Investing in a Resource-Constrained World (Part II) 28 comments
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Three weeks ago I posted the first part of a series of articles discussing the importance of making long term investment decisions based on the fact that we are living in a resource constrained world, due to rapid depletion of many non-renewable natural resources. If you look at the hot sectors in recent years, most of those that were "hot" are related to depleting natural resources one way or another. That includes oil, natural gas, coal, base metals, and precious metals. And of course, relating to the depletion of fossil fuels, the development of alternative energy is booming and the stocks are hot.
Palladium has been my most favorite metal. I have previously discussed the unusual characteristics of palladium. It is the only metal that defied the well established over-supply condition, with price rallied higher in the last 5 years, proving all metal analysts wrong in their bearish predictions. That surprising fact alone should catch people's attention, and encourage them to study what's unusual about this metal. I see booming demands of palladium from auto catalyst converters, jewelry, fuel cell, catalyst in biofuel synthesize and oil refinery, and misc. applications. Most astonishingly, palladium could be used in cold fusion and bring about a perfect solution to our current energy crisis. With even the authoritative American Physical Society [APS] now publicly endorsing cold fusion as a real science, by sponsoring cold fusion conferences, who is to say cold fusion is not proven? A Russian scientist already promised to demo a 100KW working device by August, 2008. We will soon see if he keeps his promise. If cold fusion becomes a commercial reality, I predict palladium price could reach 100 to 1000 times more expensive than gold.
There are two recent shocking developments in the PGM (platinum group metals) market. One is widely publicized, the other is hardly noticed by any one. Both are extremely bullish for platinum and palladium, and therefore bullish for the only two primary palladium producers in the whole world, PAL and SWC.
First, the little noticed event. In recent years, Russia has been selling off its strategic palladium metal stockpile, accumulated from nickel mining during the Soviet Era, at a pace of roughly 2 million ounces per year. They traditionally ship the annual palladium stockpile sale to Switzerland, in the month of December. Read John Reade's alchemnist paper. Many people speculate that as of now, the Russian palladium stockpile should be largely depleted. So it's not surprising to me at all that indeed in the month of December, 2007, shipment of Russian palladium stockpile failed to show up in Switzerland. Even UBS's John Reade himself noticed this fact and commented recently as he continued to watch if any shipment could show up in early 2008, or maybe that's the END of the Russian palladium stockpile sale.
The termination of Russian palladium stockpile sale is an earth shattering event! The 2 million ounces per year extra supply was the whole reason for the global palladium over-supply. With this extra supply now removed, there is actually a global shortage. See supply/demand data from Implats. Palladium rallied in the past 5 years under an over-supply condition. What happens now there is an industry shortage, with investment demand booming at the same time? Palladium price will have to go through the roof once people find out about the global shortage.
There has recently also been a tsunami type event in the global PGM market. South Africa's electricity power crisis caught the attention of the whole world. Recently, shortage of electricity forced ALL South African's precious metal mines to shut down production. That's quite a shocking global headline news. It had been no secret that throughout 2007, mine production in South Africa has been impacted by various problems, including strikes, safety problems, shortage of electricity. But it only captured the whole world's attention on Jan 25, 2008, when people realized it's not just a few individual mines with problems. The whole country's mining industry shut down! This is not a temporary problem. The whole country's electricity supply infrastructure simply was neglected for too long, now it is unable to meet the rapidly increasing demand. It's a strategic mistake 10 years in the making, and will take till 2013 before we see the problem fixed.
South Africa supplies over 80% of the world's platinum and over 35% of the palladium. With no easy fix of the ongoing electricity crisis in sight, it is expected that PGM metal supply from South African will be greatly impacted in the next few years, causing severe shortage. Quick thinking investors immediately jumped on the news. Prices of platinum and palladium skyrocketed in recent days. I believe several things contribute to the rally:
- The industry shortage causes the price rally.
- Investors attracted by the metal rally. Their hoarding worsens the shortage.
- Industry users, fearing a disruption of supply, will panic hoard at all cost.
I urge people to seize the opportunity and jump on board to load up stocks of SWC and PAL. Especially PAL, it is an extremely valuable deal after the dramatic 14% drop on Feb 5th, 2008. It's a shame that evil forces are allowed to manipulate the market and distort stock prices absurdly away from their rightful values. PAL, a precious metal miner that supplies more than 5% of the world's need of palladium metal, is now hardly trading above its book value and hardly above the annual metal sales revenue.
