Stillwater Mining: A Bet on Higher Palladium Prices

Includes: PGM, PLG, SWC, VALE

Palladium is at a 52 week high and has retraced a large part of its decline from a high of $582 per ounce in April 2008 to a low of $164 per ounce in December 2008. The time it took to retrace 72% of the 8-month drop of $418 per ounce has been 3 months. It will be interesting to see if palladium follows the fibonnaci series and takes a breather for a month or two.

A 2-year high of close to $600 and all time high of close to $1100 inspires hope and suggests room for upside.

Moving to fundamentals, if one believes in the protection of the environment and reduced emissions, Platinum Group Metals (NYSEMKT:PLG) exhaust pipe catalysts will see demand rise over the long-term. Investment demand and higher demand from the jewelry segment could raise the base to which a industrial recovery will add to.

A search on Palladium reserves data in tables in 10-K through the Gridstone Research search brought up two companies - Vale S.A. (NYSE:VALE) and Stillwater Mining (NYSE:SWC).

VALE had 4.3 million ounces of Platinum Group Metals reserves as per its 2008 20-F filing (150.4 million metric tons of ore with a grade of 0.9 grams per metric ton). It derived close to 1% of its revenues from the PGM group. The rise in palladium prices will therefore not have a significant impact on earnings of VALE.

SWC on the other hand derived $161 million of its revenues in the year ended Dec-09 (FY09) from palladium (41% of total revenues). Of this, $144 million was from mined product sales and the rest was from recycled and traded palladium sales. The latter are likely to have a large variable component expense component and hence could be disregarded.

In FY09, palladium mine sales stood at 393K ounces and average realization at $365 per ton. Current realizations are 25-30% higher than the FY09 average. Also, in a commodity any rise in price rise leading to increased revenue flows through to profit before tax as there is no significant cost correlated to prices of end products.

SWC thus could be one of the key beneficiaries of strong palladium prices. While this is partly factored in the current valuations of 31xFY10 consensus earnings, any move towards higher levels of demand and prices will add to investor returns.

Disclosure: No positions