Physical Rhodium Investment Case

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1 Physical Rhodium Investment Case April 2014

2 Investment Case - Summary Previous uncertainty on the strength of global economic growth and production disruptions have caused the Rhodium price to slump to a low, but RealCap believes it is an ideal time to invest in physical Rhodium based on the following reasons: Strict Emission Standards The Euro 6 emission standard for new motors comes into effect in September 2014 and is aimed at reducing nitrogen oxide emissions. Rhodium is uniquely positioned in that it is the only precious group metal(pgm) used in autocatalysts that can reduce nitrogen oxide emissions. Supply Headwinds Production disruptions are rife in South Africa, the dominant supplier of Rhodium. In addition, Rhodium supply is typically lagged due to long refinery and smelting time. Strong Rise in Industrial Demand Demand from the chemical sector for Rhodium has been rising strongly in recent years and is expected to continue in Increase in Investment Demand Investment demand for Rhodium mainly from exchange traded products will strengthen on the back of firmer industrial demand for the metal and bargain-hunting investors seeking portfolio-diversifying assets and as a hard asset store of value alternative to paper money. 2

3 Rhodium Market Rhodium(Rh) is the scarcest of the precious group metals (PGMs). It has mainly industrial application, but is beginning to attract increasing investment demand. South Africa is by far the dominant producer, holding a monopolistic market position. Rhodium is produced alongside platinum by the key South African platinum mines. Due to supply disruptions in the country primary supply from the mines has fallen while secondary supplies have played a bigger role in meeting demand. Rh demand by application Rh supply by region Autocatalyst 71% Chemical 11% South Africa 80% Glass 5% Russia 12% Other 13% N America 3% Zimbabwe 4% Others 1% Source: Johnson Matthey 3

Autocatalysts PGMs are un-substitutable components in the production of autocatalysts. Hence, demand of PGMs for use in autocatalysts is priceinelastic.

4 Autocatalysts PGMs are un-substitutable components in the production of autocatalysts. Hence, demand of PGMs for use in autocatalysts is priceinelastic. An autocatalyst is a motor component used to reduce the toxicity of emissions. Autocatalysts convert over 90% of hydrocarbons, carbon monoxide and oxides of nitrogen from gasoline/diesel engines into less harmful carbon dioxide, nitrogen and water vapour. Autocatalyst fitting has become a global requirement to curb air pollution. Today, over 95% of all new vehicles sold have autocatalysts. Emission standards are becoming stricter to improve air quality amidst growth in motor vehicle sales. Advanced autocatalysts are currently being developed to meet new regulations. This will lead to a greater use of PGMs. Source: Johnson Matthey 4

5 PGM Metal Price Trends The palladium price has outperformed Rhodium in the last 5 years. The physical Rhodium price has been the laggard, having retreated from the all-time highs seen in Stock prices of PGM companies those that are active in and derive their revenues from platinum, palladium, osmium, iridium, ruthenium and Rhodium have recently underperformed the spot price of PGMs. Escalation of labour disruptions at mines since 2012 have had a noticeable effect on the stock price performance of the mining companies. Commodity prices in USD(last 5 years) Last 5 years S&P GSCI PGM Comp. Pd Rh Source: Bloomberg 5

6 Rhodium Price Two notable spikes: 1991 and Thrifting (substitution away from/in favour of other PGMs) a big driving factor for Rhodium price movements. Current price is well below the long-term average. Nominal rhodium price ($/oz) Long-term average Source: Bloomberg 6

7 Excellent Entry Point Rhodium is currently trading at a low. Euro 6 legislation places stricter requirements on nitrogen oxide reduction. Rhodium is the only PGM that is able to combat nitrogen oxide and we anticipate a price spike as Euro 6 legislation for new motors is introduced in September More upside potential in Rhodium price than palladium price, which is at its peak. The Rhodium price is still more than 85% below its record high reached in June Relative price ratio (re-based to 100, last 5 years) Palladium expensive Rhodium expensive Pd/Rh Last 5 years Source: Bloomberg 7

8 Fundamentals: Demand vs Supply With mine production flat, recycling will assume a bigger role than ever in the Rhodium market. Nevertheless, supplies of Rhodium will fall short of gross demand (which should exceed one million ounces for the first time since 2007). Rh ('000 oz) Total Demand Total Net Demand Total Supply Source: Johnson Matthey 8

9 Strict Emission Standards Emission standards are set to tighten in the two largest developing economy auto markets, China and Brazil. Air pollution is a serious problem in China, as highlighted by recent dust smog in Beijing. In Europe, emission legislations Euro 5 and Euro 6 are in place for cars and light commercial vehicles. They aim to improve air quality by reducing a number of pollutants, especially nitrogen oxides and particulate pollutants. Euro 5 came into effect in September 2009 and it mainly aims to reduce the emission of particulate pollutant from diesel cars. Euro 6 specifies that new diesel-powered cars manufactured from September 2014 onwards need 55% reduction in nitrogen oxide emissions. Rhodium will be a primary component in diesel catalysts as there are no substitutes for reducing nitrogen oxide emissions. Source: European Commission, Johnson Matthey 9

Production Disruptions : Labour Unrest South African PGM companies have been beset with production disruptions due to escalated labour strikes in 2012-2013.

