You Say Platinum, I Say Palladium

The palladium mining industry is getting drawn into the energy and carbon debate by some recent technological advances. Representatives of North American Palladium, Ltd. (PAL) told a compelling story at the NYSSA 9^th Annual Mining and Minerals Conference in New York in late May 2009. The company has three mining operations in Quebec and Ontario, Canada. As a diversified precious metals company, NoAmer Palladium producers about 270,000 ounces of palladium and 20,000 ounces each of platinum and gold each year.

As sexy as gold and platinum might be for many investors, I was impressed by the story behind palladium. The somewhat scarce precious metal is used in electronics, dental, jewelry and automotive applications. Advances in diesel engine design have led to an increase in the amount of palladium used diesel fuel catalysts and a growing substitution of palladium for the more expensive platinum, to which palladium can be considered a close relative. NoAmer Palladium expects continued growth in demand from this market segment even without a recovery in the automotive sector.

The CPM Group expects a ramp in the palladium price from around $225 in 2009 to over $400 by 2012. Healthy trends in pricing seem logical given that palladium deposits are not abundant. North America holds about 12% of the world’s palladium resources. Russia with 45% and South Africa with 39% are the two serious palladium producers.

What really has investors abuzz about palladium is the recent CBS 60 Minutes news magazine report in April 2009 on recent developments in cold fusion. Long considered tenuous from a scientific standpoint, cold fusion researchers in California and Italy claim progress in creating energy with hydrogen from seawater, palladium and an electric current. As hard as it has been to test and prove, the cold fusion concept is appealing since there are no harmful by-products and the step up in energy created well exceeds the nuclear or “hot” fusion.

Even if cold fusion never advances beyond the laboratory bench of a few Quixotic scientists, the palladium story seems well illuminated by demand from the automotive market. In my view, what will aid palladium more than anything is more clarity on carbon emissions making it possible to compute costs and prices for diesel engine modification to include catalysts and other emission reducing components.

Disclosure: Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Comments

[Nathaniel C:]

I agree that palladium looks better right now than platinum from a valuation perspective. But long term I like platinum better because there is a supply defecit compared to palladium which is currently in surplus. Palladium could suffer because Russia has large stockpiles of palladium that they periodically dump on to the market. I am waiting for platinum to go back to 1000 to get in.

Jun 17 04:50 PM

[Mark Anthony:]

Nathan:
You were wrong. Palladium is actually in a severe supply deficit, not the surplus as indicated by the Johnson Matthew 2009 review of PGM metals:
www.platinum.matthey.c...
Johnson Matthey projected a 460K oz palladium surplus (page 6) in 2008. But they made several mistakes. First the presumed 960K Russian government stockpile sale. Other sources say none of the 960K ounces of palladium has been sold into the general market at all. Take away that 960K ounces it immediately becomes a deficit of 500K ounces. Look at longer term, Russia has been selling off the stockpile for almost two decades and it is now largely depleted. There is no economic incentive for they to sell off whatever remains in their stockpile, at current low prices.

Second, Johnson Matthey predicted 1170K ounces of secondary palladium supply, from recycling auto catalytic converters. That's absolutely false. At current low palladium price, consider the extremely complicated and costly recycling process, and that less than 2 grams (0.065 ounces) of palladium could be recovered from each old catalytic converter, it's no longer economical to recycle the old catalytic converters. More over, cars recycled today were produced about 12 to 15 years ago. In year 1995, less than 1500K ounces of palladium were used in the global auto manufacturing. It's impossible to recycle as much as 1170K ounces even if it is economically incentive to recycle 100%.

More over, Norilsk Nickel has now shifted to produce the mineral ores that are rich in nickel and poor in palladium content. This would cause annual palladium production to drop from 3000K to mere 2000K. Year 2008 production already dropped to 2700K. In 2009, this drop will be much more significant, as the production shift only occured starting in the last quarter of 2008, so the production drop effect is not fully shown yet.

Read my articles on my very detailed study of the global palladium market:
seekingalpha.com/autho...

Jun 18 03:52 AM

[The Goy:]

Mark, you must spend all day fixing people's misconceptions about palladium. I could not agree more with you, and love to read what you write, (FYI, long about 4000 oz of palladium, most physical, some futures), but you don't need to help every trader figure out how wrong they are. It will drive you nuts, arguing with people that really have no clue.


