Rhodium: Is something unusual going on?
Rhodium prices tell an interesting story that is attention worthy. Around this time a year ago, at the close of trading on 21st January 2020, rhodium prices were at US$9,400/troy oz. Just three months earlier, a troy ounce sold at US$5,550. As at the close of trading on 15 January 2021, the price of rhodium is US$21,500/troy oz, twice its price a year ago.
Prices have increased at a monthly average rate of 11% since January 2020, the highest month-on-month average growth occurring in February of 2020 at 33.5%. Average prices so far this month have grown 14.3% from the December 2020 average.
What is rhodium and what is it used for?
Rhodium is one of the six-member family of Platinum Group Metals (PGMs) which include palladium, platinum, iridium, osmium, and ruthenium. Its most common use is for the production of catalytic converters and emission control catalysts particularly in motor vehicles. Typically, about 80% of the mined metal consumed globally is used in the automotive industry and mainly for the reduction of nitrogen oxides in exhaust gases.
Other uses include:
For glass manufacturing, the second most common use for the metal, particularly in producing flat-panel glass and fiberglass;
Electroplating and coating (‘rhodium flashing’) on platinum or gold to provide a reflective surface, or on silver to protect it from tarnishing;
As an industrial catalyst, particularly in chemical reactions of acetic acid, nitric acid, and hydrogenation reaction;
For the creation of alloys, where it is used as an agent with other PGM metals such as palladium and platinum to make the alloys tough and resistant to corrosion;
For optical instrument manufacturing, where plated rhodium is applied;
In mammography systems, as a filter in X-ray production; and as
Neutron detectors in nuclear reactors.
Where do you find it?
South Africa is the largest producer, accounting for over 80% of global supply. Russia is the second largest producer, accounting for under 10%.
Why are prices on the up?
Mining output from PGMs is a main contributor to the price increase. In particular, disruptions in South African production have caused output to drop significantly.
It is estimated that 2020 output from South Africa alone dropped by around 20%, forcing producers to participate more actively in the open market as buyers in order to meet contracted volumes.
Another contributing factor, despite the negative impact of global economic restrictions in response to the Covid-19 pandemic, has been an increase in demand for catalytic converters in the automotive industry. Stringent emission regulations across the globe and growth in automotive manufacturing in Asia have been major contributing factors.
Rhodium prices are known to be volatile. This is not the first time that prices have experienced such spikes, albeit not to current heights even when adjusted for inflation. Its rarity and output dominance by one country imply that any disruptions in South African production could significantly affect supply and prices. Another factor worth tracking is the transition away from fossil fuels, particularly in the automotive market. A faster growth in the manufacturing of electric cars, in addition to more aggressive climate change policy on internal combustion engine emissions, will reduce the demand for rhodium and apply some downward pressure on prices.
December 2020 – Gold
While 2020 remains a questionable year for many, gold has had a bit more of an exciting time: With a trading average of just under $1,400 per troy ounce last year, prices this year reached a whopping $2,000 in the summer months. This was largely driven by uncertainty across all markets caused by fears of a second wave of the Covid-19 pandemic. It is not unusual that during times of rising uncertainty and turmoil, investors run to gold as a safe haven. Earlier this year, Bank of America predicted that prices will reach around $3,000 an ounce by early 2022, driven by interests from central banks and exchange traded funds. Anyone remember the lyrics to that song by Larry Gatlin, “All the gold in California is in the bank...”?
Even before the onset of the pandemic, several analysts had predicted a bull market for gold. However, as at the time of this writing, some of that excitement had died down a bit, with prices per ounce now around $1,870. So, what next for gold?
Prices drive production, production drives prices
Gold exploration and production is expensive and as such, it is very sensitive to commodity prices. In fact, metal price is the most significant factor that determines whether a gold mine is economic or not. When the price of gold is low, mining operations tend to slow down. This then leads to an overall reduction in supply which consequently leads to pressure on prices to increase.
The dynamics of production supply and market demand are crucial for all commodity prices but gold is more complicated. Prices are also impacted by inflation, central banks’ vault demands, real interest rates (particularly those in the USA), demand from private investors through exchange traded funds (ETFs) and US dollar exchange rates. Outside of inflation-protection, investment and jewellery manufacture, the demand for gold is also driven by its uses in the manufacture of electronics and medical devices.
Production in Africa – the top 5
Ghana beat South Africa as the largest producer of gold on the continent after mining over 140 metric tonnes of the precious metal in 2019.
Earlier this year, Sudan removed the restriction on private traders exporting gold with a hope that this will curtail smuggling and attract foreign currency investment. Before this, any gold in the country had to be sold to the central bank (at a fixed price) and only they could export gold. Feel free to look up the lyrics to Larry Gatlin’s song referenced in the first paragraph of this write-up and just replace California with Sudan.
