David Morgan of The Morgan Report and Silver-Investor.com is the world's foremost expert on silver and precious metals and has been for decades. He is a guest and contributor to the Ellis Martin Report.
The Ellis Martin Report Interview with Prophecy Platinum
June 19, 2013
TEMR: I'm Ellis Martin. In this segment I'm speaking with Greg Johnson, the President and CEO of Prophecy Platinum. Prophecy Platinum trades on the TSX Venture Exchange under the symbol NKL and on the OTCQX as PNIKF. Prophecy Platinum is a mining company focused on the acquisition and development of platinum group metals, PGM projects, in politically stable mining friendly jurisdictions. Prophecy's 100% owned Wellgreen property is one of the world's largest undeveloped nickel-sulphide projects with a very unique platinum and palladium resource that creates very compelling economics. Economics that you'll hear about in this interview. You'll also hear about Prophecy's near production Shakespeare Project, a nickel project near Sudbury, Ontario. Mr. Johnson has a long history in the mining sector beginning with Placer Dome, now Barrick Gold. He was a co-founder of wildly successful NovaGold and most recently helmed South American Silver. Greg, welcome back to the program.
Greg Johnson: Well, it's nice to be back. Thank you.
TEMR: For our new listeners, if you don't mind, give us a brief summary of Prophecy Platinum.
Greg Johnson: Well, Prophecy Platinum is a development stage platinum-palladium focused exploration development company. We have two projects in Canada, a world-class scale open-pittable deposit up in the Yukon called Wellgreen and then a second project called Shakespeare that's located in the Sudbury Mining District, which is the largest regional producing area in North America for platinum and palladium.
TEMR: My experience with platinum and palladium, and I've been covering them on and off for about 15 years now, relates directly to the automotive industry and catalytic converters. Do you see any change in that demand for catalytic convertors as automobiles become more "green"?
Greg Johnson: In terms of a change in demand relative to improving or increasing environmental requirements and regulations, over time the trend has been towards a greater amount of platinum and palladium, which have the catalytic activity to basically eliminate the smog and the pollutants that are coming out of the exhaust. Over time we've seen the quantity of those metals go up in order to meet higher standards. The industry has been able to achieve some reductions so better efficiency of the use of these metals, but we would expect that the trend will continue, particularly in the developing world pollution has become, particularly smog, has become such an issue. China and India would be good examples where they are going to be starting to adopt more stringent standards, which would mean more catalytic convertors, not just in the city, but also in the countryside. With the rapid increase in the market for automobiles anyways in those countries, already China is the same size market for automobiles as the United States, there's going to be, we believe significant growth and significant demand for particularly platinum and palladium.
TEMR: Even though many of us now see China as this great industrial power, compared to the U.S., there are fewer cars on the road per capita, much fewer. There's a great deal of area for growth in the automotive arena in China.
Greg Johnson: Yeah. No, it's really striking. In fact, there was a relatively recent report by Fidelity looking at automobile growth in various countries around the world. They took a look at, in that study, some data that was put together by the World Bank that looked at the number of automobiles per hundred drivers in various countries. As you can imagine the United States was near the top of that at about 90 vehicles per hundred drivers. Much of Europe was in the same area. The reference line they were using was, GDP per capita, so, kind of a wealth factor. What was striking is even though the Chinese market is as large in total vehicles as the United States, China has huge catch up potential in terms of where they sit on that curve. Currently it was showing in that study about 3 cars per hundred drivers. Their GDP per capita would suggest more like 10 if they were in trend with the other countries around the world based on GDP per capita. Just the sheer catch up to where they probably should be anyways plus the growth potential as they become a more mature developed economy is striking in terms of the number of vehicles it's likely looking at. Because their environmental standards are increasing much to deal with their smog and pollution issues, I think this is going to be a huge boom for platinum and palladium consumption, which is really the only application for catalytic convertors for eliminating those pollutants.
TEMR: Car sales here in the U.S. have gone up around 12% recently, at least they have with Ford. There's no shortage of demand here either.
Greg Johnson: It's been surprising, I think, the strength in North America. Europe has been weaker. They continue to mull around and so more vehicles in Europe are diesel Diesel engines require more platinum in their catalytic convertors so it's actually had an impact on the platinum market. It's been not as strong growth. Palladium has been by far the best performing metal in the mining space. Platinum was second to that. It's been mostly held back by that sluggish European automobile sector.
