The struggles of gold and silver miners are widely known. Although each has recently gained some steam, the Market Vectors Gold Miners ETF (NYSEArca: GDX) and the Global X Silver Miners ETF (NYSEArca: SIL) are still saddled with year-to-date losses of 45.1% and 46.2%, respectively.
Not only have fallen gold prices dragged miners down, but there are increased concerns that those lower bullion prices are eating into miners’ profitability. According to Thomson Reuters GFMS data, at current price levels, around 50% of global gold production would be unprofitable, according to commodities ETF issuer ETF Securities. [Gold Mining ETF De-Rating or More to Come]
In the futures market, things have been better for platinum and palladium. The ETFS Physical Platinum Shares (NYSEArca: PPLT) is down 9.2% year-to-date, which is at least less bad than its gold and silver equivalents. The ETFS Physical Palladium Shares (NYSEArca: PALL) is higher by 5.5%. Strong automotive demand is helping platinum and palladium outpace gold and silver. As consumer confidence and the U.S. economy improves, pent-up demand has helped fuel auto sales, which could also support platinum and palladium prices later this year. [Higher Car Sales Could Boost Palladium ETFs]
That has not mean much for the First Trust ISE Global Platinum Index Fund (NasdaqGS: PLTM). The small PLTM (just $9.8 million in assets under management) is the GDX of platinum and palladium miners. And like its gold and silver peers, PLTM has tumbled this year with a loss of 24.5%.
However, PLTM shares something else in common with gold mining ETFs: The fund is starting to rebound, up 6.5% since its June lows. A recent two-day rally in platinum futures helped spark some upside for PLTM. [Platinum ETFs See Two-Day Rally]
Despite the recent bullishness, PLTM still spins a cautionary tale. Like gold miners, platinum miners are facing intense cause issues. “According to ‘Implats’, average extraction costs increased 23% to 15,957 rand ($1,766) an ounce for the nine months through March from a year earlier.This implies that at today’s platinum price, Implats is losing close to $300 per ounce produced,” said the Sprott Group in a note posted on Zero Hedge.
That note was posted on May 23 and PPLT is down 2.7% since then, implying some of PLTM’s 19 holdings may still be losing money on platinum production. Sprott noted that cash flow return on operating assets, the true metric of return on invested capital for platinum metals miners, was stellar during previous boom times for the metal, such as 1999-2002 and 2006-2008.
“In 2012, the CFROI in the platinum sector of South Africa’s economy was a miserable -0.6%, the lowest return on capital since 1992,” according to Sprott.
South Africa is the world’s largest platinum producer and the second-largest palladium producer behind Russia. Those two countries combine for 39.5% of PLTM’s weight with South Africa alone garnering a weight of 30.3%. That means the country’s platinum miners must find a way to increase profitability and do so quickly so PLTM can sustain its recent bounce.
ETF Trends editorial team contributed to this piece.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.