By Jeff Clark, Senior Precious Metals Analyst It’s quite the dilemma.
One of the major reasons my colleagues and I are so bullish on platinum group metals (PGM)-palladium, in particular-is because of the intractable problems with supply. But most of the producers are backed into corners, with few options for improving their outlook. There’s simply no way for these metals to avoid a long-term production deficit due to the deep seated problems with the companies that produce them.
So, how to invest?
Since we’re talking about profiting from a metals bull market, we could just buy bullion-and we have indeed recommended doing so to our readers. But to really maximize your leverage to the upside (and avoid more risky futures and options ), a stock in a company that produces the metal is normally the way to go. Unfortunately, as above, the pickings are slim.
For us to invest in a PGM producer, the company would have to be:
- Outside of South Africa and Russia. The problems with miners in both countries are numerous and difficult.
- Making money. Many producers are not profitable at current prices because production costs are so high. And they won’t come down just because the strikes ended-they’ll go up, due to higher wages.
- Have a strong growth profile. We want a company that can capitalize on burgeoning demand, which would add further leverage to our investment.
- Have strong management (of course!). The last thing we want is a team with no experience navigating a volatile market such as this.
Does such a stock exist?
It’s a tall order, but the answer is yes. The company we recommend in this area meets all the criteria above-and is the safest speculation in this space. We consider it so safe, in fact, that we just “graduated” it from the International Speculator to BIG GOLD .
How’s This for Leverage? This profitable mid-tier producer is perfectly positioned: it’s not so small that we’re purely speculating on some uncertain game changing event, and yet it’s small enough to generate much larger share price gains than would be possible for one of the major mining companies. On the other hand, it’s big enough to catch the attention of mainstream investors. Here are seven reasons why we’re excited about this company and the leverage we think we’ll get by owning shares……
#1: Large, High-Grade Assets
The company has two distinct but closely related mine sites. These alone will support the company’s growth for many years. However, only nine miles of an estimated 28 miles of known mineralization has been developed between them-essentially one third of one giant mineralized structure. Management thinks it has an additional 102 million tonnes of undeveloped resources waiting to be dug up.
And get this: the average grade of their proven and probable reserves is 0.45 ounces per tonne, the world’s highest grade PGM deposit. Of these, 78% is palladium, a very attractive figure since we’re even more bullish on it than platinum. At the right metals prices, this company could double or triple production and still maintain a very long mine life.
#2: Growing Production and Low Costs
The company grew 2013 production by 10,000 ounces, but has yet to use all its milling capacity. It currently uses about 3,600 tonnes per day (tpd) of its 6,000 tpd total capacity. The company is working to increase ore production this year, which is good timing for us.
With a much cleaner balance sheet and a forecast of $800-$850 per ounce for all-in sustaining costs (AISC) in 2014, the company looks poised to make money in the current price environment-and a lot of money in the supply squeeze we anticipate.
#3: Recycling Business
In addition to mining, this company recycles depleted catalyst materials to recover palladium, platinum, and rhodium at its smelter and base metal refinery. It’s been doing this since 1997, and business is booming. Pre-tax earnings last year rose a whopping 233% over 2012. And management says it will expand this end of their business over the next few years.
#4: Strong Financial Performance
This company reported over a billion dollars of revenue last year, up nearly 30% from 2012. It finished the year with a very strong working capital position of almost a half billion dollars.
#5: Unique North American Operations
The company is one of only a few PGM producers in North America. Nearly all other PGM mines operate in South Africa (Impala, Amplats, Lonmin, etc.) or Russia (Norilsk). Therefore, this company is more stable than most that mine in other jurisdictions.
#6: Upgraded Management
A prior management team made a poor investment in Argentina a few years back, which led to major changes in the board of directors and top management last year. The new president and CEO is a 21-year industry veteran and has experience in both M&A and mine optimization. He’s already corrected past mistakes, and we’re happy with the direction he’s taken the company. The technical people on the ground seem competent and are getting admirable results.
#7: We’ve Been There!
Our Chief Metals Investment Strategist Louis James, who conducted a due diligence trip to the company’s operations last year, says:
I liked the story when I visited and considered it to be the company to buy in a safe mining jurisdiction. But I didn’t want to bet on the team in place at the time. Flash forward and now it’s under new management, which is very focused on cutting costs and expanding the core business. The company’s results for 2013 were quite impressive, and I expect them to get better going forward. I’m convinced this company is uniquely positioned to benefit from potential supply shortages. Coupled with a likely rise in demand from the global auto industry in the years ahead, this stock is a very attractive play.
Here’s a picture from his visit. Pay dirt: this is what the company’s palladium-platinum mineralization looks like before blasting. You can see the closely spaced holes that will be blasted a fraction of a second before the surrounding ones-in successive waves-so the ore is blasted inward. This high-grade resource in a safe and stable jurisdiction is the heart of our speculation. The Only Stock to Buy, in a Market Backed into a Corner Johnson Matthey, the world’s leading authority on PGMs, estimates the platinum market will register a deficit of at least 1.2 million ounces this year. This would be the largest shortfall since it first compiled data in 1975.
While it will take an enormous amount of time and expense to recover from the strikes in South Africa, that’s only the first layer of problems for the industry:
- According to consultancy GFMS, 300,000 ounces of platinum and 165,000 ounces of palladium could be lost after the strikes end, as it will take time and money to ramp up to full capacity-if that’s even possible since some mines have been damaged. The Implats CEO said it will take his company at least three months to return to full production, and they’ve already put the development of three new replacement shafts in the Rustenburg area on hold. Anglo American announced just last week that it plans to sell its platinum operations.
- Holdings of physically backed palladium ETFs continue to hit record highs. In less than two months, a half million ounces were added to ETFs. Fund holdings will likely continue to climb and push the palladium market further into deficit.
- The Russian government has been reportedly buying palladium from local producers, since it appears its stockpiles are near exhaustion. Exports ticked higher last month, but that was likely in anticipation of potential sanctions.
- Some recyclers announced they are holding back on sales, as they believe prices will move higher.
- Platinum demand in India is expected to grow 35% this year.
- Reports have surfaced that tout replacements to platinum and/or palladium. However, these are mostly research projects and are at least two to three years away from commercial viability (some will never make it).
- Auto sales in the US, China, and Europe, the three biggest regions by consumption, were up 12% through May over 2013.
- Existing stockpiles of these metals have dwindled. Based on prior estimates from Citigroup, only nine weeks of palladium and 22 weeks of platinum supplies remain-and half of those are in Russia. Standard Bank projects that stockpiled material from South African producers will run out in a month or less.
The key point is that platinum and palladium supply is in a structural deficit. Prices will pull back now that the strikes have ended-and that is your opportunity. The bull market in these metals is really just getting underway.
And we have the primo pick in the space. The shares of this stock would have to climb 50% just to match its 2011 highs-and that’s without the platinum/palladium supply crunch we’re speculating on. As you’ve surmised by now, I can’t give away the name of this stock in fairness to paid subscribers. But you can get it by giving BIG GOLD a risk free try. You’ll receive our full analysis and specific buy guidance, along with an exclusive discount on a popular gold coin in the June issue. And, if you want the absolute safest way to invest in PGMs, check out the options recommended in the May issue.
If you’re not 100% satisfied with the newsletter, simply cancel during the 3-month trial period for a full refund-no questions asked. Whatever you do, though, don’t miss out on the best stock pick in the PGM bull market. Click Here to learn more about BIG GOLD or Click Here to go straight to the order form.
The article The Only PGM Stock You Should Buy was originally published at Casey Research
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