Joseph L.
Shaefer
submits:
<< Return to Part 1
The platinum group metals (PGMs) are six metallic elements
clustered together in the periodic table: platinum, palladium,
rhodium, osmium, iridium, and ruthenium. They have similar physical
and chemical properties and, for the most part, tend to occur
together in the same mineral deposits. Every one of the PGMs have
superb catalytic properties. They are highly resistant to wear and
tarnish, resistant to chemical attack, and are stable at high
temperatures and in electrical applications. In a word, they are
highly desirable for use in a number of industries.
I want to concentrate on palladium as the "dessert" I am most
interested in while digesting our gold and silver gains, simply
because it has the most established track record for industrial
applications I see as essential to development of the world's
economies. But a few words in passing about platinum are in order,
since few of us have seen or worked with palladium but many of us
own or have seen platinum ("white gold") in jewelry. (This is
changing, however, with Stillwater Mining (
SWC
) and a number of wholesale and retail jewelers working together to
market palladium jewelry.)
South Africa is still the undisputed king of the world's
platinum producers, with something like 80% of all international
production (and closer to 90% of the currently economically
recoverable reserves.) I need to debunk a notion, foisted upon
investors by those screaming headling, "Secret Trillion Dollar
Property Owned by Penny Stock!" ads you might receive from
newsletter writers with little research and less scruples to back
up their claims. The world i s
not
about to run out of platinum. According to a fine report from
precious metals fabricator and dealer Johnson Matthey (available
here
):
There are enough platinum group element deposits in the
Bushveld Complex in South Africa to supply world demands for many
decades or even a century using current mining techniques.
Demonstrated reserves and resources published by mining companies
make detailed calculations up to a maximum of about twenty years
ahead, but there is abundant and adequate geological evidence
that these deposits continue far beyond where mining companies
have proven according to rigorous international reporting codes.
For each 1 km of depth into the Earth in the Bushveld Complex
there is in the order of 350 million oz of platinum. For
comparison, annual production of platinum from the Bushveld
Complex currently is only around 5 million oz.
The problem isn't the size of the reserves. The problem is what
it takes in effort, energy, and costs in dollars or rand to get the
stuff. Platinum is never easy to process; it takes about 10 tons of
ore from the ground to refine just one ounce of the metal. As a
result, world platinum
production
typically totals about 1% of the amount of silver produced
annually, and less than 10% of the amount of gold. Maybe half that
platinum, in small quantities, finds its way into catalytic
converters to transform toxic emissions from internal combustion
engines into more benign by-products. Most of the rest, ex
stockpiling, gets used in jewelry. Impala Platinum Holdings
(IMPUY.PK) and Anglo Platinum Limited (AGPPY.PK) are two relatively
pure plays in platinum.
While nearly half of platinum product goes to jewelry and
another quarter to automotive catalytic converters, half of
palladium finished product goes to catalytic converters and another
quarter to electronics and dental applications. Assuming these
trends continue, I'd rather be in palladium. The world's appetite
for automobiles for transportation, electronics (cell phones,
laptops, LCD TVs, iPods, DVD players, etc.) to make their lives
easier, and dental applications as more people worldwide seek a
higher level of dental and medical care, all augur for greater
growth in this area. The jewelry industry's push to market more
palladium jewelry (another 14% of usage) is merely the icing on
this white cake.
Illustrating the potential for increased usage of palladium for
the automotive market are these two charts, courtesy of
ETF Sources
:
(Click to enlarge)
While the growth in China looks impressive (and will likely be
matched in India, Brazil and other emerging markets), we need to
realize just how low the actual market penetration is -- yet
already the numbers are staggering!
(Click to enlarge)
I refer you to Stillwater'swebsite, which shows the current
production geographically, reaching the (self-serving) conclusion
that sources beyond North America - where Stillwater is the Big
Kahuna - are politically less stable or secure:
(Click to enlarge)
Whether you agree or disagree with SWC's political assessment (I
happen to agree,) one point is unimpeachable: the source for
palladium titled "Russia inventory liquidation" is about to dry up
and blow away. I outlined the demand situation above, with
increased auto, electronic, dental and jewelry usage. The supply
situation is about to be affected hugely, with some 12-15% of the
supply abruptly declining. Here's why: Russia's Norilsk Nickel
(NILSY.PK) is currently the largest palladium producer in the
world, producing about 2.5 million ounces of palladium annually.