Mali, Africa’s fourth largest producer of gold, had its government dissolved by military coup as we marked the end of summer this year. Coupled with the uncertainty and turmoil this brings, miners exposed to the region have seen their share prices tumble albeit some say that operations are currently unaffected.
According to NS Energy, Burkina Faso’s 62 metric tonnes of gold produced in 2019 makes it the fifth largest gold producer in Africa. Canadian listed Endeavour Mining has continued to expand in the country. Earlier this year, they merged with Semafo (also Canadian listed). They are currently in talks to acquire Teranga Gold to add to their operations in Burkina Faso.
What next for Gold
If the 1981 forecast of Bert Dohmen, an analyst and trader, is anything to go by, we should expect gold prices to continue to rise until 2030. The current drop in price should then be seen as just a temporary dip and prices will continue to rise. In fact, Rikards, in an interview this summer, projected prices could reach $15,000 per ounce by 2025. The view was that the dynamics which will put pressure on gold prices were unlikely to change anytime soon: interest rates will stay low for the foreseeable future and the value of the dollar will fall.
Other analysts have more modest views with Bank of America targeting $3,000 per ounce by 2022 and City group expecting $2,300 by summer 2021. However, the position on the macro-economic factors remains consistent.
For further analysis, contact us @BargateAdvisory
November 2020 – Nigeria
Last month, Bargate’s advisory board chairman, Dr Ekpen Omonbude, attended a budgIT webinar and discussed the 2020 Nigerian Petroleum Industry Bill with fellow industry professionals. Below are some of our initial thoughts and observations regarding the fiscal framework of the Nigerian 2020 Petroleum Industry Bill.
The global oil and gas industry is experiencing interesting times. Oil prices are no longer climbing the exciting heights once reached before the collapse of 2014-2016. There is talk of a new normal, in which prices are expected to hover around US$45-50 per barrel for the foreseeable future. This has in turn affected capital expenditures from the international oil companies (IOCs) who are in stiff competition to outwardly demonstrate who is more green/sustainable. Fossil fuel is simply no longer an attractive proposition in so far as climate change is concerned and this is demonstrated in the ongoing energy transition being experienced. Any oil producing country considering this kind of backdrop would seriously have to reimagine the manner in which it would continue attracting investment into it, and the manner in which it would continue relying on the sector for revenues. This is a context that the Nigerian Government’s 2020 Petroleum Industry Bill ought to reflect, given its main challenges, namely its need for funds and its need to keep the industry attractive.
The stated objectives of the Bill appear well intentioned. They are listed as:
A progressive fiscal framework that encourages investment
A forward-looking framework based on core principles of clarity, dynamism, & fiscal rules of general application
A framework that expands the revenue base of the Federal Government while ensuring a fair return for investors
Simplification of the administration of petroleum tax
Promotion of equity and transparency in the fiscal regime
It is always helpful to test such objectives against actual results, where possible, and/or against core oil and gas taxation principles such as simplicity, reasonable state take, assurance of fiscal receipts, international competitiveness, neutrality, transparency, and prevention of leakage.
The meat of it
The petroleum royalty system as envisaged by the Bill could be a lot simpler. It has the standard fare of lower royalty rates for higher risk fields (such as marginal fields, frontier basins and deep offshore), and higher royalty rates for lower risk fields (such as onshore or shallow water). It also has a very low and very competitive suite of royalty rates for natural gas (the highest rate being 7.5% for onshore areas). It is fairly obvious that the Government is keen on gas. Where it gets unnecessarily complicated is in the addition of a price-based royalty calculation, charging up to 10% additional royalty in circumstances where the oil price gets to US$150 per barrel. This, in the context of the new normal highlighted earlier, might prove a redundant instrument. And it is particularly interesting to note that this added component is earmarked for the benefit of the Nigerian Sovereign Investment Authority (NSIA).
The introduction and applicability of a Hydrocarbon Tax appears clear. It will apply to onshore, shallow water, deep offshore, crude oil, condensates and natural gas liquids (NGLs) from associated gas. It will not apply to associated and non-associated gas, condensates and NGLs, and frontier acreage. Our understanding is that this Hydrocarbon Tax would eventually replace the Petroleum Profits Tax. The deep offshore tax rate is the lowest at 5%, and a distinction is made between rates for new licences and rates for existing licences converted to then be subject to this new law. The highest Hydrocarbon tax rate is 42.5%, for existing onshore operations converted under this new law.
The fiscal system also introduces an additional chargeable tax, which appears confusing. It provides for an additional chargeable tax to be payable in certain circumstances, but the conditions for calculating the tax liability can be better framed.
