Objective Capital Precious Metals, Diamonds and Gemstones Investment Summit: Panel Discussion: Outlook for the Precious Metals Markets - David Wilson

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Objective Capital Precious Metals, Diamonds and Gemstones Investment Summit Panel Discussion: Outlook for the Precious Metals Markets 20 May 2010 by David Wilson - Societe Generale Bill Fisher - RX Exploration David Hargreaves - Fair Trade Gemstones

Text of Objective Capital Precious Metals, Diamonds and Gemstones Investment Summit: Panel Discussion:...

  • 1.PRECIOUS METALS, DIAMONDS & GEMSTONES INVESTMENT SUMMIT 2.00 2.40 Panel Discussion: Outlook for the Precious Metals MarketsDavid Wilson Director - Metals Research, Socit Gnrale Bill Fisher Director, RX Exploration Inc David Hargreaves CEO, Fair Trade Gemstones THE LONDON CHAMBER OF COMMERCE AND INDUSTRY THURSDAY, 20 MAY 2010 www.ObjectiveCapitalConferences.com

2. An overview of Platinum market driversMay 2010David Wilson Director Metals Research david.wilson@sgcib.com +44 (0)20-7762-5384 Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains aCONFIDENTIAL research recommendation ( recommandation dinvestissement caractre promotionnel ). 3. 2 Platinum is still in surplus, but rising mining costs and improving sentiment in autos in particular should support prices 000 oz 000 oz10 00012009 0008008 0004007 00006 000-4005 000-8004 000-120019992000 20012002 20032004 20052006 20072008 20092010F2011FS upply Demand Balance, rh scaleSource: GFMS & SG Cross Asset Research Platinums surplus (prior to ETF investment activity) is increasing due to: A recovery in South African production. Increasing supply from other areas including automotive scrap The recent falls in automotive demand, which will take a long time to be recouped Bullish longer-term fundamentals (non-OECD demand vs. maturing supply). 4. 3 Global platinum inventories are estimated to have fallen by 2.4 million ounces since the start of 1999035-500 30 -1000 25-1500 -200020-250015 -3000 10-35005-4000 -4500019992003 20072011F000 ounces weeks' demandSource: GFMS & SG Cross Asset Research This is equivalent to roughly 24 weeks demand But the market has been able accommodate new ETF instruments as the balance has shifted into surplus And there is plenty of liquidity in the market With one month lease rates below 0.5%, and twelve months below 2% 5. 4 ETF net investment has taken up over a third of a million ounces of platinum so far this year, augmenting demand by an ~15% 000 oz 1 2001 000 800 600 400 2000Apr-07 Apr-08 Apr-09 Apr-10ETFZKBETF NY Source: GFMS & SG Cross Asset Research Although this interest has been distorted by the new ETF in New York Platinum ETFs have absorbed approximately 330,000 ounces so far this year With some small attrition in the ETF Securities London-listed funds, a slight increase in ZKB and over 330,000 ounces into the New York ETF If this rate of accrual were to continue then ETFs would more than absorb this years industrial surplus, but this looks doubtful 6. 5 Net speculative platinum positions on NYMEX reached a record in mid- April at 1.38 million ounces 000 oz 1 600 1 400 1 200 1 0008006004002000Jan-03Jan-04 Jan-05 Jan-06 Jan-07 Jan-08Jan-09Jan-10-200Source: CFTC & SG Cross Asset Research This is starting to look top-heavy and may point towards a short term price correction This position is equivalent to 18% of one years industrial demand And the gross long position is just off a record level and comprises 41% of total open interest, vs a 38% average over the past fifteen months 7. 6 South Africa remains the primary source of platinum supply with 76% of mine production and 64% of total Other6% Russia13% North America5% S outh Africa 76% Source: GFMS & SG Cross Asset Research South Africas major producers continue to watch the purse-strings Although the major producers are running cost profiles lower than prevailing prices, their balance sheets have been under strain And the Eskom price increases will contribute to roughly 10% per annum cost increases This is unlikely barring any extreme problems from external causes such as power loss to affect output plans, but is likely to continue to defer marginal expansion programmes 8. 7 Emission control demand remains the key to platinum, with jewellery in second place for platinum100%90%80%70%60%50%40%30%20%10% 0% 2003 2004 200520062007 2008 2009 2010 J ewelleryAutocatsOtherSource: GFMS & SG Cross Asset Research Platinum use in autocats contracted sharply in the global downturn And while recovering, will lose market share to palladium as Europe, which is platinum-intensive, continues to struggle Especially by comparison with the recoveries elsewhere and the strength in China Jewellery demand has rebounded, but now needs to consolidate and may struggle at higher prices 9. 