Although a recent Street Authority article discussing Stillwater Mining (NYSE:SWC
) called it a “rare earth metals stock,” that’s not quite accurate because the company is known mostly as a major palladium miner.
While palladium may be rare, it’s not a rare earth metal. It’s a platinum group metal. Platinum, palladium and the other metals in the group have unique properties which make them excellent autocatalysts.
Stillwater does produce platinum and some of the other metals in the group, but given its palladium assets, the stock tends to track the price of palladium quite closely.
Here’s a chart showing Stillwater’s stock price against palladium over the past two years.
I color coded the chart to show three distinct time periods. The May 2009 through June 2010 period was when palladium prices double from around $250 to $500 per ounce.
Then from July 2010 into March 2011, the metal rose to over $850. After the Japanese earthquake in mid-March, however, palladium prices have been under pressure given the disruption in automobile manufacturing and the overall decline in commodities. But throughout all three time periods, SWC has traded in a tight correlation with palladium.
Here’s that chart again, eliminating the distraction of the different colored dots and adding a regression line.
SWC Buy and Sell Levels
If this regression relationship holds, the following formula can provide logical buying and selling levels.
First, multiply the price of palladium by 0.030744. Take this value and subtract $4 as a buy point or add about $1 as a potential selling level. For example, with palladium at $700, those levels would be about $17.50 and $22.50.
The Bullish Case for Palladium
Both palladium and platinum can be used as autocatalysts, each with its own set of advantages for various types of engines. According to the Economic Times of India
, metal consulting firm GFMS expects palladium to be in shorter supply than platinum.
GFMS expects platinum to show a seventh consecutive annual surplus in 2011 as jewelery demand softens and consumption from the auto sector continues to depend on the struggling European market, which is predominantly diesel-powered.
Palladium on the other hand is forecast to show a deficit, possibly of over half a million ounces in 2011, for a fifth year in a row, while demand is expected to show modest improvement, largely thanks to robust use of the metal in catalytic converters for the gasoline-intensive Chinese and U.S. markets.
Part of the supply deficit is the result of dwindling output from Russian mines. According to MiningWeekly.com
, Stillwater CEO Francis McAllister predicted tight supplies for palladium.
Billings, Montana,-based Stillwater Mining believes it's likely that Russia's infamous stockpile of palladium metal is either almost or entirely gone, CEO Francis McAllister said on Tuesday.
Any inventories that still remain would probably not have much of an impact on the market if they were sold, especially given the strong industrial demand for the metal, he said at the company's annual shareholders meeting.
What’s interesting about palladium is the ratio between it and its sister metal platinum. If that ratio is reliable, then palladium is indeed in high demand. Here’s a price chart of both metals.
Click to enlarge
Click to enlarge
As you can see, only a couple of years ago five ounces of palladium cost the same as one ounce of platinum. Now it only takes about 2.5 ounces of palladium to equal the value of that same ounce of platinum.
If you want to invest in the metal itself, you can buy palladium coins or shares of the Physical Palladium ETF (NYSEARCA:PALL
). I own both.
I don’t own Stillwater – at least not yet, but I’ll be looking for an entry point based on the chart above.
Disclosure: I am long PALL.