The Best Investment Opportunity in Precious Metals: Palladium Stocks

Palladium is in a top position to rally compared to its fellow precious metals, even as South African supplies come back online. Unfortunately, for investors there are few opportunities to play in this sector.

Jun 18, 2014 at 9:07AM

Now that the South African miner's strike appears to be coming to an end investors may be looking to cash out on their palladium-related stocks after a labor dispute contributed to the metal rallying about 20% since the start of the year. However, a quick examination of the fundamentals of the palladium market suggests that this may not be the best decision; in fact now may even be a good time to look at adding palladium investments to your portfolio.

Even without strike, supply chain is tight
While the deal reached between the union representing the workers and the major South African miners mitigates the immediate supply threat that contributed to palladium's quick ascent, overall the supply situation is in no way completely stabilized. Palladium was forecast to be in short supply even before the labor dispute. The disruption simply exacerbated the situation.

The problem with palladium's supply chain is that more than 80% of the world's palladium is produced by two countries: South Africa and Russia. Recently, both these countries have been dealing with problems that have affected supplies.

The latest labor dispute in South Africa is only unique due to its duration, lasting almost six months. Supply chain disruptions in the country are frequent. It seems we can't go more than a year without a strike, and when strikes are not crimping output, power supply issues rear their ugly head.

Historically, Russia could come to the rescue when the palladium market was in a shortage, but over the past decade Russia has not stepped up to the plate as much as it used to. According to palladium analysts this is because the country simply no longer has the palladium reserves to intervene. But, because Russia does not release stockpile data, it is anyone's guess why the country has stopped adding surplus palladium to the global market.

Adding more pressure on Russian supplies was the recent geopolitical tensions between the country and Ukraine. Western powers enacted, and have threatened more sanctions against Russia due to its actions in Ukraine. These sanctions had, and have, the potential to impact palladium exports.

Demand for palladium remains robust
Palladium's primary use is in the auto industry, as an auto catalyst. As the global economy has improved over the past couple of years, so have the demand expectations for the commodity.

A great deal of increased demand for palladium will come from emerging markets, which are currently undergoing a rapid increase in wealth. This increase in wealth means higher demand for more luxury items including cars and jewelry.

In addition, palladium is starting to see an influx in investment demand. Historically, palladium has not been as popular of an investment as its precious metal counterparts gold and palladium, but the metal's recent rally is attracting the attention of investors, and this is turn has resulted in more interest in physical-backed ETFs – which in turn has created more demand for the metal. 

A deepening deficit
The latest forecast released by Walter de Wet of Standard Bank points to a 2014 palladium market deficit of 2 million ounces. Back in April, when the South African miners' strike was in its fourth month, de Wet forecast a 1.5 million ounce deficit. Looking forward, for 2015 de Wet predicts a 1.3 million ounce deficit, and in 2016 he estimates the deficit will be 1.8 million ounces.

Investment opportunities
The best opportunities in palladium are outside of top producers South Africa and Russia. Unfortunately, there are few options.

Stillwater Mining (NYSE:SWC) has an operational PGM mine in Montana, and is currently developing new PGM mines. The company posted strong results in 2013. Revenue increased 30% year over year. Its first quarter was mixed. The company reported EPS of $0.15, more than double the Capital IQ consensus estimate of $0.07, but according to two analysts revenue was a shortfall.   Still, overall the company's financials are robust, with cash and liquid investments on hand. The company also continues to make money-conserving decisions even though its current financial state is strong, which shows good management and positions the company for more future success. When asked about the recent rally in palladium and platinum prices, the CEO said he would not immediately step up production just to cash in, a move many miners often do and then are put in in a bad place when prices level off. In addition, Stillwater has recently offered some union members buyouts to conserve money, and signed a supply agreement with Johnson Matthey.

The only other North American option is North American Palladium (NYSEMKT:PAL). North American Palladium's financial position is not as stable as Stillwater's. The company has struggled to maintain profitable operations for some time, and posted a per share loss in the most recent quarter. While a struggling company can make a great turnaround story, the company continues to acquire a great deal of debt to increase production, and given its struggles to consistently turn a profit, acquiring more debt puts investors in a risky position, for now.

In conclusion
The medium- and long-term case for palladium in strong, but unfortunately there are only a few options for investors outside of South Africa and Russia. The limited supply may provide even more support for the value of these investments, with Stillwater mining being the "safest bet", but North American Palladium should be watched to see if it could make a great turnaround story. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 
 

Leia Klingel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers