Most of the raw materials have been trading substantially lower since their 2011 tops. Gold for instance, sank from above $1900 to $1370, Silver from above $40 to now $23 and the same goes for a variety of other raw materials. The exception to the rule is palladium. Look at the chart. Right now, Palladium is trading just a few nickels shy of the top set in September 2011. Although most materials lost interest from inflation-hedging investors, demand for palladium has been very strong the last few years. Strong demand from the automobile sector was the biggest driver behind this.
Looking for companies who are benefiting from the scarcity in palladium, we can only name a few in the Western world. As Russia and South-Africa are the main suppliers of our beloved material, three companies in the United States and Canada are involved in mining palladium. Besides Stillwater Mining Company (NYSE:SWC) and North American Palladium (NYSEMKT:PAL), there is one other company that caught my attention.
Platinum Group Metals (PLG)
Platinum Group Metals is a mining company based in Vancouver, Canada, and in Johannesburg, South Africa, and engages in the acquisition, exploration, and development of mineral properties in South Africa and Canada. The company explores for copper, nickel, cobalt, platinum group metals, and gold deposits. Its main holding is a 74% interest in the Project 1 Platinum mine in the western Limb of the Bushveld Complex, South Africa.
The company spent roughly $50 million on development and purchase of the two mines in South Africa the past nine months, and with the cash position of $152 million, the company is well capable of further developing the South African mines. The target date for production is in 2015.
Loan not afloat yet
Beginning this year, PLG issued new shares. The proceeds of this share issue, $169 million, was needed to further develop the platinum fields. For some reason, the loan of $260 million, negotiated with a banking consortium, is still not afloat. At the presentation of the Q2 figures, the company stated that:
On December 6, 2012 the Company announced that a syndicate of lead arrangers had obtained credit committee approval for a US$260
On December 6, 2012 the Company announced that a syndicate of lead arrangers had obtained credit committee approval for a US$260 million Project Loan Facility for the construction of the Project 1 Platinum Mine. The credit approval is not subject to further syndication prior to closing. Closing and draw down of the loan facility is subject to the negotiation and execution of final documentation and satisfaction of conditions precedent.
It is not hard to understand that banks are not very eager to invest in the mining industry at the moment. For platinum (and palladium)however, things look different because prices have not come down like the gold and silver prices did. Luckily for PLG, the $169 million from the share issuance will at least help them through the next couple of years.
The biggest risks for PLG
The main interests for PLG are in South Africa and the potential labor unrest is a threat to the further development of the PLG possessions. The political climate is another factor to bear in mind. Government in South Africa is far from stable and there is always a risk of further nationalization in the form of substantial taxes on mining profits.
What separates PLG from a lot of other (junior) miners is that they already raised a substantial amount of cash. Dozens of mining companies misjudged both the selling price of their commodities as well as the costs of development and exploration. PLG has successfully raised new capital without having to pay high interest like North American Palladium for instance agreed upon with its rescuer Brookfield Capital Partners. With the $152 million cash on hand PLG should be easily capable of reaching the production target date in 2015.
From the three platinum miners mentioned above, PLG is in my humble opinion the most safe investment right now.