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  • Palladium and North American Palladium 1 comment
    May 6, 2010 10:47 AM | about stocks: IAG, PAL, SWC
    Palladium is the poor stepchild of precious metals. When investors think of precious metals, it is palladium's flashy cousins gold, silver and platinum that investors think of. Not poor palladium.
     
    But investors should not forget about palladium.....
     
    Over the past 15 months, palladium has been the best performing precious metal. Palladium has risen 35 percent since the start of the year and is fast approaching the two-year peak of $590 an ounce it hit in March 2008.
     
    Apart from seven days during February and March 2008, palladium is trading at its highest level in nine years. Prices have been driven higher by dwindling supplies and two key sources of demand.
     
    Auto Demand
     
    Palladium has been buoyed by improving sentiment in the auto industry, which accounts for about 60 percent of the consumption of the precious metal. This year has seen large increases in vehicle production in leading countries as sales rebounded from last year's collapse in demand in most mature markets.
     
    This is borne out by figures from consultancy firm PriceWaterhouseCooper. Its figures show that vehicle production in January and February rose by double-digit numbers from their levels a year ago in nine of the world's biggest vehicle markets. These markets account for about two-thirds of global light vehicle production.
     
    Vehicle production was especially strong in China and the United States in January and February. And vehicle sales remained steadfast...in March, US auto sales were 24 per cent higher than a year ago while Chinese auto sales reached a record 1.7 million vehicles, up 56 percent.
     
    These two vehicle markets are important drivers of palladium demand. That is because in China and the United States most vehicles are gasoline-powered. In contrast, most vehicles in Europe are diesel-powered.
     
    Palladium is used mostly on catalytic converters for gasoline-powered cars while platinum is used mostly on catalytic converters for diesel-powered cars.
     
    Other Demand Sources
     
    Besides the automotive market, other sources of demand for palladium include industries such as jewelry, electronics, chemicals and medical. Demand for palladium is climbing as Asian countries, especially China, are buying more electronics and jewelry that increasingly use palladium.
     
    Another source of demand for the precious metal is investment demand which formerly played a minor role. But that has changed this year with the launch of new, physically-backed exchange traded funds (ETFs).
     
    ETF holdings of palladium are at a record high, up 50 percent just from the beginning of the year.
     
    The ETF launched this year in the United States is the ETFS Physical Palladium Shares (NYSE: PALL). As of February 2010, this fund had 430,000 ounces of palladium.
     
    And as of February, all of the palladium ETFs globally were holding about 1.7 million ounces of the metal. This totals more than 23 per cent of 2009's estimated global supply.
     
    Palladium Supply
     
    The final piece to the palladium puzzle is supply. Palladium is a fairly rare metal, with global production a tenth the size of silver mining. The metal can be found in ores with other platinum group metals, but  is most often produced as a byproduct of nickel mining. This makes increasing supply difficult and highly dependent on economic conditions surrounding nickel, which is extensively used in making stainless steel.
     
    Another complication is the concentration geographically of palladium. According to the US Geological Survey, Russia is the source of over 40 percent of the metal, with South Africa a close second. Canada and the United States supply almost all the remainder.
     
    South Africa's mining problems are well documented. The nation has ten times the palladium reserves of Russia but cannot tap these resources without a reliable power grid. South African mines need reliable power since many of the palladium deposits are located over a mile below the surface.
     
    The publicly-owned South African electric utility Eskom continues to struggle meeting the country's electric needs. Estimates are there may not be an appreciable increase to generating capacity in South Africa until 2013.
     
    Russia's Norilsk Nickel ADR (OTC: NILSY) is the world's largest nickel miner and therefore also the world's dominant palladium supplier. However, it is switching to mining mineral ores that are rich in nickel and poor in palladium content. This will further cut palladium supplies.
     
    In addition, Norilsk has publicly stated that it believes palladium prices should be trading somewhere between the price of gold and the price of platinum. This lends to the thinking that the company will be in no hurry to supply more palladium to the market.
     
    Russian stockpiles, built up in the 1970s and 1980s, were a major source of palladium over the last decade. However, it now looks as if these stockpiles have been depleted. If so, this is a huge development for the palladium market. The huge inventory overhang plaguing the metal for the past decade would be gone.
     
    Sales from Russia stockpiles dropped off sharply in 2009. And global production of the metal declined by 4.4 percent last year. This may have caused the palladium market to slip into a structural deficit in 2009. This deficit looks likely to continue in 2010, as the ramp up of production from previously shuttered mines still lags the rate of demand.
     
    A structural supply deficit for palladium is a very positive development for bullish palladium investors and palladium companies.
     
    North American Palladium
     
    There are only two known primary palladium producers in the world. The two companies are North American Palladium (AMEX: PAL) and Stillwater Mining (AMEX: SWC).
     
    North American Palladium recently announced that it had restarted production at its flagship Lac des Iles mine in northwestern Ontario. This mine, which produced palladium since 1993, was shuttered in October 2008.
     
    Ore production from the Roby Underground zone at the Lac des Iles mine is expected to have increased on May 1 from 2,000 tons per day to 2,600 tons per day. In total, North American Palladium is expected to produce 140,000 ounces of palladium per year.
     
    The company also renewed its smelting contract with mining giant Xstrata ADR (OTC: XSRAY). The company said a new feature of the contract entitles it to receive advance payments of 70 percent within 60 days following the month of concentrate delivery.
     
    North American Palladium also owns and operates the Sleeping Giant gold mine which is located in the prolific Abitibi region of Quebec. The mine produced over 1 million ounces of gold before being put on care and maintenance in 2008 by IAMGOLD (NYSE: IAG).
     
    The restart of production at its flagship palladium mine will give the company positive cash flow and lower the need for additional working capital. Combined with the outlook for palladium prices looking bright for the foreseeable future, North American Palladium should do well over the next several years.


    Disclosure: No positions
    Themes: palladium, nickel Stocks: IAG, PAL, SWC
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  • Thelastrockstar
    , contributor
    Comments (35) | Send Message
     
    I hold shares in PDL and recently just bought in SWC and I believe there is a huge future for both these companies, most especially since they're both located in stable countries.

     

    That said, the recent market volatility has shaken things up quite a bit. Hopefully by next week things will settle down.
    7 May 2010, 04:17 PM Reply Like
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