metal, and store it in a vault as long as investors hold ETF units.
When investors sell ETF units, specifically when it’s a large scale liquidation like this, the ETF issuer needs to sell the physical metals again.
So, in the span of four days nearly a million ounces of PGMs were liquidated and sold. This flooded the PGM market and sent the prices of these metals crashing.
But that’s exactly the thing… These ETF liquidations are ‘artificial’ supply. Once they are sold into the market that’s it. They can’t be replaced. Next year the gap will need to be filled.
All the platinum price needs is a little more demand and then it’ll soar!
According to the World Platinum Investment Council the platinum market has had three consecutive years of supply deficit.
Simply put – the world used more platinum in the past three years than it produced.
Even though the world is using more platinum than it’s producing; the platinum price hasn’t skyrocketed as you’d expect.
The liquidation of ETF stockpiles have depressed the price. But as these stockpiles dwindle the supply will become seriously constrained.
2015 forecasts for platinum show there’ll be a further 235,000 ounces supply deficit from mining this year. And this means that stockpiles are slowly but steadily being depleted.
Stockpile levels are now at about 4-6 months’ worth of production.
It sounds like a lot. But here’s the kicker – a single three month strike like the one we saw last year would be enough to decimate platinum stockpiles…
All platinum needs is the failure of one of the majors for massive upside potential!
Literally the only thing the platinum market needs right now is for a major platinum producer such as Lonmin to fail.
Or even for a company like Anglo Plat or Impala to cut production steeply.
That’ll put the platinum market in a massive deficit position that mere liquidation of ETFs and other stockpiles won’t be able to stop.
This is definitely something worthwhile to keep your eyes on… Any mine closures in the platinum sector will be massive positives for the metal, which is now at its largest discount to gold in years…
Here’s to unleashing real value
Editor, Red Hot Penny Shares