TEMR: We're seeing some occasional spikes in volatility in the platinum and palladium prices. What do you attribute that to?
Greg Johnson: Well, because of the concentration of production, particularly out of South Africa, about 75% of the world's platinum and palladium comes out of South Africa. In fact, if you add up southern Africa and Russia, it's over 90% of the world's production. There are a number of really structural features which make it a challenge for the South African mining industry to be able to maintain production. Production for platinum peaked in 2006 and for palladium mining production peaked in 2004. It's been falling in both metals since that point. In fact, if we look back over the last 6 or 7 years, production's been falling at 2% to 3% a year on average. Last year was a huge drop of South Africa. A lot of that's being driven by social unrest, strong labor unions who have been staging strikes and other events. The sheer fact that the sector, because these mines in South Africa are very deep, they're narrow horizons, which means your cost are high, you're not really able to mechanize the mining and because of the depth they're mining at a kilometer, a kilometer and a half of depth typically in these mines. Their cost structure is very high. In fact, it's been estimated that 70% of the mining industry for platinum, which is probably primarily deep South African mines are not producing an ounce of platinum at their all-in cost of production. What that effectively means is you've got a sector that's just not doing well. Companies are not going to be reinvesting into maintenance, into expansion. They're certainly not going to be developing new projects with that. Because of the inherent lag in the mining industry anyways, in terms of being able to bring new production, because it takes so much capital and time to be able to bring new mines on, this could be setting up a situation very similar what we saw in silver a few years ago when the price of silver was around $5.00 and the producers were not making money and not reinvesting in production. I think that's around the time that Warren Buffet took that huge stake in physical silver. Sure enough, a few years later that lack of reinvestment in the sector as demand continued to grow, which it typically does in these industrial metals over time with population growth and industrialization in the third world. We saw the silver price rise to the teens, the twenties, the thirties and eventually hit $50.00 an ounce before backing off a bit. Now it's currently in the $20.00 to $30.00 range. We could see a similar development in platinum and palladium because of the falling production and increasing demand that we're seeing currently.
TEMR: And so we're seeing more and more investors shift their strategy into platinum and palladium, correct?
Greg Johnson: Yeah. I think a lot of people--- they're cautious on gold. They've seen the correction in gold. I think that's shaken some investors a bit. Gold may take a little while to further consolidate before moving up. A lot of interest has shifted to platinum and palladium because the fundamentals are so much stronger, because they are a combination of industrial and investment use, but dominantly industrial. Particularly the single largest use for both platinum and palladium is catalytic convertors, which is such a strong growth market.
TEMR: Well, with production cost of near $1,700.00 an ounce in South Africa and a spot price at near $1,500.00 an ounce, are the majors turning to the politically stable and economically more friendly Canadian, Yukon?
Greg Johnson: There's no question that major producers are going to have to be looking at where they can diversify their production if they've got these issues of labor and rising energy prices and social unrest in their key production areas. Zimbabwe is also thrown in nationalization into the mix just for good measure. The challenge has been that that's been the focus of the industry in that area. That is a very enriched area. It's been one of the primary producers. There's hasn't been a lot of exploration outside of those regions, Southern African and Russia. I think there will be, but this is a situation now where there's very few development stage projects even out there to be looked at. Ours up in the Yukon is one of the projects that, with 7 million ounces, which is definitely world-class and scale already. It really stands out as a project that's unusual. Because it's also amenable to low-cost open-pit mining production, our cost structure is going to be much, much lower than these deep underground mines. We could have one of the lowest cost producers in the world. The other benefit of open-pit mining is that it's very scaleable. You can build these projects at different scales and be able to increase production. With a deposit this large and with highway access to the project and other infrastructure that's needed for development, this could be a very promising project, certainly for our company, but also for larger companies that might be interested in looking at acquisitions in the space.
TEMR: With the Chinese buying up as much as the world's commodities, especially with regards to precious metals, base metals, rare earths, et cetera. In fact, the leading country in doing so. Why wouldn't they be buying up what they need in platinum and palladium from you?
