Calling a North American Palladium Bottom

In a previous article I discussed that palladium could be the best commodity investment and I recommend that people buy the stocks of Stillwater Mining Company (SWC) and North American Palladium (PAL) for leveraged long term profit from the coming palladium super bull. These two North American mining companies are the only primary PGM metal producers outside Russia and South Africa. I discussed the major reasons why palladium is super bullish, including the end of the Russian stockpile sale soon; some determined investors have been loading quietly since 2003; auto companies switching to the cheaper palladium for catalysts converters; emerging PGM metal applications including the red hot fuel cell batteries in vehicles, as well as in mobile electronics; and the more exotic prospective that cold fusion could become a commercial reality, bringing the palladium price to unimaginable level if that happens.

As of this writing, the stock price of PAL has been pushed from recent high of $12.65 to a multi-year low of only $3.40, while prices of its metal products are near multi-year highs. I have sufficient reasons to believe this is a deliberate stock price manipulation.

This is an extremely rare opportunity that investors need to seize immediately and load up PAL at this incredibly low entry price, I urge people to rush in to buy. For all those folks who could not bear the pain and sold, now is time to buy back your shares. Don't let some one else steal your shares at this dirt cheap price.

PAL started the drop from $8.05 a share, on November 5th, 2007, when a Q3 loss of 25 cents was reported, far worse than estimates. The plummet worsened when PAL announces a $100M secondary public offer on November 27, 2007, with the offer units and price yet to be determined at the time. PAL reached the low of $4.04 on December 10, and the secondary offer price was fixed at $4 that evening, number of offer unit was fixed at 14M, for a total of $56M.

The next day, on December 11th, PAL saw extremely high volume of trade, more than one million shares were traded in just the first 5 minute. More than 7.89M shares traded that day, and the stock was pushed to the low of $3.40 a share at close. The next day, December 12 saw reduced but still significant trade volume, and the stock price recovered some to close at $3.54.

It looks like a well defined bottom upon the conclusion of secondary offer. Once the offer is closed (today, December 13, 2007), the conventional wisdom is the stock should rally back up.

I believe the PAL's Q3 loss result, as well as the secondary offer announced right after a bad quarterly result, were deliberately planned for the sole purpose of depressing stock price and get the secondary offering priced as low as possible, so as to allow certain big stake holders to increase their stakes at the lowest cost possible, and shake out retail investors. There was also carefully timed and concerted market manipulations going on to mercilessly hammer the stock down during the trading hours for the last few weeks.

Why do I believe that the Q3 result was deliberately depressed? I examined the financial report for the third quarter, and discovered that the sales revenue reported is way much lower than that in first quarter, during which PAL reported a 10 cents per share profit. The Q1 sales revenue was $68.4M, while the Q3 sales revenue was only $36.492M. It was way much less!

Further, the $36.492M sales revenue in Q3 just does not look right, judging from the amount of metals produced and their realize prices. For the calculation I used the metal producton numbers from page 3; Palladium sales price from page 2; byproduct metal prices from page 6, and the sales revenue break down from page 25. I did the calculation, and found that indeed the numbers do not look right:

So we see that the total value of metals produced was $51.33M, but the actual sales revenue was only $36.492M. The shortcoming is as high as $14.84M, more than the reported quarterly loss of $14M. Clearly, the PAL management did not sell all of the metals produced. They held some metals back, and reported reduced sales revenue as well as quarterly loss. The quarterly loss was an intended result!

Once we understand that the quarterly loss was a planned result, it's now easy to understand why the management chose to announce a secondary offering right after a bad quarterly result depressed the stock price, knowing full well that such an announcement of secondary offering could only further depress the share price, and dilute share value.

Because a share price drop must be the intended result! There must be some internal pressure from certain big share holders to produce the quarterly loss they want to see, and then a secondary offer announcement to depress stock price.

Because somebody must want to load cheap shares to increase their stake at as low a cost as possible. That is why! Folks, now you understand why you are forced to sell your shares at dirt cheap price? Somebody wants to grab your cheap shares!

People need to wake up and hurry to buy back the shares they lost! Now is the right time!

Full Disclosure: The author is holding long positions in both PAL and SWC stocks.

Comments

[fxtrader07:]

Hey mark, this is by far the strangest and, frankly, most absurd commentary I ever came across at seeking alpha.

Are you aware that by this strange construction of causes and effects you do not only accuse mgmt of outright planned share price manipulation and fraudulent SEC filings? But that you simply are way off the mark (no pun intended) by failing to address the one most obvious and most reasonable point of them all??
And this one is, plain and simple: PAL's mgmt screw it up completely and will run the company straight into the ground if it is allowed to continue.
As I see it, and is clear from the cash-flow statements, mgmt simply failed to generate sufficient cash from operations to keep the ever declining production running. In the current climate of credit squeeze they suddenly woke up and discovered that access to capital to keep the company running was getting very difficult. Now, at the end of the quarter they were almost running out of cash and hence, made this awful secondary that destroyed (diluted) shareholders' equity and put enormous pressure on the stock price.
If they did so intentionally as you assumed, they ought to get fired instantly and a class action lawsuit filed against them.
However, by looking at the development of this company in a PM and PGM bullmarket environment, I cannot help but conclude that the mgmt of PAL is simply one of the worst in industry, a bunch of incompetent managers that do serve only their own interests, i.e. living off shareholders' money as long as possible.
Rather than blindly pumping the stock you better wake up to realities at PAL before urging people to throw in their money.-
This stock should be avoided except for a short-term rebound trade, (though i would not bank on even that).
Because, regardless whether the q3 loss and the subsequent secondary offering were done by intention to depress the share price (robbing shareholders) or whether they were the result simply of mgmt's incompetence, the net effect is the same: a company, whose mgmt cannot and should not be trusted.
I know, we differ on that, but I side with the great Warren Buffet here, who is supposed to have said that investors should seek to own companies that even a monkey could run -- because eventually, one will. Now, the mining industry isn't one that a monkey will ever run successfully and PAL is a case in point.

2007 Dec 13 08:14 AM

[fxtrader07:]

the above comment was by me - somehow my name didn't appear

fxtrader_2007

2007 Dec 13 08:16 AM

[kevintx:]

Nice digging to see the underselling of production but we don't need to imagine a conspiracy when simple incompetence might explain it. This company moves almost 6 million tons of ore in a year, about one great pyramid of Cheops every year, but still makes less money than a kid's lemonade stand.

2007 Dec 13 08:54 AM

[Mark Anthony:]

The chart that I submitted could not be displayed. Read my original article on my blog site to see the chart of the metals revenue break down:
stockology.blogspot.co...

No one can deny that PAL sold way less metal than what it produced during the quarter. I do NOT. Repeat I do NOT accume the management of illegal accouting practice. Company can chose to sell more or less metal than they produced in any of the quarter and it is perfectly legal.

But it does mislead people in judging the company's operating status. It mislead people who only read headline news, but could not fool some one who is willing to dig through details to find out the truth. That's how important it is that you always need to do your own DD.

2007 Dec 13 09:30 AM

[vboring:]

To unsuspecting reader, be sure to check out this author's other posts. He makes some wild claims.

Knowing nothing about this company, I'd like to suggest the possibility that they are perhaps the weakest company in an increasingly competitive industry.

The biggest use of Pd is in catalysts for automotive emissions controls. Auto sales are declining in areas that require catalysts like the US because the purchases are fueled by credit and optimism, and credit and optimism are both having a bad year.

So, the field is getting tightened and maybe PAL is the weakest company and will go away.

Definitely check Mark's claims before following any of his advice, though. He has a way of spreading crazy all of the place.

2007 Dec 13 11:36 AM

[fxtrader07:]

Mark, i am not questioning your numbers, because it doesn't matter in this case. i question your interpretation. if mgmt intentionally produced a managed loss only to do a secondary offering at depresed prices thereafter, it's pretty much irrelevant whether they did follow accounting rules. It still is fraudulent behaviour, at least it is not trustworthy. So, tell me please, where in your due diligence process is trustworthiness of mgmt ranked? does it play a role at all?
how can you be sure that they do this kind of "trick" not again and again, effectively taking away all your money?
in short: How can you make a bull case out of that? Don't you really see the huge disconnect in your story??

2007 Dec 13 11:40 AM

[bushman:]

If theirs a scam to sucker investers ... We should surely ask the question, "are you Mark not part of the scam??

2007 Dec 13 10:35 PM

[Mark Anthony:]

There are further proofs that the reported Q3 loss of $14M was just a deliberate accouting gimmick. There wasn't a real loss in Q3.

At the end of Q2, total asset was $267.766M, total liability was $93.209M, Shareholder equity $174.557M.

At the end of Q3, total asset was $244.432M, total liability was $77.807M, shareholder equity $166.625M.

The drop of shareholder equity from $174.557M to $166.625M would indicate that actual quarterly loss was $7.932M. It's far less than the $14M loss reported on the income statement.

But even the $7.932M loss of shareholder equity is an incorrect indicator. PAL paid down $15.406M of the liability. Where did it get money to pay down the liability if it had a quarterly loss?

The real gimmick item is an item in the asset, called "mining interest". It is NOT a current asset and does not contribute to cash flow. The mining interest dropped from $130.757M to $121.366M. A drop of $9.391M.

This $9.391M drop of mining interest is the accounting gimmick that more than accounted for the $7.932M drop of shareholder equity.

Without this gimmick, the shareholder equity will actually see a GAIN of $1.459M for Q3. That is the real number that actually reflected the status of the Q3 operation: A slight gaim, NOT a loss.

Mining interest throughout the whole 2006 year remained a constant at $146.617M. Why does it drop in Q3? It's not a cash item! Any time the management wants to show a worse quarterly result, they can just drop that number as they wish. That's the accounting gimmick we see here.

2007 Dec 14 05:39 AM

[Mark Anthony:]

fxtrader_2007:

To answer your question, trust-worthiness of management ranks the last in my due diligence to decide whether it is a worthy investment or not. The whole point of doing your own DD is that you do NOT trust people and do NOT take things at their face value. So if you have already done your DD and already know something's value, why do you care if you trust or dis-trust some one?

Let me give you an analog: Some one is selling you a piece of palladium but he tells you it's silver, It's actually one pound but he told you it's one kilogram. You don't trust him. you do your due diligence. You use your instrument to determine that it's palladium, and it is only one pound, not one kilogram.

Would you walk away just because the guy cheated you, or would you be happy to buy it as what he claims it to be, one kilogram of silver? The answer to me is obvious. I will take the deal knowing that I have done my DD and his deception does not bother me.

PAL at below $4 is a steal. It's like buying palladium at silver price.

2007 Dec 14 06:14 AM

[Smart Look:]

Ultimately you were correct Mark.
Thanks for the tip. I got in at $4.34 and sold at $8.36 yesterday.
I don't know what to make of it now but I may trade it on a day to day basis.

2008 Mar 04 11:45 PM