Platinum Group Metals (NYSE: PLG/TSX: PTM) is about to fly. Back just 90 days ago I wisely bought PLG (prices will reference PLG versus PTM as I’m a US investor) shares at just $1.10-$1.14 per share, literally scraping all time lows in price. However, I then foolishly flipped out of my shares within 2 weeks, way too early. I was fooled on the power and shift of precious metals entering a new bull market after a nearly 5 year bear cycle. My strategy on gold stocks has been steady and I’ve taken almost no profits on gold holdings since the enormous surge of 2016. But platinum I have less commitment to and knowledge of, however, the value here may even be greater than gold. From 2000-2010 roughly, it took almost 2 ounces of gold to buy one ounce of platinum. Now, the ratio requires 1.2 ounces of platinum to buy one of gold, indicating value in platinum (the gold to silver ratio has been at multi decade extremes as well and points to a favorable time for silver performance going forward relative to gold).
But we don’t really need to say more than that about the ratio because of the special value and tremendous assets PLG controls. We’re about to see the company embark on significant production after years and about $500 Million in exploration and development costs being deployed. PLG has mostly funded development through equity and has less than $100MM of debt on the books. Their low cost Maseve mine was commissioned in February 2016 and is now entering production, which is exactly when you want to invest in a mining company (the other time being into a discovery cycle). This is a 10 million ounce deposit when including proven, probable, and M&I reserves, which is not small.
The company is forecasting 116,000 ounces of platinum production this year, 185,000 in 2017, and a steady state of 250,000 ounces annually with a 20 plus year mine life. Combined independent life of mine cost averages out at $625 per ounce, leaving room for serious cash flows. In addition, the company’s Waterberg project (these are both in South Africa) has 35 Million ounces of indicated/inferred platinum already! This is a monstrous project in which PLG owns 54%. I’ll get a bit into economics and potential valuation metrics shortly but first take a look at the charts.
This daily chart clearly shows a bullish triangle pattern at the end of its road. We will see a breakout either up or down within hours/days. 70% plus of patterns like this continue in their primary trend, which is now UP for PLG. You will see a sweet combo of MACD just turning up, a 2 month digestion/consolidation of big gains, and an RSI near 50, leaving lots of room to run when it busts out.
Are we “chasing” a stock that already tripled? No. And that’s the biggest mistake that investors are making right now in my opinion in the precious metals mining complex, you just don’t get it. We have begun a new cyclical bull market in precious metals and mining stocks and there is a LONG way to go on the upside. Eventually we will have a sharp pull back and buying opportunity but it isn’t happening like people thought/hoped. Let’s simply step back and look at the ten year chart here to gain some perspective of how bombed out this stock had become:
The chart is a little busy, but let me point out a few key points. Accounting for a big roll back the company did over a year ago, the share price was $45 per share in 2007 and $30 in early 2011. The long term down sloping blue trend line is circled in the $8-9 area, which is where I think the share price is going just on a mean reversion. But remember, 5 years ago this project was FAR from where it is now, entering strong and growing production into a likely rising platinum price environment. Conceivably, this company is worth twice what it was 5-7 years ago, or more, when simply looking at reserves, CAPEX, exploration success, and overall development.
In late 2013 I actually met with CEO Michael Jones in Vancouver in their offices. We have a mutual friend and the company was already on my radar because of their terrific assets. However, even though greatly impressed with Mike and PLG, I avoided the stock for over 2 years due to the sense that the sector had more washout coming, evidenced by repeated technical breakdowns. But during tax selling season late in 2015, I said to myself “this is insane”! I believe PLG will prove to be a multi bagger return for long term investors. In the short term, the stock is about to breakout and we should see fresh 52 week highs rather quickly. Some resistance at $5 and $6 will occur, but I don’t expect strong resistance until we hit the long term trend line at $8-10 or so. $8-10 is my price target range by year end 2016, which is just under a triple in just 7 months. I know this seems quite aggressive but precious metals stocks are volatile, they can produce horror on the downside and shock and awe on the upside! “Conservative” traders can enter upon a breakout of the triangle pattern and lock in a nice 30-40% return by selling around $4.75.
I’ll be publishing a more analytical report on Platinum Group Metals in May so be sure to sign up for our newsletter for updates in the box below. For “back of the napkin” sake, let’s look at 35 million ounces in the ground at Waterberg. In a more normalized market for platinum development stage assets, which is where we are headed, $50 an ounce in the ground is reasonable. That’s $1.75 Billion, giving PLG’s majority ownership a nearly $1 Billion value alone. Cash flows on Maseve, giving $150-200 an ounce cushion on costs, should be about $30MM per year. A growing assets/production profile should command 20X those earnings, or $600MM in year one, yet more than doubling within 24 months. You can fairly extract a $1.5B valuation on PLG right now giving further reduction to these very generalized numbers. But if the price of platinum rises from the $1,050-$1,100 an ounce area, the leverage goes through the roof.
PLG is a terrific speculation in the low to mid $3’s. It is a great way for investors to own platinum at a very cheap price per ounce and technically the chart is extremely bullish. Next report I will show sector comps, which glaringly shows that the market is not valuing PLG’s assets fairly. But make no mistake, these are world class assets and this company’s stock and platinum will shine once again!
The most recent investor presentation can be viewed here:
I am long shares of PLG and may choose to buy more or sell without notice
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