How high should PAL and SWC share prices go? PAL, with 79M shares outstanding, produces 290K ounces of palladium and 25K ounces of platinum per year. That's 0.00367 oz Pd and 0.0003164 oz Pt per share. At a reasonable P/E ratio of 10, each $1 increase of Pd and Pt metal prices should translate to $0.0367 and $0.003164 gain of PAL share price. Since Jan. 23, 2008, platinum gained $288/oz ($1550/oz to $1838/oz); palladium gained $62/oz ($367/oz to $429/oz). Just based on this metal prices gain, PAL share price should have gained $2.28 from the palladium rally, and $0.91 from platinum, for a total of $3.19 per share gain. But PAL only increased from $3.59 to $4.73. PAL should already be at $6.78 today!
I say, when you see such a dirt cheap deal, jump in to load as much as possible. Sadly most people would rather chase the high fliers with ridiculously high valuation ratio, than do their due diligence study and pick up gems that no one wants. That's why the world has millions of fools but only a handful successful investors like Warren Buffet.
One of such high fliers is the solar stock, First Solar, FSLR, which I talked about in several previous Seeking Alpha articles. I pointed out that due to extremely limited global tellurium supply and booming demand from new applications, FSLR, which is exclusively based on cadmium telluride, has no growth potential. Not only it has no growth potential, I see that it shut business down in the matter of about two years. I also see an incredible opportunity in investing in physical tellurium metal, and have purchased a small stockpile as the result of my study. At the time of writing those tellurium articles I had a short position in FSLR. As of now, I have already closed my FSLR short position so as to concentrate my investment resources in response to recent extremely bullish development of the fundamentals of PAL and SWC.
I stand by all my previous view points and I want to continue to discuss FSLR's tellurium problem, even though I no longer have a vested interest in the stock at this time. I feel I have an obligation to continue the discussion and warn people, especially as I made a shocking discovery recently from 5N Plus's recent quarterly release. The transcript of VNP's conference call provides more information and confirms my suspicion. That is, FSLR is probably getting only about half of the CdTe raw material it needs, from its dominant supplier 5N Plus Inc.. I do not know how it is going to continue its round the clock 24/7 production. More over, FSLR repeatedly assured investors that it has made proper arrangement to ensure raw material supply once the new Malaysia factories start up. But from 5N Plus, looks like FSLR hasn't yet talked with 5N Plus regarding the raw material supply of the Malaysia factory. If they haven't consulted with their most important supplier, how can they be so sure their supply chain will be in proper order to support the new factories? I plan to short FSLR again right before the Q4/07 earnings report.
I used to be a gold and silver fan, and have studied a number of silver mining stocks. My favorites are PAAS, CDE and SLW. I actually owned SLW for some time in 2006. It was claimed to be the purest silver player. A bit too pure. SLW does not own any mine itself. If you are a resource investor, why do you invest in something that does not actually own the resources? SLW is essentially a holding company, with its value derived from a few silver purchase contracts. I am just not sure whether you want to bet $3B worth of investments on nothing but a few contracts. Too much risk if those contracts are in jeopardy. I also looked at PAAS and believe it is probably one of the best silver mining companies. But ultimately I decided that I would rather own silver rounds from PAAS, than its stocks.
In my last article I talked about IPSU, a sugar player, and JRCC, a coal player. I determined that IPSU may not be the best stock to leverage the sugar bull. IPSU does not produce sugar feedstock itself, so it's not clear how it can benefit from raising sugar price. As for JRCC, it rallied too fast for me to catch lately, due to the rally in coal prices. The strong coal rally in recent months took me by surprise. I do not see how the supply/demand equation of coal has changed. Coal is still abundant in the United States. I do not see a dramatic increase of coal consumption in electricity generation. The rally of coal is probably speculation driven, motivated by recent strong demand on the international coal market. I am not sure how long the coal rally will continue, or whether it could turn south suddenly. Investing in JRCC is thus a bit risky at this price level. I would watch the coal movement a little bit to see if it lasts, and wait for JRCC share price to drop a bit before jumping on board.