On Jun 18 03:52 AM Mark Anthony wrote:

> Nathan:
> You were wrong. Palladium is actually in a severe supply deficit,
> not the surplus as indicated by the Johnson Matthew 2009 review of
> PGM metals:
> www.platinum.matthey.c...
> Johnson Matthey projected a 460K oz palladium surplus (page 6) in
> 2008. But they made several mistakes. First the presumed 960K Russian
> government stockpile sale. Other sources say none of the 960K ounces
> of palladium has been sold into the general market at all. Take away
> that 960K ounces it immediately becomes a deficit of 500K ounces.
> Look at longer term, Russia has been selling off the stockpile for
> almost two decades and it is now largely depleted. There is no economic
> incentive for they to sell off whatever remains in their stockpile,
> at current low prices.
>
> Second, Johnson Matthey predicted 1170K ounces of secondary palladium
> supply, from recycling auto catalytic converters. That's absolutely
> false. At current low palladium price, consider the extremely complicated
> and costly recycling process, and that less than 2 grams (0.065 ounces)
> of palladium could be recovered from each old catalytic converter,
> it's no longer economical to recycle the old catalytic converters.
> More over, cars recycled today were produced about 12 to 15 years
> ago. In year 1995, less than 1500K ounces of palladium were used
> in the global auto manufacturing. It's impossible to recycle as much
> as 1170K ounces even if it is economically incentive to recycle 100%.
>
>
> More over, Norilsk Nickel has now shifted to produce the mineral
> ores that are rich in nickel and poor in palladium content. This
> would cause annual palladium production to drop from 3000K to mere
> 2000K. Year 2008 production already dropped to 2700K. In 2009, this
> drop will be much more significant, as the production shift only
> occured starting in the last quarter of 2008, so the production drop
> effect is not fully shown yet.
>
> Read my articles on my very detailed study of the global palladium
> market:
> seekingalpha.com/autho...

Jun 18 07:31 AM

[Mark Anthony:]

The Goy:

I am not trying to argue. I am trying to help people who simply do not know about palladium, about the status of Russian stockpile, and about the potential demands in the near future.

BTW, PAL is not the only palladium mine. There is a bigger SWC in North America. These two are the world's only primary palladium producers. Norilsk produces palladium only as a minor by-product. South African PGM mines also consider palladium as a by-product.

I have been watching the progress of cultured diamond (Check out Apollo Diamond). When this thing takes off and the dream of every bride in the world can own a diamond wedding ring, there will be an absolute explosion in palladium and platinum price!!!

Jun 18 12:26 PM

[The Goy:]

Hey Mark,

I wanted to ask you about PAL and SWC. I have owned both and have met with management of both as well as listening to numerous CC's. I just can't find a reason to own them(this from a person who is VERY long Palladium) At current Palladium rates they lose money. I would think Palladium would have to be well over 600 for them just to break even. Since I can't buy the stocks, I am pretty much stuck buying as much of the metal as I can stomach. I have read that you are long both, I just don't see the reason. Obviously if PAE does what we think, both will go higher, but they are so poorly run, that I just would rather be in the metal. I would love to get your thoughts.

Jun 18 06:10 PM

[Jake2:]

Yes, Mark. Speak your thoughts or forever . . . Well , you get the idea.

Jun 19 02:44 PM

[Mark Anthony:]

The Goy:

If you have any complains about the management of SWC and PAL, please speak out here. But I think not being able to make money at current low metal prices is not a management thing. If you understand how PGM metals are produced from the mine, you should know the PGM mining is extremely labor intensive and the processing is an extremely complicated long process that is very costly and very energy intensive:
www.stillwatermining.c...
You are talking about producing 1/4 of an ounce of palladium, and 1/14 of an ounce of palladium from each ton of ores.

South African PGM mines have even poorer mineral grades, but they benefitted from the fact that 75% of the PGM in their mines are the more expensive platinum, versus SWC's 80% palladium and 20% platinum. South Africa also benefitted from much cheaper labor, way much cheaper electricity (they pay less than US$0.02 per KWH electricity). Even so most South African PGM mines are not profitable at current metal prices either. You can not demand management to show profitability at low metal prices. That is not humanly possible.

However we CAN, and SHOULD demand that managements take more proactive actions to boost global PGM prices, both on the part of SWC and PAL, and on the part of their South African colleagues. There are many many things they can do to instantly boost the platinum and palladium prices. They are not doing it.

You can never go wrong investing in the physical palladium metal itself. However when it comes to investing in actual mining companies, you do not have a lot of choices. On the other hand this gives the narrow sector a much bigger potential for gains.

Jun 19 06:10 PM

[tailspin:]

Mark,

I really appreciate your continued enthusiasm about palladium in particular since it took a nosedive since last year. Reminds me that you should not be in love with a stock.

The one thing that does not make sense to me: If the palladium mines are in the red and they have real pricing power, why would they not use it? I would. Mind to elaborate?

Or do you have in mind building a cartel? That is sticky, would it not?

Jul 18 08:53 PM

[McGonicle:]

I look at it this way. The mines are quickly closed, the price falters, and PAL is .98 metal 180. Today, the mines are still closed, PAL @ 3 metal 290.

So whether the mine makes money or not (obviously it doesnt when it is paying its workers to watch hockey), the stock mysteriously triples in price. Why must this be?

Well, my friend, I say it is because it is the stock, and morons like you and me that buy it, that moves their own accord, without being directly correlated to the price or performance of the company.

So, when the price of the metal goes down 2 dollars, and PAL moves from 2.55 to 2.99 in 3 hours what does it say to you?

Sep 02 09:07 PM