Palladium Miners and the Palladium/Platinum Ratio

Includes: PAL, SWC
by: Richard Bloch
In a comment on my article on Stillwater Mining (NYSE:SWC) and its relationship to the price of palladium, brianjroach asked for a similar analysis on North American Palladium (NYSEMKT:PAL), another large palladium miner, so here it is.
First, let’s review what I said about Stillwater’s relationship to palladium, based on this chart going back about two years.

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.

Now here’s a similar chart for North American Palladium – also going back about two years.
For this stock, you’d find buy and sell levels by multiplying the price of palladium by 0.00767. Then take this value and subtract about $1 as a buy point or add about $1 as an area to sell. With palladium at $700, for example, that would equal about $4.70 and $6.70.
As I mentioned in my previous article, the price of palladium has been gaining on platinum in recent months. What I found interesting (but not surprising) is that these miners are leveraged to this ratio itself.
Here’s what I mean. This is a chart of both miners over the past two years based on the relationship of palladium to platinum.
[Click to enlarge]
As the ratio grows higher, both of these companies seem poised to grow along with it. Right now the ratio is about 0.40 (the price of palladium is approximately 40% the price of platinum). It’s a complex business because higher palladium prices could lead to platinum being used as a substitute in some cases. But it wouldn’t surprise me if palladium continued to gain on platinum.
Here’s a chart showing that ratio over the past 15 years.
I’m not sure the ratio will ever hit 1.00 again, but it still looks like there’s room for growth for both miners.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.