Platinum is one of the world's most precious metals. Bernard Loriol Best Asset Class spoke to Mike Gallagher about investing in precious metals
Bernard Loriol is the founder and managing partner of Best Asset Class (BAC), which is a Swiss mutual fund predominantly interested in the precious metals sector, particularly platinum. Before launching BAC, Loriol worked in the hedge funds business development department at Harcourt AG in Switzerland and before that was head of the institutional investor division at Darier Hentsch in Geneva.
Can you tell us something about your plans for the Middle East?
We have just created a joint venture here and Cyrill Moity, our director of Middle East operations will be working from here. We expect to get approval for the distribution of our Swiss mutual fund here soon. Now that we have one product that is a success story, we are going to launch a new one, which is an Africa natural resource fund. To my knowledge there is one fund every month that is launched on Africa, but ours is the only one that is going to be purely on natural resources.
You are aiming for returns of 15 per cent. Why did you pick that number?
I based my average returns on the Gold 2000 fund as it has an excellent track record going back eight years. It has average returns of around 27 per cent a year. What I wanted with this fund, because the volatility is quite high, was to reduce the volatility and therefore I was expecting less of a return. By having a target of 15 per cent, I figured I could reduce the volatility from 28 per cent to 15 per cent. So far I have missed the volatility target, but the investors are very pleased with that because the returns over three years have been over 53 per cent after performance fees. The investors are happy when the volatility is on the upside.
Why do you concentrate mostly on Southern Africa?
Because South Africa produces 79 per cent of the world's platinum and 99 per cent of the world's platinum group metals are below 2000 metres there. The veins of platinum can start near the surface and go down as far as 8000 or 9000 metres. The Bushveldt complex where we operate is a little larger than Switzerland and is part of the Witwatersrand area of South Africa which produces two thirds of the world's gold.
It also has the majority of the world's platinum group metals, such as palladium, rhodium, ruthenium, osmium, and iridium, as well as one of the biggest chromium deposits.
The region has an immense amount of natural resources. The diamonds are in Botswana on one side and the platinum and gold deposits on the other side. There is also the copper belt in Zambia and the Congo. Then there is uranium and diamonds in Namibia, so there is an unbelievable mineral wealth in the region.
So it is about the concentration of natural mineral wealth in the region?
If you take the economic value of this part of the world and there is about 5 grams of platinum per tonne of ore, then it is relatively easy to estimate the value of the platinum deposits, because there are no big surprises in terms of geology in the region. They are worth about $30 trillion. There is about 48,000 tonnes of platinum and we produce 250 tonnes a year. It is the same value as the combined oil reserves of Saudi Arabia and the UAE together.
What are the major investment themes?
One concerns the emerging markets of China and India. The Chinese stock market is trading at around 60 times price to earnings, while the platinum producers are trading at around 15 times price to earnings, and China has no platinum at all. The Indian stock market is also booming. In 1999 China consumed 1 per cent of the world's platinum, and that has risen to around 28 per cent in eight years. In five years time they will consume more than one third of the world's production. They need platinum for jewelry and China is becoming the number one consumer of jewelry, especially as its economy takes off. Jewelry demand in China increased by 53 per cent in August.
But platinum is still not as well known as gold. Why so?
It has a lot do with marketing. Anglo Platinum, for example, I believe spent just $45 million on its marketing budget, which is very small for a luxury brand, compared to what is spent on gold, which must be billions. Spending $3 million on a single, targeted campaign will produce an immediate reaction. They could be very aggressive and hire the likes of Brad Pitt or other high profile figures.
But platinum is also in demand by the car industry. What is the future there?
The demand for platinum for car catalysts is extraordinary and the platinum producers have realised that they cannot control it anymore because environmental legislation in places like the European Union means that demand for platinum is increasing for catalytic converters to control vehicle carbon emissions.
If, at the federal level, governments all over the world applied the California environmental vehicle emission laws, then car producers would be in serious trouble because the average car needs $200 worth of platinum for the standard catalyst in the average car. However, US cars tend to be bigger, on average, than European or Japanese models and that means they would need more like $700 of platinum to meet the California laws.
How will this affect the average car user?
There is the issue of diesel. Higher gasoline prices mean that consumers are going to be forced to use diesel and diesel has higher emissions. Only 3 per cent of cars run on diesel in the US, compared to 50 per cent in Europe.
UBS launched a study which predicted that by 2015, 15 per cent of cars in the US will be running on diesel. Using diesel reduces consumption by 20 to 30 per cent. The consumer is becoming more environmentally aware, so the push for environmentally friendly types of transport is increasing and with them, the demands for more efficient catalysts. Companies are looking at hydrogen fuel cells and they currently use around 60 grams of platinum.
What is the risk of substitution of the catalyst technology at the moment?
The risk is very small because the future is hydrogen and at a time when the car industry is struggling with a 2 per cent profit margin, if a car manufacturer has a decent research and development facility and makes a major effort on fuel cells, then it will make a huge difference to their profit margins. Catalysts are going to be around for at least another 25 years and manufacturers will also refine the technology used in them as well.
Today the cost of hydrogen production is far too high compared to oil. But high oil prices are going to force producers to look at alternatives. There will eventually be a balance. There will be 1.2 billion cars on the roads by 2020 and we are at 800 million at the moment. If you multiply 1.2 billion cars by 60 grams of platinum for hydrogen fuel cells in each car, then 72,000 tonnes of platinum will be needed, but there is only 48,000 tonnes in Bushveldt, we produce 250 tonnes of platinum and there is no stockpile.
Why so bullish on precious metals?
First, the dollar will continue to drop. The dollar is just a measure of the decline of America, and it is not going to stop there. It is okay for some Americans as long as it is not a collapse, so it will not create a crash like it did in 1987. They are okay with a weaker dollar. It will help to correct a weak trade deficit. We have also hit the turning point on real estate and this will have an impact on inflation. According to Alan Greenspan, inflation might come back in five years time. We hear about all these prices of food and energy and commodities and they are also having an effect on inflation.
One estimate said real estate prices in Europe could fall by 30 per cent in the coming two years, while the Schiller index estimated that they might lose 50 per cent of their value. People have traditionally invested in real estate as a hedge against inflation. The US real estate market is $20 trillion, and compare this to the $30 trillion market of the Bushveldt.
© Banker Middle East 2007