Greg Johnson: We are definitely hearing the same thing. In fact, we are hearing from Chinese groups that we're already in discussions with about the project, that they are concerned about security and supply of platinum and palladium because they recognize that South Africa is a problem in terms of being able to meet their needs. With such a large automobile industry, they need a lot of metal. We are already starting to see that interest in our projects. Because we're at a stage where we've still got a couple of more years of work to do before we'll be in a position to build them, we may see that interest express itself in investment in the company, financing of the project through to production. Those type of structures could be quite attractive. It tends to be that the groups that we're talking with on platinum and palladium, are more the end-users or even the groups that run the smelters rather than the mining companies at this point. There are also opportunities, I think, for some of the major metal producers who may not have exposure to platinum and palladium. Some of the big companies, whether they be in Asia or elsewhere, also to look at projects of significant scale.
TEMR: Well, the end-users, from my experience, are doing all sorts of off-take deals now in Australia and Canada, everywhere. The large manufacturers in Asia, they're just going right to these junior mining companies.
Greg Johnson: The off-take structure can be really attractive for a company as well because it often means you'll see this group that wants the supply of metal come in and they may buy a percentage of the project and provide, with their large balance sheets, project financing and attractive interest rates. This can be really a win-win for both the development company, ourselves, as well as the company that's looking to secure supply because it, kind of, brings the strengths of both groups to the table. The experience and expertise in mining and development on the one side with the project asset and the need for the capital to build these projects, which can be fairly capital intensive on the other side. It's a really nice structure that works, kind of, bringing both the people that need the metal along with the groups that have the metal in these deposits to the table at the same time.
TEMR: I'm looking at an article, a Sprott's Thought's article, that was forwarded to me. The title of this article is called, The Dire State of Platinum-Palladium Miners by David Franklin. In this article the phrase, perfect storm was used. I think he was referencing the political issues we were talking about in South and Zimbabwe compared to the potential in North America, but the perfect storm is really bigger than that. It encompasses everything we discussed. At some point it could all happen at once then, what?
Greg Johnson: The reality is that mining is the type of industry that you just can't build a new factory anywhere you want to and you can't build that production capacity overnight. If you have these events, and particularly the article you referred to from Sprott, where they talk about the multiple areas, the rising cost of labor, the rising cost of energy, the fact they haven't reinvested into the energy grid in South Africa and nationalization rumors, all of these factors build to have a situation where with so much production concentrated in that area, if you saw some of those mines shutdown or major changes in the ability to reach production and maintain production from some of those mines, you could have radical price increases that could be really profound. Then companies outside of South Africa would likely see the equity market respond measurably because really it's the underlying value of the metal that drives the valuations typically in the mining stocks.
TEMR: My good friend and fellow broadcaster on this network, Jay Taylor, has made a buy recommendation on your company. Very few junior companies are getting such recommendations at this time. Let's talk about that.
Greg Johnson: I have known Jay for a number of years and had the opportunity to sit down with him at a mining conference here in Vancouver recently and let him know that this is my third public company, that I switched over from silver, which we had a very nice run in silver to platinum and palladium. Particularly that I had moved over to Prophecy Platinum and we're excited about the developments on our Wellgreen Project in the Yukon and our mining project that's in Ontario. We sat down and had an opportunity and Jay had mentioned that he had followed this story for some time, that he liked the platinum and palladium dynamics. It was just a really great conversation. We provided him some information so he could do his review and due diligence. He came out with a really strong recommendation on the company. We very much appreciated that.
TEMR: We spoke about this earlier, but I want to, sort of, go back just a bit. When these off-take agreements take place for these metals, they tend to happen a few years before production begins and then you're spoken for. It could happen pretty quick. Greg, do you think that will hypothetically be the case with your company?
Greg Johnson: We have a number of options that we can look at for financing the project through the next couple of stages. Definitely off-take arrangements are very attractive. For a gold only project they're difficult because you're producing gold bars. In a project that's platinum and palladium, it's also going to come along with other metals typically, often copper and nickel and in our case cobalt as well. You've got underlying demand for those metals from smelting groups. You've got the platinum and palladium itself. A great structure with these off-take arrangements is bringing together the parties that want to secure supply of those metal concentrates and companies, like ours. It can be really a win-win scenario where you bring those deep pockets of those major industrial players to the table. It gives them exposure often time to the success of the project. They often will buy a stake in the project itself. It also gives the company access to the capital that they need to advance the project and bring it to production.
TEMR: Let's talk about how potentially undervalued your stock is and what you're doing to get the word out.
