Seeking Alpha

Palladium: The Bullish Case Now Looks Even Stronger

by: Mark Anthony

Russia's Norilsk Nickel Mine (NILSY.PK) is the world's largest nickel mine, with its by-product, palladium, accounting for 45% of the world’s production.

Recent termination of Russian government palladium stockpile sales, due to depletion of the stockpile, is just one of the reasons why palladium has extremely bullish supply/demand fundamentals, and why palladium performed the best among all four precious metals in 2009.

Reduction of palladium production from the Norilsk Mine could further restrain the supply, and may prompt major industry users to panic hoard as they did in 2000/2001.

One must correctly project Norilsk Nickel's 2010 metals production, to have an accurate picture of global platinum and palladium supply/demand outlook for 2010.

Norilsk's Russian operation has two divisions, the Polar Division, which produces platinum and palladium as by-products, and the Kola Division, which handles only nickel and copper.

The Polar Division proven reserve mineral ore contents are as follows:

Ore Type Ni (%) Cu (%) Pt (g/ton) Pd (g/ton) Cu/Ni Ratio
Rich 2.86% 3.98% 1.49 7.04 1.392
Cuprous 1.13% 4.58% 2.57 10.80 4.053
Disseminated 0.49% 0.89% 1.45 3.97 1.816

There are mainly two types of ores, as the third, called disseminated, is insignificant:

  1. Rich type, which is rich in nickel but poor in copper, platinum and palladium content.

  2. Cuprous type, the opposite, poor in nickel, but rich in copper, platinum and palladium.

In the past, I pointed out that Norilsk was switching to the rich nickel ore to cut costs and increase nickel revenue, or possibly due to the geologic structure of the ore body being mined.

The effect of the production switch is that for the same amount of nickel, much less copper, platinum and palladium will be produced.

The data in the past two years and Norilsk’s own projection for 2010 have confirmed my predictions of this, made in previous posts. The ore type switch can be closely monitored by looking at the Copper/Nickel production ratio and seeing how it changes over time.

Here are the Norilsk Nickel Russian production numbers (Polar + Kola Divisions) over the years, plus 2010 projections:

Year Ni (tons) Cu (tons) Pt (troy oz) ±% Pd (troy oz) ±% Cu/Ni
2005 243,000 427,000 751,000 3,133,000 1.757
2006 244,000 425,000 752,000 +0.13% 3,164,000 +0.99% 1.742
2007 234,454 404,465 727,000 -3.32% 3,049,000 -3.63% 1.725
2008 232,302 400,338 632,000 -13.1% 2,702,000 -11.4% 1,723
2009 232,813 382,443 636,000 +0.63% 2,676,000 -0.96% 1.643
2010* 234,000 363,000 655,000 +2.99% 2,715,000 +1.46% 1.551

(* Based on Norilsk Nickel projection for 2010)

We are interested in palladium, so we want to see only the productions of the Polar Division. After subtracting the Kola Division, here are the numbers for the Polar Division:

Year Ni (tons) Cu (tons) Pt (troy oz) ±% Pd (troy oz) ±% Cu/Ni
2005 123,000 361,000 751,000 3,133,000 2.935
2006 122,000 351,000 752,000 +0.13% 3,164,000 +0.99% 2.877
2007 119,000 338,000 727,000 -3.32% 3,049,000 -3.63% 2.840
2008 122,000 339,000 632,000 -13.1% 2,702,000 -11.4% 2.779
2009 122,813 321,443 636,000 +0.63% 2,676,000 -0.96% 2.617
2010* 124,000 302,000 655,000 +2.99% 2,715,000 +1.46% 2.435

(* Based on Norilsk Nickel projection for 2010)

As shown in the chart, nickel production has remained pretty flat over the years. However the copper/nickel ratio consistently dropped. The drop of the Cu/Ni ratio accelerated since 2008 and continues to go significantly down in 2010 projections.

As a result, I predict Norilsk’s palladium production in 2010 will not go up slightly as projected by Norilsk Nickel itself, but rather, should continue to drop significantly from 2009 levels, commensurate with the drop of the copper/nickel production ratio.

I am predicting a palladium production level at 2.55M ounces for 2010, and platinum at 600K ounces.

Is it ridiculous to expect that readers should believe my prediction, rather than Norilsk’s own prediction? From early 2008 on, based on my observation of the ore type switch, I insisted on my prediction of Norilsk palladium production at 2.7M level for 2008.

But Norilsk has re-iterated that it’s on target to reach 2008 palladium production levels of 3.02M to 3.07M ounces. They still insist that previous full year projections were unchanged. In Q3 they did not revise annual guidance either. When the final result of 2008 came out to be 2.7M ounces, I was right, Norilsk Nickel was wrong. Why they insist on a wrong and overly optimistic guidance, is beyond me.

The bullish case for global palladium markets now looks even stronger. Investors in the world’s only primary palladium producers, Stillwater Mining (SWC) and North American Palladium (PAL), will stand to profit from the expected palladium price surge in 2010.

After falling continuously for 8 days, for a healthy correction from recent high, it’s now time to buy back these two stocks, SWC and PAL.

Data sources:
Norilsk Nickel Company Web Page
Norilsk Nickel Production Result Releases
Norilsk Nickel 2009 Production and Projection for 2010
Norilsk Nickel Mineral Reserves and Resources Statement
Norilsk Nickel Mining Operations

Full Disclosure: The author hoards physical precious metal palladium, and holds large positions in SWC and PAL. 95% of my 401K account is in SWC and PAL.