North American Palladium Ltd. (NYSEMKT:PAL) is primed form a breakout. Its stock has fallen 60% year to date. It trades at a PE of 213.85. However, life is about to change for this company. It has an FPE (FY2012) of 11.12 based on much better earnings estimates, and these are not just analysts fanciful imaginings. The improvements are based on mine expansions and new mine developments that are coming online in 2012. If you add to this the continued expansion in auto sales worldwide (autos use palladium in catalytic converters), you get a truly rosy outlook for PAL’s future. Last month U.S. auto sales beat at 13.10M versus an expectation of 12.50M. China’s auto sales did well in September too. They were 22.7% higher than in August. China is currently forecast to grow auto sales for FY2011 by just under 5%. Not spectacular, but still good growth. This should keep palladium makers healthy. PAL is slated to grow earnings 87.50% in FY2011, but FY2012 will be the breakout year with earnings expansion of 1450.00%. Yes, this is a case of the company moving from low or no profit to good profitability. However, it is not a one time phenomenon. PAL is forecast to grow earnings 50% per annum over the next five years. All those who have patiently waited for projects under development to bear fruit are going to finally see their patience rewarded. The good thing for you, is that you do not have to put up with all of this waiting. You can buy now (or soon) to ride the gravy train higher.
One may wish to more fully understand the fundamentals of palladium investment before buying into this stock. Only 6.8 million ounces of palladium were produced worldwide in 2010 (9% in North America). Yet the 2010 Fabrication Demand was 7.7 million ounces. Plus the Russian state stockpiles are believed to be near depletion. They have been a main source of filling the supply shortfall. Recycling is another source. The chart below shows the various sources of palladium demand in 2010.
As you can see, palladium use for automobile production is by far the biggest source of demand. The chart below shows the five year global growth forecast for light vehicle production. The strongest demand increases will be in areas outside North America, Europe, and Japan.
In addition to the increase in automobile production, emission control standards are expected to become stricter over time, especially in the emerging markets. The table below attempts to show the general progression expected.
The higher levels of emission control standards require higher amounts of PGMs in the catalytic converters.
With the recent movement toward electric cars, some are worried this will hurt palladium use. There is no requirement for palladium in electric cars, but they are only forecast to be only 2% of the total worldwide auto market by 2020 (Mitsui Global Precious Metals). Hybrids and fully gas powered cars will still use palladium in their catalytic converters. Plus the move to low sulfur diesel fuel will mean an increase from 25% palladium to 50% palladium in those catalytic converters. Investment demand has also been increasing, and this trend is expected to continue. This demand experienced a huge jump from the PALL ETF in the last two years. The overall investment demand rose from nearly zero to greater than 500,000 ounces in 2008. It has since grown to about 2 million ounces in just a few years. The chart and table below show the recent price history of palladium and the forecast price by a variety of brokerages.
The macroeconomic fundamentals for palladium are excellent going forward for many years into the future. The production capabilities of PAL are growing significantly too. The Lac Des Iles mine is transitioning to a long life, low cost mine. It is forecast to produce 145,000 - 155,000 oz. of palladium for FY2011. The average cost is forecast to be $450/oz. Once the mine reaches 5,500 tpd, production is expected to be greater than 250,000 oz./year , and the cost per oz. is expected to be about $200/oz. (Q1 2015). As part of this the mine is converting from a ramp to a shaft operation. It is opening up new mining zones in this process. These are some of the costs that have kept profitability low recently. Currently its mill and tailings facility is also underutilized. PAL is doing substantial exploration drilling for expansion.
PAL is simultaneously expanding its gold mining operations. The new Vezza mine is currently scheduled to reach production in Q1 2012. Production is expected to be 39,000 oz./year. This by itself should give PAL’s earnings a good boost. Further PAL is expecting increased production and profitability from its Sleeping Giant mine by deepening its shaft by 200 meters to allow development of three new mining levels of higher grade ore. Production from these new areas is set to commence in Q1 2012. PAL is developing its Flordin mine and its Discovery mine, which are scheduled to begin production in 2014. Discovery alone has the potential for up to 40,000 oz./year in gold production. 2011 is a transition year for the Sleeping Giant mine, but it is forecast to produce 15,000 - 20,000 oz. this year even so. The new development will add to this number significantly. It should also bring the average production cost down. A few of the resource tables for these projects are below.
The Lac Des Iles Palladium mine (data from May 31, 2010 -- Roby Zone and Dec. 31, 2010 Offset Zone).
The mineral table of the Sleeping Giant mine from Dec. 31, 2010.
The mineral table of the Vezza mine from Dec. 31, 2010.
The mineral table of the Flordin mine from Mar. 14, 2011.
The mineral table of the Discovery mine from Aug. 1, 2008.
There are substantial resources delineated above. However, these are not all of PAL’s resources. Further development work is being done. There are expansions planned to the above mines. Plus palladium is being mined at the Legris and other areas. The important point is that the resources are substantial. They have room to grow. Plus two major new production areas are set to come online in early 2012. This is why the PE is set to move from about 200 to about 10. This movement should push up the stock price substantially as it occurs.
The two year chart of PAL below may provide some insight into when or if to purchase this up and coming company.
PAL appears to be near term overbought on the Slow Stochastic sub chart. However, it is at or near major long term support. It is still underneath both its 200-day SMA and its 50-day SMA, but it appears to be moving up toward both. This is a bullish buy signal overall. You could try for perfect timing, but this stock appears to be a good buy now. Averaging in is usually a good strategy. The probability of this stock reaching $4 - $5+ in the next 6-8 months seems very high. The possibility of a 50%-100% return on your investment within a year is excellent.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PAL over the next 72 hours.