Agriculture is hot! The fertilizer sector seems to be pretty hot in recent months. That prompted me to pay attention to stocks like POT, MOS, CF, AGU, TNH, SEED, FEED, COIN. People know that Jim Rogers is favorable in agriculture. The few stocks I cited here are mostly fertilizer producers, with stellar stock performance in the past 12 months, thanks to rapidly raising fertilizer prices. These fertilizer stocks have seen some setbacks recently. Should we buy here?
But after some study, I am skeptical about how much higher these fertilizer stocks can go. Fertilizers have only one usage: fertilizing agriculture and landscaping plantations. The surface area of the earth is not growing any bigger. Arable lands are actually shrinking. World food production has been flat , with little growth potential. I do not see a big growth potential on the demand side of fertilizer. On the supply side, there is no limitation of the raw material feedstock of the fertilizer industry. Nitrogen is 80% of the earth's atmosphere. Potassium is one of the most abundant elements on earth. As for phosphorite, it is less abundant but the known reserve is still estimated at a few hundred years. So fertilizers are not constrained by natural resources. The recent price boom of fertilizers is probably more due to rapidly rising energy costs, like natural gas, and less due to increased demand. I don't think fertilizer makers are the best place to bet your resource-oriented investments. However, maybe stocking up some physical fertilizers in your backyard could be a good idea.
Palladium, platinum, and tellurium are still my most favorite elements. I will talk about uranium and other metals in my next article.
Disclosure: At the time of writing, the author is heavily invested in SWC and PAL and plans to add more position as fund becomes available. The author does not currently have a position in FSLR but intends to short it soon.
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This article has 28 comments:
Any thoughts on water? I have looked at and used some of the water ETF's.
But what Iam looking for is exposure to water rights. Where people own the water access. I have found no vehicles for that approach. Does it exist?
Any thoughts would be appreciated.
The PGM rally is awesome, so is the gain in the stocks PAL and SWC. We are blessed that there is really not a third player in the field, just PAL and SWC, or you go buy physical PGM metals.
You have become one of my favorite Bloggers. Very refreshing to see someone that shares my analysis on Palladium. You made a great call.
I am very interested to see your next article focusing on Uranium.
Keep up the great analysis.
Regards,
FW
As usual you are blowing smoke and making things up instead of actually studying:
"The recent price boom of fertilizers is probably more due to rapidly rising energy costs, like natural gas, and less due to increased demand. "
Look into ethanol mandates, their direct effect on corn farming, and their indirect effect on all other agriculture.
Is there a link to your e-mail on your blog? I wanted to your analysis. Just didn't think here is the right place.
Thanks
beanieville.blogspot.c...
beanieville.blogspot.c...
Look at this incredible price rally in tellurium. See teh chart on the right side:
www.asianmetal.com/Met...
Look at that, no one should have much doubt that FSLR is quickly approaching a DOOM pretty soon, as tellurium shortage worsen globally.
When is your next article on Uranium?
WHat is your target price on Palladium and PDL?
Also same as Mark above - is it still a good idea to get PAL now or wait for a pullback after this huge run?
NEW YORK, Feb 20 (Reuters) - Thin-film solar maker First Solar (FSLR) expects its new plant in Malaysia to cut production costs by about 20 cents per watt when it comes on line later this year.
"As we're moving to Malaysia, I think our models imply a 20 cent cost-per-watt reduction," Jens Meyerhoff, First Solar chief financial officer, told a Piper Jaffray investment conference.
First Solar has said its production costs in the fourth quarter fell to $1.12 per watt, down from $1.29 at the beginning of 2007.
The company's reliance on cadmium telluride rather than silicon for its solar cells has helped protect it from rising costs that have hurt other solar equipment makers.
Meyerhoff dismissed concerns by some analysts who have questioned whether the world's supplies of tellurium, one of the planet's rarest elements, would be ample enough to feed First Solar's new production.
"Tellurium availability has not impacted us. As we're building out this capacity, we're assessing supply chain readiness ... we feel comfortable with the supply," he said. (Reporting by Matt Daily, editing by Gerald E. McCormick and Maureen Bavdek)
Either they are lying or they have another source besides 5N Plus. Maybe 5n's price was too high.
