HardAssetsInvestor

Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hi everybody, welcome to HardAssetsInvestor.com’s interview series. I’m Mike Norman, your host today. My guest is Miguel Perez-Santalla, vice president of sales for Heraeus Precious Metals Management; that’s a mouthful. Miguel, why don’t you tell us a little bit about your firm and what it is you guys do.

Miguel Perez-Santalla, vice president of sales, Heraeus Precious Metals Management (Perez-Santalla): Well, Heraeus Precious Metals is a company that was founded over 150 years ago by Dr. Bill Heraeus, and principally he was one of the original melters of platinum and helped to supply the jewelry industry. From there the company grew into many facets of industry and manufacturing for platinum group metals and other precious metals as well in the jewelry market. We now have grown to having 12,000 employees worldwide. We have offices all over the world, including China, North America, South America. At this time, Heraeus is constantly growing and looking how to further produce product in those precious metals markets. So we’re a consumer as well as a trading company.

Norman: All right, let’s talk a little bit about those markets. Everybody knows, it’s no secret, that they have been on a tremendous tear over the last five or six years like all commodity markets. Perhaps those markets, more than any other, have led the pack. Tell us what has been - in your opinion, because you’re on the industrial side of it, you deal with industrial companies - tell us what are some of the factors behind the price run-up?

Perez-Santalla: Well, the original factor, of course, was the new consumption coming out of Asia from China and India. That initial growth spurt sparked the market going. Originally it was copper that drove it, then gold, then all the other metals started rallying along with it.

Once the metals were rallying, then there was news of the financial collapse due to the subprime mortgages, which then drove the metals even higher. In the platinum group metals, though, that was more affected by the problems in South Africa with the supply issues that started in February, and that drove the price up to over $2,100/ounce. Right now, we’re starting to see a correction there, but fundamentally, what’s gone on now at these high levels is that the precious metals consumers have held back. Now that it’s starting to correct a little bit, we’re seeing some new fresh plans.

Norman: Is this a repeat of events that we’ve seen historically, where you get a spike in commodity prices? For example, have we seen anything like this before in real dollar terms? Is this another one of these events where these metals have languished for a long period of time, undervalued, they started to go up, now maybe overvalued, and will correct back down on a constant dollar basis where they’ve been for a long time?

Perez-Santalla: My personal opinion from what I see - I do believe that it will correct. Will it go down from the levels we saw pre-2005? No. That was way undervalued, and then it started to come up. We’re a little bit overvalued at the moment; there’s going to be an adjustment. For instance, in the gold market, gold is currently trading above $900/ounce. The greatest consumer of gold in the world is the jewelry industry. Now the jewelry industry has come to a basic standstill with the price over $900/ounce because the consumer does not want to buy, so they’ve had to replace gold with other alloys. For instance, let’s say a ring that would have been just pure 18 karat gold before, it may be a 12 or 10 karat gold ring plated with 18 karats so it looks the same, but in reality, you’re getting less precious metal in that gold ring.

Norman: Let’s talk platinum for a second. What would you peg currently as the cost of production?

Perez-Santalla: What I heard recently is the cost of production is somewhere around $800 an ounce. Of course, one thing you have to take into account when they say that $800 an ounce is that they’re building all their expenses into platinum and they’re not really considering the residual gains they have from other metal by-products that come with the platinum group metals - which are rhodium … which by the way is an $8,000 an ounce metal … ruthenium and iridium, which are both around $300 to $400 an ounce.

Norman: So we got to see some hip-hop stars with rhodium watches, I think.

Perez-Santalla: I don’t think so.

Norman: That’s even out of their league, huh?

Perez-Santalla: Well, the interesting thing is that the biggest consumer of platinum and rhodium is auto catalysts, and I’m sure you’re well aware of the fact that SUVs probably hold the most amount of precious metals out of all the cars out there. So the SUVs are getting whacked - not only are people not buying it, but there are people ripping off the exhaust systems and having it refined somewhere, removing the catalyst.

Norman: All right, I want to stop here. We’re going to come back with the second part of our interview when we are going to talk about another element of demand, which is investment and speculative demand. So stick around folks, for the second half of my interview with Miguel Perez-Santalla. This is Mike Norman and you are watching HardAssetsInvestor.com; stay tuned.