The Bill includes a production sharing system, which is straightforward. There are two cost recovery ceilings (70% for new licences and 60% for existing contracts converted under this new law) and six different profit-sharing thresholds based on cumulative oil production per field. The production shares apportioned to the Government based on these thresholds range from 5% if cumulative production is less than or up to 50 million barrels, to 45% if cumulative production is beyond 1.5 billion barrels.
On initial analysis, the level of fiscal burden imposed by these new instruments can be as high as 90% in the case of converted licences operating onshore, and as low as 22% in the case of converted licences operating deep offshore. For new licences, however, the level of fiscal burden is much lower for onshore operations at around 61% but comparatively higher for deep water operations at about 32%.
It is important to note that the only significant dedicated fiscal instrument itemised in the Bill for natural gas operations is the royalty. This further underscores what appears to be a clear policy push for expanding natural gas investments.
The envisaged fiscal framework somewhat achieves its goal of progressivity, but it does not do so through the additional chargeable tax nor does it do so in periods of sustained low oil prices. Instead, it relies on increments from the royalty by price component in order to raise the level of fiscal burden if prices change. That said, the system as envisaged by the Bill provides an incentive to keep costs down: state take reduces when project costs reduce. This is an important reward for achieving cost efficiency.
Good intentions, but likely poor outcomes
All said, the objectives of the Bill as envisaged do not score well on simplicity, a reasonable state take, international competitiveness, neutrality, and prevention of leakage. They do, however, score well on assurance of fiscal receipts, progressiveness (albeit based on the imposition of a heavier pre-tax burden), predictability and transparency.
Contact us @BargateAdvisory to learn more
October 2020 – Burkina Faso
Not so long ago (circa 20 years), Burkina Faso’s economy was pretty much described as agriculturally based, with the sector employing around 80% of the working population. Recently, however, it has enjoyed somewhat of a mining boom: Gold is the most mined mineral and it is reportedly found in every region of the country, from the southeast to the northwest.
This year, Canadian listed Endeavour Mining merged with Semafo (also Canadian listed) to create what is arguably the largest Gold miner in the country. Word on the streets is that the combined group are seeking a London listing. Other players in the gold space include Roxgold and Thor Exploration, both also Canadian listed.
Trevali, (again, Canadian listed – there may be a trend here) currently operates the only base metals mine, Perkoa Mine, in the country and its CEO recently described Burkina Faso as having “one of the richest zinc ore bodies in the world.”
Here at Bargate, we think the mining sector in Burkina Faso is worth a closer look even with the security concerns and a pending Presidential and National Assembly elections coming up next month.
#gold #mining #africa #burkinafaso
Contact us @BargateAdvisory to learn more
September 2020 – Nigeria
Ahead of the Nigeria Mining Week this October, Bargate Advisory’s UK MD, Ugo Isiadinso attended a “virtual aperitif” of sorts to this conference, a webinar on driving investment to the mining sector. We heard from the Minister of Mines and Steel Development, Arc. Olamilekan Adegbite; the Executive Governor of Nassarawa state in Nigeria, Engineer Abdullahi Sule as well as other industry professionals and yes, we are somewhat convinced of the seriousness with which this industry is being looked at!
So, what has been happening? you ask!
Okay, in 2017, The World Bank’s Board approved a $150 million credit line to enhance the contribution of the mining sector to the Nigerian economy.
Nigeria spent the last few years enhancing the resources of its mining cadastre. We have checked it out and we think it’s actually decent. Furthermore, the ministry’s ‘National Integrated Mineral Exploration Project’ has the primary objective of generating integrated Geosciences information. We think there is evidence here that the ministry believes data is king which is what it should be!
On a fiscal policy level, the sector is being teased with tax holidays of 3 – 5 years for “would-be” investors and duty waivers on importation of mining equipment. As per infrastructure, rail links and/or water ways are also being developed to support the sector. There are also various projects in train to formalize the artisanal mining sector. Here at Bargate, we have a cost effective power solution for mining which we are prepared to discuss.
With respect to the private sector;
Australian listed, Kogi Iron (ASX: KFE) continues their iron-ore Agbaja Cast Steel project and, as at last month’s reports, is in the process of conducting trial mining on site.
Also last month, Canadian listed, Thor Explorations (THX:TSX-V) reported results from its drilling program in Osun state, Nigeria and they are scheduled to pour first gold in Q2 2021.
Now this one is interesting: Japaul Oil & Maritime Services Plc, plans to raise $70 million to fund its "reassignment” from an oil and gas services company to a mining company.
Bargate will continue to keep a close eye on the developments of this sector.
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