Last week commodity stocks dived as the sector was rocked by both Beijing reining in an over-heating Chinese economy and Australia’s new 40% super-tax on resource company profits. However, the precious metals sector remains red hot – gold recently hit an all-time high over $1,200 per ounce. But that’s because momentum investors – who chase price movements, rather than value – have been blindly piling into safe-haven assets. And it’s not only the yellow metal that’s being snapped up. Aquarius Platinum, a miner based in South Africa (80%) and Zimbabwe (20%), has seen its stock rocket an eye-popping 400% over the past 18 months. That’s thanks to a doubling in the price of platinum and palladium – metals used heavily in catalytic converters to reduce carbon emissions.
The ‘cash for clunkers’ programme lifted demand, but this type of stimulus measure is now being withdrawn. So it seems to me that recent price rises are not simply down to improving demand from Asia, nor to a resurgent car market. Rather, the key factor behind recent price spikes is rampant speculation.
But this is only part of the problem for Aquarius. As well as being tied to the metals bubble, the miner is also exposed to substantial geopolitical risk. All of the firm’s assets are located in countries where labour strikes and power stoppages are commonplace. Indeed, its mineral production could soon be affected during the Football World Cup if, as I suspect, electricity has to be rationed in South Africa.
Aquarius Platinum (LSE: AQP), rated a BUY by Deutsche Bank
Worse, there are even rumours that Robert Mugabe will shortly introduce sweeping new ‘snatch-and grab’ laws (under the Indigenisation Bill) in Zimbabwe. As a result, foreign owners may be forced to hand over 51% of their local businesses to employees.
Aquarius’s shares are far too expensive, trading on a stratospheric 33 times 2010 p/e multiple, while only offering a 1% dividend yield. Given all that, I would rate the stock at best on eight-times through-cycle earnings before interest tax depreciation and amortisation. That generates an intrinsic worth of 250p per share, or around 35% below today’s level.
True, demand for catalytic converters will be boosted by new American and European emission standards. The trouble is that huge efforts are being made to replace the platinum used in industrial processes with cheaper materials. And as Australia has demonstrated, the whole sector could soon become a rich seam of tax receipts for many cash-strapped nations.
Recommendation: SELL at £3.80
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments