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Scarcity Will Drive North American Palladium Higher

By Rich Duprey - Dec 10, 2012 at 10:02AM

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Platinum metals group specialist North American Palladium (PALDF) has dug itself into a deep hole as world economies stagnate. It had to close its Sleeping Giant gold mine, but with three of the four analysts covering the miner believing it will outperform the broad market indexes, let's see if there is enough basis for that positive outlook.

North American Palladium snapshot

Market Cap

$245 million

Revenues, TTM

$167 million

1-Yr. Stock Return

(56.7%)

Return on Investment

(17.6%)

Est. 5-Yr EPS Growth

0%

Dividend & Yield

N/A

Recent Price

$1.40

CAPS Rating

****

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

Remember, without much analyst support, you'll have to do more digging on your own to see whether or not it deserves a spot in your portfolio, so don't just buy or sell it based solely on its appearance here. 

Hiding in plain sight
Despite the relative scarcity of platinum and palladium -- they're actually rarer than gold -- they don't command the same premium as their yellow cousin, and lately prices have been falling. In the latest quarter, North American Palladium realized just $632 an ounce for palladium compared to $742 an ounce a year ago (a 15% disparity), while its realized gold price of $1,655 an ounce was off less than 1% from last year's prices. Of course gold has a long history of being a valued metal, but even the Smithsonian admits that not only are platinum and palladium rarer, they are more useful too (but then so are rhenium, ruthenium, and iridium to name just a few). It's most commonly found in a car's catalytic converter.

Which is why PAL and fellow palladium producer Stillwater Mining (SWC) rely so heavily upon a recovery in the auto industry, yet with Europe's economy a shambles, car sales are faltering. According to LMC Automotive, European sales fell 10.5% in November as France and Italy plunged 20% and Germany, which is the continent's biggest auto market, fell 3.4%. Full-year sales are expected to come in 8% lower than they did in 2011, while next year sales are expected to fall another 3%. The situation there is bad enough that Ford and General Motors are closing European manufacturing facilities.

Part of the collapse in palladium pricing has been due to Russia selling off its state stockpile. Analysts estimate that such sales accounted for as much as 10% of supplies in 2010, keeping global inventories in surplus. But, Russia announced that it may stop sales altogether within two years. Combine that fact with the strikes crippling South African mining ventures, and the result is that there's expected to be a huge 915,000 ounce deficit next year. China is expected to keep demand high, and the U.S. auto industry remains strong with seasonally adjusted sales hitting 15 million cars. Current spot prices for palladium are back to $700 an ounce.

Low-cost leader
Although PAL closed its Sleeping Giant mine, it still has the Vezza gold project that it is developing toward commercialization, but the real investment potential is its flagship Lac des Iles operation in Ontario. It's one of only two primary palladium producers in the world and it is expanding its operations to further reduce its cash costs per ounce.

While pockets of demand have been dampened, the effects were exacerbated by Russia's stock sales, thus impacting North American Palladium's own performance. With those factors eliminated, the palladium producer should see production rise, sales grow, and profits expand. Although it's lost more than half its value over the past year, I see North American Palladium recovering that ground and more.

Gold miners like Goldcorp (GG) and silver streamer Silver Wheaton (WPM 2.77%) may grab the limelight more often than often overlooked palladium producers, but a resurgence in demand and pricing just as supplies become even scarcer should make North American Palladium a truly precious metals investment.

 

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Stocks Mentioned

North American Palladium Ltd. Stock Quote
North American Palladium Ltd.
PALDF
Goldcorp Inc. Stock Quote
Goldcorp Inc.
GG
Wheaton Precious Metals Corp. Stock Quote
Wheaton Precious Metals Corp.
WPM
$38.20 (2.77%) $1.03
Stillwater Mining Company Stock Quote
Stillwater Mining Company
SWC

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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