“Precious metals investors have had plenty to cheer about lately. Gold climbed 30% last year, yet it placed third among metal returns. It was easily bested by silver, which just hit a 31-year high. The top winner was palladium, which delivered a crowd-pleasing 97% gain. I think palladium has what it takes to continue this powerful run, perhaps racing another 25% to retake the $900/oz. mark.
“Global demand will top eight million ounces this year, just as a key supply source appears to be running dry. ... There’s only one large above- ground store of palladium, a strategic reserve that the Soviet Union spent 50 years accumulating. Russia decided to open it up for sale in 1990 when the stockpile was estimated to be 27 million ounces. Since then, buyers have withdrawn about 25 million ounces. ... Most analysts estimate the supply is now just 2 million ounces—about a three-month supply.
“Global demand for palladium is also on the rise. The versatile metal has a multitude of uses, most notably in the dental, jewelry and electronics fields. But demand from the auto sector is greater than all of those combined. You see, platinum group metals (PGMs) are the agent in catalytic converters that turn vehicle exhaust into carbon dioxide and water vapor. Without these devices, internal combustion engines would spew out tons of noxious pollutants. Despite decades of research, carmakers have never found a viable substitute. With the recession now in the rear-view mirror, auto production is ramping up quickly. In China alone, new car sales jumped 32% to 18 million last year. ... At the same time, developed and emerging markets are both cracking down on pollution and mandating tighter emission standards. And higher standards mean increased palladium loading requirements (China is headed from two grams per car to four grams). ... As supplies get squeezed, automakers will soon start hoarding and stockpiling. General Motors (GM) recently signed an offtake agreement—an agreement to buy future supplies of product—with Stillwater Mining (SWC) without fixed floor or ceiling prices. This contract is akin to a blank check—GM just wants the metal, regardless of what it has to pay. And here’s the best part: there are only a small handful of companies splitting this rich jackpot.
“Believe it or not, there are only two mines on the planet that yield palladium first and foremost—it’s a by-product everywhere else. And one of those mines belongs to North American Palladium Ltd. (PAL). The Lac des Iles (LDI) site in Ontario, Canada, is a geological treasure trove. The mine spit out 95,000 ounces of palladium last year. And expansion projects underway will soon have that total rising swiftly. Production rates are forecast to climb 75% this year to 165,000 ounces. From there, they will ratchet up to 190,000 ounces in 2012, 200,000 in 2013, 220,000 in 2014, and 250,000+ thereafter. That aggressive growth curve can send earnings soaring, even if prices don’t move. Ordinarily, such an increase might be accompanied by a sharp rise in costs. But that’s not the case here. In fact, the transition from ramp mining to shaft mining is expected to lower extraction costs from $283 per ounce today to $150 per ounce.
“I don’t need to explain what the combination of triple-digit production growth, falling costs and rising palladium prices can do to cash flows—and share prices. Better still, these projections don’t include three new zones ... that have been discovered over the last couple years.
“And there’s icing on the cake—solid gold icing. In May 2009, the company acquired the Sleeping Giant gold mine in Quebec, a proven performer that has yielded over one million ounces of gold over the past two decades. But NAP is confident it can squeeze out much more. Management has begun drilling 600 feet deeper to access three new mining zones. Once it hits paydirt, gold production is projected to double from 17,000 ounces last year to 30,000 ounces this year— and on up to 50,000 ounces next year.
“There’s more in the pipeline, including Vezza (which has the potential to produce 39,000 ounces of gold annually), and Discovery (which could add 44,000 ounces per year). As early as next year, the company could already be producing well over 80,000 ounces of gold—equivalent to $1.1 billion in sales at today’s prices. Keep in mind, the entire company only has a market cap of $1 billion. North American Palladium has been spending heavily to boost production, sacrificing profits today for a rich payoff tomorrow. The shrewd move into gold will help diversify the income stream and should be a growth driver. But my real interest in NAP is the Lac Des Isles mine, which will almost print money if palladium prices revisit their former highs. North American Palladium could ultimately provide triple-digit returns and I plan to add 300 shares to my Top Growth Picks Portfolio.”
Nathan Slaughter, StreetAuthority Market Advisor, 3/24/11
