Despite a handful of catalysts that should be propelling platinum group metals prices higher, platinum and palladium futures pulled back sharply yesterday, leading shares of Stillwater Mining (NYSE:SWC) to lose almost 4% of their value as well. Yet despite its stock being up 38% over the last six months, the only U.S. producer of palladium and platinum -- and the largest primary producer of platinum group metals outside South Africa and Russia -- remains significantly undervalued.
The PGM metals industry faces a series of challenges in the immediate future that indicate pricing will move significantly higher, and though Stillwater is a smaller player on the world stage, it should benefit nonetheless from the drama about to unfold.
Russia and South Africa account for 80% of the world's supply of platinum group metal reserves, and the possibility of interruptions in either locale could have far-reaching repercussions. Russia's aggression against Ukraine, for example, could lead to additional sanctions being imposed against it, including against palladium, which accounts for 41% of the world's supply. South Africa is in the grips of widespread strikes against PGM miners in the country, and since it is responsible for almost three quarters of the world's platinum supply, disruptions in production will create shortages.
All of this comes as demand for PGM metals expands. In February, Moody's Investors Service said global light vehicle sales ought to grow 3.2% this year, and though that's down from 4.8% one year ago, Europe should see sales widen 2% as it returns to pre-financial crisis levels and China jump some 8% over the next two years. With the U.S. Geological Survey estimating as much as 58% of palladium going toward the auto industry, limitations on supplies could be severe.
These are essentially short-term supply constraints, and though they'll have a critical impact on PGM pricing, of more lasting concern should be the declining ore grades in Russia's platinum and palladium mines. Without lower quality ores coming to market and new mines many years away, supply constraints will be even more acute.
Norilsk Nickel (NASDAQOTH:NILSY) is the world's largest producer of palladium and one of the biggest producers of platinum. It reported in January that production of platinum and palladium in 2013 fell 3% and 5%, respectively, due to reduction of PGM grades in the processed ore. In the fourth quarter alone, platinum production was down 13% to 143,000 ounces, and palladium tumbled 12% to 602,000 ounces. While much of that was because production over the first nine months of the year came in ahead of budget, the lower grades mean its expecting output in 2014 to be virtually unchanged from last year.
All of which positions Stillwater Mining for a valuation boom. Like Norilsk, the U.S. PGM miner also suffered from lower ore grades in 2013, leading to a 3% drop in production year over year, but its problem was temporary, and by November and December, actual ore grades were above those budgeted.
With some calling for the creation of a PGM cartel (including the governments of Russia and South Africa), the long-term outlook for pricing remains positive, a situation that can only serve to sweep Stillwater Mining along with it. At just $15 a share today, we may be thinking how quaint that price seems tomorrow.