ANGPY - Anglo American Platinum: Conceivable That Markets Are Missing The Big Picture

2023-10-10 10:00:53 ET

Summary

• Palladium and platinum prices have fallen significantly, impacting Anglo American Platinum's profits.
• The decline in palladium prices is due to speculation about the growth of electric vehicles, which reduces the demand for palladium in catalytic converters.
• However, the potential for the hydrogen economy to increase the demand for platinum group metals (PGMs) could provide a boost to Anglo American Platinum's production assets.
• A revaluation of the secular story would be excellent for the stock, but it could come with more taxation by South Africa, and there is no certainty around the hydrogen narrative.
• At the moment, there is no major reason for the narrative around the hydrogen case to pick up.

Anglo American Platinum (ANGPY) is quite an ambiguous picture. While there are some possible secular trends, there are also immediate secular concerns as well as possible immediate medium term concerns. Palladium prices are falling a lot, as are all the other PGMs which ANGPY mines. The case for ANGPY is that it is producing interim income, and the intensity of PGM use for the hydrogen economy should be much higher than the current intensity of PGM use in catalytic converters if the hydrogen economy works as intended. The issue is of course whether hydrogen will take off at all in the end. If it doesn't, most of the PGMs become a terminal proposition since the majority of their current use cases are for cars.

PGM Prices Since H1

Palladium and platinum futures are down around 30% and 20% respectively YTD, and 18% and 10% since H1. There are a couple of reasons for this. The first is general commodity deflation related to caution around the global economy. Also, there are likely unwound hoarding effects since Russia has not addressed its palladium reserves in any retaliatory geopolitical measures.

But the main reason for the decline of palladium in particular, which is much more dependent on automotive than platinum, is the longer term speculation that the growth of share of EVs in the global care fleet renders the autocatalyst demand rather terminal . It's a major issue for a commodity when markets are confident that it is a terminal case.

Hydrogen Case

On the other hand, that also means that a revision in that rather dismal expectation could be massive, as it introduces a large horizon into the value of production assets for palladium and platinum and the other PGMs.

The only thing of which we're currently aware that could change the narrative , and have been for more than a year, is the advent of the hydrogen economy which will require large amounts of PGMs in all parts of the value chain. ANGPY is finally focusing on t his in its quarterly disclosures now .

PGMs are going to be needed for:

• The fuel cells themselves
• Any instruments to detect hydrogen leaks (leaks took out the Hindenburg)
• All storage terminals
• All pipeline and transportation equipment

In our article on the economics of PGM utilization for the hydrogen economy, we calculated that in order to power a fleet of cars on hydrogen rather than ICE, that transition would 4x the demand for PGMs. Then the material intensity of the infrastructure further adds to the demand, probably at a much higher quantum than just the demand for the hydrogen fuel cells.

Considering that most PGMs, especially rhodium and ruthenium, see almost 80% of their demand from cars, with palladium being more than 75% used in catalytic converters, that 4x in intensity just in the theoretical ICE to hydrogen shift gets mostly translated into new incremental demand. Then there's the infrastructure, and not to mention all the other uses for hydrogen fuel cells and energy.

Bottom Line

The problem is that while there are billions being ploughed into every renewable opportunity under the sun, not all of them are necessarily going to work. Even the most incumbent renewable ideas like wind and solar, while they are going somewhere, have not at all been demonstrated as a total solution. Just in automotive , the several stages of transferring energy into different forms in order to power a car with hydrogen fuel loses a lot of energy, much more than half. But ultimately, automotive applications are only one use case among the hundreds for an energy source which gives it some other outs.

The problem is that many renewable energy solutions compete with each other for scarce resources. Additionally, PGMs have their biggest reserves in Russia. It makes sense for states to invest in them all to hedge their bets, but whether the solution involves a big market for the PGMs is unclear.

ANGPY offers a solid vehicle for owning a cash stream related to PGMs, but with continued declines in prices, a weak secular picture, and the uncertainty around the hydrogen narrative, ANGPY is not a slam dunk at all. Also, it has historically carried a warranted discount by being a South African player, with the risks of arbitrary and sudden higher taxes or other measures by government to protect incumbent interests having the potential of exogenously tanking cash flows. But mostly, it comes down to the commodities moves and the lack of an upside case except for perhaps the ongoing slow recovery of automotive volumes, increasingly composed of EV.

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