8 China remains key to platinum demand, especially in the jewellery sector000 oz %1 80090 1 50075 1 20060 90045 60030 30015 001999 200120032005 2007 2009 China J ewellery As % of jewellery total Source: GFMS & SG Cross Asset Research Chinas jewellery demand rebounded last year and was almost certainly the second highest year on record But conditions slowed in late 2009 and the market is now consolidating in response to higher prices The countrys robust auto sector is underpinning its platinum demand, but is more important for palladium While the countrys economic growth is supporting demand in the glass and other sectors, suggesting that China is now likely to be the worlds second largest platinum consumer behind Europe 10. 9 Chinas automotive sector; palladium the primary beneficiary000 oz70060050040030020010001999 2000 2001 2002 2003 20042005 2006 200720082009 2010P latinum P alladium Source: GFMS & SG Cross Asset Research Palladium demand in the auto sector is likely to grow by more than 10% this year The Chinese auto market is not yet mature and new emission control limits are being rolled out across the country The industry is gasoline fuelled in the main and therefore much more reliant on palladium While it must not be forgotten that palladium is also now taking market share from platinum in the diesel sector 11. 10 By late April, Platinum had unwound 63% of the fall from its 2009 high, while palladium has unwound 84% of its fall P latinum US $/ozP alladium US $/oz 2 800 600 2 100 450 1 400 30070015008 0809 0910 08 0809 09 10 Apr-J ul-Oct- J an- Apr-J ul-Oct- J an-Apr- J an-P latinum P alladiumSource: GFMS & SG Cross Asset Research Price recoveries have been driven by an improving economic outlook With palladium especially boosted by the auto and electronic sectors While platinum has been boosted by improving jewellery (allied to reduced scrap return) But the majority of the recovery is now out of the way and there is a case for a mild retraction in prices 12. Platinum market to remain in surplus in 2010 (excluding investment demand) PLA T INUM 000oz 20052006 2007 200820092010f Non-Russian prim ary product ion 5,632 5,4475,0744,671 4,6004,720 Russian product ion960 948917835 840860 Ot her13 628591645 635700Fabricat ion dem and:- Aut ocat alyst ** 3,056 3,2513,2182,816 1,9502,050- Jewellery 1,792 1,6821,329736 1,8001,700- Indust rial 1,827 1,8491,9502,273 1,5001,701 Invest m ent in ETF/ ETCs 194104 384 Residual balance-70 241-217222441830Pr i ce p m f i x, $ / o z 897 1 ,1 4 2 1 ,3 0 3 1 ,5 7 81 ,2 0 9 1 ,6 5 0 * Nat ional Defence St ockpile, aut om ot ive indust ry, fut ures ex changes ** net of scrap Source: SGCIB11 13. Forecast risksUpside risks Further postponement/cancellation of expansion projects Energy related disruption at South African operations Faster than expected demand recovery in world outside China Further and higher than expected investment flows (into ETFs)Downside risks Slower than expected global economic growth in 2010 / evaporation of positive investor sentiment Further palladium inroads into the diesel auto cat sector12 14. 13DisclaimerThe information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securities and including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Socit Gnrale (SG) believe it to be fair and not misleading or deceptive. SG, and their affiliated companies in the SG Group, may from time to time deal in, profit from the trading of, hold or act as market-makers or act as advisers, brokers or bankers in relation to the securities, or derivatives thereof, of persons, firms or entities mentioned in this document or be represented on the board of such persons, firms or entities. Employees of SG, and their affiliated companies in the SG Group, or individuals connected to them may from time to time have a position in or be holding any of the investments or related investments mentioned in this document. SG and their affiliated companies in the SG Group are under no obligation to disclose or take account of this document when advising or dealing with or for their customers. The views of SG reflected in this document may change without notice. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein. Dealing in warrants and/or derivative products such as futures, options, and contracts for differences has specific risks and other significant aspects. You should not deal in these products unless you understand their nature and the extent of your exposure to risk. This research document is not intended for use by or targeted at retail customers. Should a retail customer obtain a copy of this report they should not base their investment decisions solely on the basis of this document but must seek independent financial advice. Important Notice: The circumstances in which this publication has been produced are such (for example because of reporting or remuneration structures or the physical location of the author of the material), that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketin