Investing in Palladium: The Bull Case On Norilsk Nickel (NILSY)

Jan.29.06 | About: MMC Norilsk (NILSY)

In the annual Barron's Roundtable (sub. req.) of top investment pros, Felix Zulauf, head of Switzerland's Zulauf Asset Management, makes a well-reasoned bull case for the precious metal palladium -- and names a stock pick:

Palladium has an even tighter market [than gold]. It is a white precious metal that was discovered about 200 years ago. It is usually found and mined together with nickel, copper and platinum. More than 50% comes from Russia. Palladium does not tarnish in the air and is the least dense of the platinum group. It is used in catalytic converters in the automobile industry and in jewelry, watchmaking, dentistry, surgical instruments and electrical contacts.

Barron's: How expensive is it?

Zulauf: The price shot up to about $1,000 an ounce in 2000. It was cornered by a hedge fund, and when the fund closed the price collapsed. Half the world's palladium comes from Russia, and Russia's Norilsk Nickel, the primary producer, does not give out any information. It can't sell palladium directly to consumers, and a lot of consumers have substituted platinum. Platinum has become expensive and now trades at $1,000 an ounce, while palladium has become cheap and trades at $270. The pendulum is going to swing back. The Russians are becoming more open, and costs will lead consumers to switch.

Barron's: How do you invest in palladium?

Zulauf: Buy Norilsk Nickel (OTCPK:NILSY). In addition to palladium, it accounts for about 20% of global nickel supply, 24% of platinum and 4% of copper... The company accounts for 5% of Russian exports. The market cap is $19 billion, and 62% of the stock is controlled by the chairman, Vladimir Potanin, and the CEO, Mikhail Prokhorov. Another 25% is held in ADRs, and 14% is held by other investors. The stock accounts for 7.5% of the MSCI Russia Index.

Norilsk earned about $10 per share in 2005, versus $8.78 in '04 and $4.14 in '03. The dividend yield is a bit over 2%. Today [Jan. 9] the company spun off its gold-production business. For each share of Norilsk, shareholders will receive one share of Polyus Gold, representing Norilsk's Siberian gold production plus 20% of the gold fields Norilsk owns. In 2004 Norilsk produced 34 tons of gold, or 20% of Russia's gold output....

This is a cheap mining company with which one can participate in the natural-resources boom I see continuing for several years. The majority owner, Potanin, is an oligarch, but is on very good terms with the Kremlin. Still, there is a higher risk here than in a U.S. utility stock or a five-year U.S. Treasury bond.


NILSY 1-yr chart:

Related: Two Companies Poised To Ride the Palladium Rush (SWC, PAL)

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