There's a BOGO Sale on North American Palladium

The world's top value investors love it when their best stocks ideas are selling at bargain-basement prices. For those investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy one-get one" sale on their stocks.

Considering the anticipated shortage of platinum group metals, the prospects for the auto industry to sell 15.3 million cars this year, and a pending mine expansion, you'd expect palladium miner North American Palladium (NYSEMKT: PAL  ) to be doing much better than it is. But other than a few brief periods of rising expectations, its stock has been on a slow, steady decline.

Still you'll want to do your own due diligence before buying in to see if this is really a chance to pick up a quality stock at a severe discount.

North American Palladium snapshot

Market Cap

$262 million

Revenues (TTM)

$156 million

1-Year Stock Return

(44.8%)

Return on Investment

(3.1%)

Dividend and Yield

N/A

Estimated 5-Year EPS Growth

0%

52-Week High

$3.06

Recent Price

$1.48

% Below 52-Week High

(51.6%)

CAPS Rating

****

Source: FinViz.com. N/A = not available; North American Palladium doesn't pay a dividend.

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

Platinum records
Although platinum group metals have some diverse applications in industry and jewelry making, the primary use is in the auto industry's catalytic converter exhaust system, according to NAP's primary competitor, Stillwater Mining   (NYSE: SWC  ) . The U.S. Geological Survey estimates that as much as 58% of palladium goes toward the auto industry, with 26% used for jewelry. Electronics and dentistry account for other significant usages. 

So the health of the auto market remains of paramount concern, and in the U.S., at least, it seems to have regained its footing. According to the analysts at WardsAuto, seasonally adjusted light vehicle auto sales will reach 15.33 million in 2013 based on February's sales numbers, an increase from January's 15.22 million SAAR. Sales have been stronger than expected, with General Motors, Chrysler, and Ford all recording better-than-expected sales. The industry sold 12.8 million vehicles in 2012.

The growing demand for cars will place new demand for platinum group metals, even as supply concerns mount. South Africa has been beset by strikes, and Zimbabwe said last month it would seize dozens of hectares of land leased by platinum miner Zimplats Holdings. It's a smaller amount than what comes from top producer South Africa and second place Russia, but it adds to the supply constraints already being felt. Earlier this year, it was rumored that Russia's state stockpiles had almost been exhausted, as inventory sales plunged 68% in 2012. Russia flooded the market for years with inventory sales, keeping prices in check, but now they'll probably be on the rise once again as that supply dries up.

Unclogging the pipes
The real problem for NAP is the expansion of its Lac des Iles mine in Quebec, which is taking longer than anticipated to get up and running, leading to higher costs than expected. Although it expects the mine to be fully operational by the end of the third quarter and anticipates its cash costs to be in a range between $375 and $425 an ounce, cash costs are expected to spike to around $600 an ounce.

Palladium is trading for around $770 an ounce today, up $40 an ounce from a month ago, and I think we'll probably see it testing the $800 level sooner or later. Because Stillwater diversified away from platinum group metals to gold and copper -- and not without a lot of dissent from shareholders -- I see North American Palladium as the one to best cash in on the better opportunities in palladium and platinum.

I've noted previously that Anglo American, the world's biggest platinum miner, is cutting production in South Africa 20% this year in a bid to shore up profitability, and with NAP's problems depressing its share price, it becomes a potential takeover target. Would that make Anglo interested in acquiring the miner? No such rumblings have been rumored just yet, but if the platinum metals market continues to look as attractive as it appears, it seems to me it would be one large miner that might look for strategic alternatives to quickly get back in the game.

Let me know in the comments box below if you think North American Palladium is more attractive as a standalone company or as an adjunct to some larger player.

Have half a mind
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Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2013, at 5:43 PM, davidcavner wrote:

    Thank you for your insightful comments about Lac Des Iles Mine. One correction i have for you is that the mine is in Ontario about 90 minutes drive from Thunder Bay Ontario. I worked at the mine for 8 years when it under went the first major expansion in 2000.

    The two gold properties that NAP owns are in Quebec.

  • Report this Comment On March 17, 2013, at 8:29 PM, bellbell63 wrote:

    While I would prefer NAP to remain independent and the present stockholders to benefit from the highly leveraged PD operations I just don't see how they can do it alone anymore. The have thrown away $100M on the gold division (now for sale but seems no buyers).

    Any (equity) financing now would be at a disaster price. They need a buyer who can bring deep pockets and better mgt.

  • Report this Comment On March 17, 2013, at 8:41 PM, bellbell63 wrote:

    SWC would be a logical buyer but after the $450M Argentine copper mine fiasco it would be hard to convince the SWC BOD to be aggressive unless there was a major BOD and mgt upheaval

    Xstrata might might make sense also as they have smelting capability in Ontario I believe. They might want to diversify more into PGM as Ni prices have been depressed for a long time.

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