3 Things to Watch With North American Palladium

North American Palladium (NYSE: PAL  ) is a minerals miner that primarily sells palladium -- as well as platinum, gold, nickel, and copper -- through its Lac des Iles palladium mine located in Ontario, Canada.

Today, let's look at three things investors should be watching regarding North American Palladium, as they will provide us better insight into the company.

1. Car production figures
With approximately two-thirds of all palladium mined being used by the automotive industry in catalytic converters, it's imperative for NA Palladium and its larger rival, Stillwater Mining (NYSE: SWC  ) -- which sold more than three times as many ounces of platinum group metals than NA Palladium in 2011 -- to keep up on the latest auto sales figures.

Although auto sales are a far cry from their pre-recessionary levels and used car sales are still motoring strong, the past few months' figures have been encouraging in light of weak consumer spending. For the month of June, total industry car sales rose by 25% while light-duty truck units sold increased 19% over the year-ago period. Individually, General Motors (NYSE: GM  ) and Ford reported unit increases of 15.5% and 7.1%, respectively.

But, as my Foolish colleague Dan Caplinger pointed out just a few weeks ago, Ford's decision to focus on profit margins and not unit output could cause an inventory glut in palladium supply, squashing demand and hurting prices. That could mean bad news for NA Palladium, which is spending wildly on expanding its Lac des Iles mines' underground operations where it has recovered palladium at ore grades that are more than three times better than at the surface.

2. Jewelry sales
Next to the automotive industry, jewelry sales provide the next biggest boost to palladium miners' bottom lines. Predominantly used as an alloy to strengthen jewelry, palladium is beginning to gain acceptance among consumers as a stand-alone product (i.e. jewelry made almost entirely out of palladium). Keeping an eye on discretionary spending in the jewelry sector is another important factor shareholders will want to watch.

Just like the automotive sector, we're going to get a mixed picture here. Logic would say that an increasing population is likely to lead to more marriages and the need for more rings and/or jewelry, which would be good for the palladium miners. What we're seeing recently is completely different, with jewelers hurting from the high end to the low end. Tiffany (NYSE: TIF  ) has warned twice now in the past few months that high-end consumer demand is weakening while Zale (NYSE: ZLC  ) -- which, in its defense, has beaten Wall Street's estimates in every quarter over the past year -- has seen its margins tighten and future estimates fall.

3. Palladium supply & platinum prices
In order to invest in miners of any kind, it pays to understand the driving forces behind the metals that your investment mines. With palladium being the primary resource of the Lac des Iles mine, let's focus on what could affect palladium prices and demand.

One of the primary factors that affects demand, especially in the automotive industry, is the price of platinum. When platinum prices rise, auto manufacturers will switch from platinum to palladium in catalytic converters. To some extent this means that the lower the price of platinum, the lower the demand for palladium from the auto industry.

It should also be noted that palladium is actually much rarer than gold or silver. The majority of palladium mines and reserves are found in Russia and South Africa, which control about 80% of the world's production. That means a flood of palladium on the market or a scarcity in supply could drastically alter the underlying price of the commodity.

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Now that you know what to watch for, it should be easier to analyze North American Palladium's possible future and hopefully give you a competitive investing edge.

If you're still craving even more info on North American Palladium, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.

Keep in mind that with many metals still near their decade-long highs, North American Palladium isn't the only miner standing to benefit. Our analysts at Stock Advisor have identified a small miner that could be sitting on a fortune and whose stock price could catapult significantly higher in the coming years. Find out which metals miner has our analysts so excited by clicking here to get your free special report.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Ford and Tiffany. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, creating a synthetic long position in Ford, and shorting shares of Tiffany. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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