"Net sales in the fourth quarter rose to $201 million from $53 million a year earlier. Analysts had been looking for about $180.2 million."
The palladium and platinum super bull cycle is a multi-year cycle. We are only seeing the beginning of it. PAL and SWC are definitely a buy and long term holding at current price level. I have not sold a single share. I took advantage of last Friday (Feb 29,08)'s PAL dip and loaded more shares using increased buying power. I advice you do the same.
On FSLR, do you guys notice that whenever analysts asked them for specific, quantified answers on tellurium supply, they could never give a specific number for an answer. They look like trying to hide something. I honestly believe that their Q4 production numbers could not be possible. 5N Plus remains their dominant CdTe supplier and I see no indication that they are getting enough CdTe supply from 5N Plus. I repeatedly contacted FSLR ask for clarification on their CdTe supply. I even threatened to file a complaint to SEC, so far I get no response from them. At this moment I do not own any long or short position in FSLR. But I really hope they be honest with the public regarding their tellurium supply.
www.asianmetal.cn/Meta...
Look at the charts on the right side. In just the last 12 months, tellurium went from 500 Yuan/kilogram to now 1500 to 1600 Yuan/kilogram. More than triple in 12 months. That really tells you how tight the global tellurium supply is!!!
By Jack Lifton
14 Feb 2008 at 01:12 PM GMT-05:00
DETROIT (ResourceInvestor.com) -- In honour of St. Valentine’s Day, I want to tell my readers not to get their hearts set on investing in palladium; I think that palladium seems to have recently flat lined. I detect the odour of wasted money emanating from any investments in it other than very short term plays, which are best left to those able to absorb large losses without losing their ability to eat and sleep in a warm building.
I noticed a posting in Resource Investor’s PitPundit Blog a few days ago that was a clear warning sign to those who might seek to link platinum’s current spree with palladium. The Nymex has raised the margin requirements for those who wish to trade in palladium futures both here and in Asia. I asked myself, after I read that report, why has the Nymex acted as if it is getting ready for a flood of speculation in the least valuable of the platinum group metals?
I don’t want to be mysterious, for even a second, so I will tell you that the NYMEX is worried that speculators with a (not well) hidden agenda, such as hedge funds, large German banking institutions and major producers of palladium, want to try to piggyback on current platinum fever to run up the price of palladium and unload positions in physical metal, which some of them have held for nearly a decade and the total of which equals several years, yes, I said years, of demand at current (noticeably declining) levels.
I actually think that we are seeing a utility based only paradigm developing for trading the coinage metals (historically these are gold, silver and copper, and there has been an attempt to add platinum and even a tiny amount of palladium to this category), and it, the new paradigm, in the commodity usage blow out that has characterized the 21st century; is one that the producers and traders do not like.
Although the platinum group metals (platinum, palladium, rhodium, ruthenium, iridium, osmium) cartel of trading companies and producers would like you to think differently, it is a fact that the production of platinum and palladium are not linked; the primary producers of those two metals produce one or the other in major volume but not both. If the production of platinum were to stop so then would the production of rhodium, but palladium production would be unaffected. Likewise, but not symmetrically so, the stopping of palladium production would not effect the ability of primary platinum miners to continue in production of platinum and rhodium. A slowdown in nickel production in Canada and or Russia would reduce palladium production in direct proportion whereas a slowdown in nickel production in the Republic of South Africa would only affect part of the production of platinum and rhodium.
Another illusion that the cartel likes to promote is that there is a linkage in the usage of platinum and palladium by the OEM automotive industry.
Global OEM automotive industry demand and its sources of supply are proprietary, whereas that portion of PGMs supply coming from newly mined metal is mostly public. Recycling and byproduct production are mostly proprietary. So the Johnson-Matthey yearly “Platinum Book” is mostly educated guesswork on OEM automotive industry demand, even though that demand takes up most of the world’s rhodium and platinum production but not anywhere near as significant a part of new palladium production.