10 Production Disruptions : Labour Unrest South African PGM companies have been beset with production disruptions due to escalated labour strikes in A wide gap remains between labour and management demands; no long-term solution yet. Above-inflation double-digit percentage wage growth will weigh on production costs. Platinum producers are hunkering down to ride out the strikes. Source: Bloomberg, Johnson Matthey 10

11 Supply Headwinds The Rhodium supply deficit is estimated to be about 14,000 ounces in Primary Rhodium supply is flat with shaft closures in South Africa and the gradual depletion of Rhodium-rich pyrrhotite concentrate at Norilsk, Russia. Rh supply by region ('000 oz) Mines are moving to mine the UG2 ore variety, which could be more Rhodium-rich than the traditional Merensky reef, but contains more chrome concentrations which causes problems in the smelting process and reduces capacity over time. This makes extracting Rhodium even more difficult. As Rhodium inherently takes longer to refine than Platinum and Palladium, supply coming to market is typically lagged. Johnson Matthey expects double digit growth in recycling of Rhodium from secondary materials. Source: Johnson Matthey South Africa Russia N America Zimbabwe Others 11

12 Investment Demand Growth Exchange traded products (ETPs), backed by physical Rhodium are the main investment vehicles to gain exposure to physical Rhodium. Investment demand grew rapidly post-2008 with the proliferation of ETPs. Through ETPs, investors are able to gain exposure to physical Rhodium with relative ease. Rh demand by application ('000 oz) Autocatalyst Chemical Glass Other Source: Johnson Matthey 12

13 Fundamentals: Demand vs Supply Supply Output of Rhodium in South Africa has declined in 2013, reflecting sporadic industrial action and the closure of UG2 shafts in the last two years (UG2 typically has a higher Rhodium content than other platinum-bearing reefs mined in South Africa). These declines will be matched by higher output elsewhere, with an expansion at Zimplats beginning to contribute to supplies. There is little immediate prospect of a return to growth in primary Rhodium supplies, with more shaft closures being implemented in South Africa, and the gradual depletion of stored pyrrhotite concentrate at Norilsk. Outlook for recycling of Rhodium from secondary material is positive: double-digit growth in recoveries from spent autocatalysts is expected in 2014, as collection efficiencies improve in most regions, and as the Rhodium content of catalyst scrap increases. Demand Autocatalyst demand rose in 2013 due to strong vehicle sales, especially in Europe. Significant thrifting of Rhodium in last few years by auto makers in North America, Europe and Japan has depressed the price. However, there is now much less potential for thrifting due to a rise in the price of palladium. A revival of China s auto market will drive Rhodium demand growth in Production of light duty gasoline vehicles is expected to rise at double digit rates, and Rhodium usage will expand accordingly. While historically the use of Rhodium in light duty diesel applications has been almost non-existent, introduction of Euro 6 legislation for new models from September 2014 will generate measurable use of Rhodium in diesel catalysts for the first time. Glass fibre manufacturers to increase adoption of platinum alloys with a higher Rhodium content. Sales of Rhodium to the chemicals sector will remain high, supported by purchases of Rhodium process catalysts for use in new oxo-alcohol and acetic acid plants. Source: Johnson Matthey 13

14 Summary Based on RealCap s fundamental analysis, the current Rhodium price environment is an excellent entry point for investors to gain exposure to the physical Rhodium market using exchange traded products. Rhodium usage in autocatalysts set to spike in the advent of Euro 6 for new motors; Metal is scarce and does not have substitutes for reducing nitrogen oxide emissions; Demand-Supply imbalance cannot be sustained and is expected to lead to a price correction; Physical Rhodium investment avoids exposure to idiosyncratic(company-specific) risks; Significant upside potential in the medium term (18 months). 14

15 CONTACT US Tel: Fax: Physical Address: 19 Braemar Road, St James, 7945 Postal Address: Suite 762, Private Bag X16, Constantia, Investment Information Invest with us today Steve Doidge Chief Executive Officer Tel: Tarryn Valle Head: Investment Strategy Tel: RealFin Capital Partners (Pty) Ltd is an authorised financial services provider - Licence No The information contained in this document is recorded and expressed in good faith and on reliance of sources believed to be credible. However, no representation, warranty or undertaking or guarantee of whatever nature is made or given concerning the accuracy and/or the completeness of such information and opinions. In no way is this document to be construed as financial advice or as an offer to invest in any portfolio or investment managed by RealCap.

At a glance. Platinum Supply and Demand. page 54 Platinum oz

At a glance. Platinum Supply and Demand. page 54 Platinum oz SUPPLY AND DEMAND TABLES Platinum Supply and Demand oz Supply South Africa,,,,, Russia Zimbabwe Platinum Supply Gross Demand by Application Recycling Total Supply,,,,,,,,,, Chemical Electrical Glass Investment