Greg Johnson: Well, the entire sector has been going through a consolidation Ellis, as I know you are aware, for the last 2½ years. Most of the equities hit, kind of, peaks sometime in 2010-2011 and have been in a correction mode or consolidation mode along with the metals since that point. We're now at a point where this is one of the longest consolidations we've seen since the market lows for the metals in 1999 and 2001. On a relative basis, if we take a look at the value of the metals mining company and the explorer/developers relative to the value of the metals today, we're at one of the lowest valuation points we've seen in the past decade or two. We're at the same levels on a relative value basis as 2008 and 2001. This is truly one of those exceptional periods in time where investors who are interested in the space are able to buy names at very attractive rates, buy at time when others are selling perhaps because they don't appreciate the overall dynamics of the sector and the needs for these fundamental metals as the world continues to develop. It's one of the opportunities where high-quality names with good management teams and good assets in safe jurisdictions I think are going to be trading at significantly higher levels in the future. This is the kind of market, if we look at both 2008 as well as 2001, where once things start to change they can move very, very rapidly. Effectively, Ellis I see the market today as mining companies and explorer/developers, such as ourselves, are trading not at what the companies are worth based on their fundamentals. They're really, kind of, trading at what people can sell them for. It's more of a volume and liquidity driven market where things are not being priced on value. When the market turns and we start to see companies once again trading on their fundamentals and their underlying value of the assets, that's when we could see a radical shift and see it very quickly where these things start to get bid up significantly above the current level. I wouldn't be surprised with this correction 2½ years already in the making if we might not be seen that move here in the near future. Certainly it appears that the GDX and GDXJ, which are the U.S.-listed Gold Miners Index and the U.S.-listed junior Gold Miners Index, which includes silver and some platinum names, it appears that they may have hit their lows. We may actually be in a position where it's establishing a bottom and we may see this move higher at some point in the near future.
TEMR: You mentioned big names, management teams and I can think of a company with a big name and a big success story, NovaGold. One of the founders of that company is the person I'm speaking with right now, Greg Johnson.
Greg Johnson: NovaGold was a tremendous success story. That was my first public company I was involved in as a co-founder coming out of having worked for Barrick Gold for the first part of my career. In that period we acquired our assets in a very similar market. If you recall we picked up our first major acquisition, the Donlin Creek Gold Mine, in Alaska in 2001. Similar to what we're looking at with Prophecy Platinum, it was about a 10 million ounce gold deposit so it was huge, world-class deposit, but the sector was out of favor. The mining companies were focusing on profitablity. They were cutting back exploration costs. These are all the same patterns that we're seeing now. The same trends where the big companies are slashing budgets, slashing projects, putting projects on hold, focusing on profitability. This is setting up for the same kind of big move, I think, in years ahead where because they're a depleting industry, as they mine their reserves basically the life of their product goes away. They have to replace those reserves with new projects or expanded reserves around their existing mines. The demand for junior companies with high-quality projects that can come into the portfolios of these big producers, it will return. It'll come back probably like it has in past cycles, in a vengeance. We'll see, really a dramatic increase potentially in the valuations of these companies as the big companies start to go out and acquire large projects that can be meaningful in their portfolio.
TEMR: This sounds very exciting, especially when you consider the need for automobiles will not decrease. It never has since automobiles were first introduced to the world. The need for platinum and palladium will only increase as well.
Greg Johnson: We're quite excited. The entire team, we've all arrived at Prophecy Platinum 6 months ago after the board undertook an executive search. We're excited to basically be here. We think the opportunity we have here is getting in at the ground level. It's very early days, but with something very tangible. It's got a resource. It's got a first engineering study. We see all kinds of opportunities on the engineering front, on the exploration front. We've been acquiring shares over the last 6 months since we've arrived. You'll see us continue to build our position. We believe in being owner-builders. We think this project and this company as an opportunity in a sector that's got fantastic fundamentals, platinum and palladium, to come to market with something really exciting. This project, with its location in the Yukon, and our second project in Ontario we think is the right type of project for an industry that's searching for projects outside of high political risk areas that can have scale and have attractive economics and low-cost operations.
TEMR: Greg, another great interview. Thanks for joining me. I look forward to having you back again soon on the program.
Greg Johnson: Thanks a lot Ellis. We look forward to being back to update you again soon.
TEMR: I've been speaking with Greg Johnson, President of Prophecy Platinum, trading on the TSX venture Exchange under the symbol NKL and on the OTCQX as PNIKF. Listen to this segment again on the podcast page of our website, EllisMartinReport.com or download the entire program on iTunes. I'm Ellis Martin.
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