The U.S. Geological Survey has just published its Platinum-Group Metals Minerals Commodity Summary (PGM MCS) for January 2008, listing its data for 2003 through 2007 inclusively. The USGS is very conservative in its projections or predictions; neither of these are not the point of their data publishing agenda. I want to quote for you the paragraph in the USGS, January, 2008, PGM MCS, which should be of interest to investors in palladium:
“Substitutes: Some motor vehicle manufacturers have substituted palladium for the more expensive platinum in catalytic converters. Until recently only platinum could be used in diesel catalytic converters; however new technologies allow palladium to be used. For most other end uses, PGMs can be substituted for other PGMs, with some losses in efficiency. In addition, electronic parts manufacturers are reducing the average palladium content of the conductive pastes used to form the electrodes of multilayer ceramic capacitors by substituting base metals or silver-palladium pastes that contain significantly less palladium.”
Investors need to be aware that some reductions in the uses of palladium, which the USGS writer mentions as trends are, in fact, already accomplished.
For example, when palladium became more expensive than platinum in 2001, its usage in catalytic converters was reduced substantially and both this “thrifting” and new technology have allowed OEM users of catalytic converters to dramatically reduce their needs for PGMs since that time. This has kept any growth in palladium usage, for example, either very low or negative. As far as the electronics industry goes, thrifting has eliminated, since 2000, some 1 million ounces of demand for palladium by that industry. It is no secret that the American sole producer of palladium was only able to stay in business during that period because of a mistake by the Ford Motor Company that forced Ford to take or pay palladium from that company at above market prices for several years; Ford took a $1 billion write-down in 2004-2005 to cover just that one error in judgment.
When that contract finally ran out, America’s sole producer of palladium was forced to sell itself to the world’s largest palladium producer, Norilsk, the Russian nickel giant. The American company was paid in part with nearly a million ounces of palladium delivered from Norilsk’s mammoth inventory of the metal. This enabled the American company to meet its contractual obligations without having to produce more palladium at a cost above the global market price.
The vaults of companies such as Norilsk, and some banks, both for their own account and for the accounts of funds that bought the metal as pure speculation in the run up of the early 2000s, are brim full of palladium. But hasn’t palladium’s price doubled since 2003? Why don’t the holders of physical metal unload their positions?
The Nymex seems to agree with me. Its action in raising the margin indicates that it sees a wave of speculation coming and it wants to protect its market makers from insolvency. The Nymex has raised its margin requirement for palladium to a level higher than it thinks palladium may be selling for in the near future so that those who have been building inventories of physical palladium for the last eight years either to maintain the price (producers) or to make a “killing” on another 2001-type speculative push will have to, at current or near term prices, bear the hard currency losses caused by their initial rush to “get into palladium” without an exit strategy.
Perhaps the Nymex is just adjusting to the new (declining) value of the dollar; perhaps margins on the less utilitarian metals will shortly be indexed to one or a basket of hard currencies.
Don’t go near palladium for the time being; you could get burned because it may only be hot due to the friction caused the shovels being used to empty vaults in Montana, Novosibirsk, Zurich, Geneva and some beautiful German Cities.
Read the other article I wrote on palladium:
seekingalpha.com/artic...
If you're so sure of yourselves, may i suggest the leap puts on FSLR? Should make ya rich rich rich.
beanieville.blogspot.c...
There are several water hoarding plays, such as PICO, which is buying land in Nevada and Arizona I believe. Boenning Scattergood publishes excellent research on the water sector, and some of it is freely available. They had a recent good call on Ameron.
I agree with Rogers, however, that when a crisis hits, you'll be lucky if they just hang you. And from both a moral and environmental perspective, this is in NO way a 'socially conscious' investment. On the contrary, free water rights for landowners is resulting in overuse of groundwater around the country and the world. Go look at the situation in Atlanta right now. There has been an ongoing fight between Georgia and Florida over river flows and groundwater for decades. It affected the oyster harvesters in Florida for a while, but now Atlanta is paying the price - you can't fill up your swimming pool there this summer due to water shortages.
One commenter mentioned water ETFs - these are a fools game, created purely for marketing purposes, with no coherent holdings. Many of them hold hoarding plays like PICO, as well as GE and Siemens, which are big in water but water is a small percentage of their business.
Basinwater (BWTR) is a black hole of bad governance and a money-losing product -- although it addresses an interesting market, which is the removal mercury and other contaminants from groundwater. Increased government regulations of such toxins will expand the market here for better capitalized competitors.
The opportunities abroad will be significant. Epure does water treatment in China -- worth taking a look at.