But two factors argue against a continuation of this dominance.
First, Norilsk's palladium production isn't enough to meet
rapidly growing demand even now, so Russia fills the deficit from
Russian palladium stockpiles, built up over the years. These
stockpiles are known to have been falling as have the amounts sold
on the export market. The most likely reason is that the stockpiles
are nearing depletion and the government has chosen to keep what
remains for strategic reasons rather than allow Norilsk to act as
agent for their sales. If this is so, then global demand will be
more dependent on mine production.
Second, because it is incredibly polluting, Norilsk is under
heavy pressure to stop using its highly-polluting
high-temperature-required smeltering processes to separate the more
stable palladium (and platinum) from its nickel ore operations.
Since the nickel is less valuable per ounce but incredibly more
valuable because of the sheer tonnage available, if Norilsk bows to
pressure from the government and citizens living near their
properties to change from the high-temperature process that allows
for the separation of PMGs from the nickel to a chemical leaching
process that does not allow for the removal of "impurities" from
the nickel in a cost-effective manner, that source of PMGs will be
gone, as well.
If both these events occur, which seems likely, then it will be
a double-whammy to the supply side of the supply / demand equation.
Between the two, we're talking about a 30-40% dent in supplies at a
time when demand is rising globally.
Palladium isn't cheap. The price of both platinum and palladium
have moved up in concert with other precious metals over the last
couple years:
(Click to enlarge)
Regrettably, this long-term chart, while showing the Decline of
Everything in 2008, and the recovery of PMs and the PMGs in
2009-2010, doesn't show the most recent data. Palladium still
enjoys a pricing advantage, but of slightly less than 2:1 rather
than the 3:1 differential in the February 2010 chart above - as
seen in today's price, courtesy of Mineweb.com:
Investing in Palladium
We have three favorite ways to play an increase in palladium
demand / decrease in supply. We also note that there are venues we
use only for our most conservative clients, like purchasing shares
of the Physical Palladium Shares ETF (
PALL
). Investors using this venue will benefit from any increase in the
price of the metal itself. Other ETFs and ETNs dealing with the
Platinum Group Metals include the ETFS Physical Platinum Shares (
PPLT
), the iPath DJ-UBS Platinum ETN (
PGM
), the UBS E-TRACS Long Platinum ETN (
PTM
) and First Trust ISE Global Platinum (PLTM).
But for most clients, and ourselves, we are buying instead three
favored firms that provide operating efficiencies that result in
additional leverage to the price of the physical metal.
Stillwater Mining does it all - and does it right here in the
USA. It mines for, extracts, processes, refines and markets PGMs,
especially palladium from two primary properties in Montana, and
also recycles used catalytic converters. In addition, just this
month, SWC acquired Marathon PGM Corp., an exploration firm with
newly-proven reserves in the Thunder Bay region of Ontario.
North American Palladium (PAL) is a Canadian PGM producer whose
primary asset is the Lac des Iles palladium mine in northwestern
Ontario, but also has promising reserves at the Sleeping Giant gold
mine in northwestern Quebec, and several exploration properties in
the Abitibi region of Quebec. Like SWC, however, PAL trades on US
exchanges.
The smallest and most speculative of our favorites is Platinum
Group Metals Ltd. (PLG), which is still an exploration and
development company. Its primary properties are well-located,
however, just north of the famous Bushveld Complex in South Africa
and in the same regions that SWC and PAL are currently successfully
working in Ontario, specifically contiguous to PAL's Lac Des Iles
project.
Let me leave you with two final points. One is best shown in the
following Johnson Matthey graphic, showing in picture form the
reasons why I believe palladium is the more attractive of the two
primary PMGs:
(Click to enlarge)
And lastly, this. While it may be "pie in the sky" right now,
the synergies from the following empirically verifiable reality may
one day provide palladium from what many would think the most
unlikely of sources. Significant quantities of the three light
platinum group metals - Ruthenium, Rhodium and Palladium - are
formed as fission by-products in nuclear reactors. With tightening
supplies and increasing demand, reactor-produced palladium is
emerging as an alternative source of the metal. Wouldn't the irony
be supreme if the energy source many have vehemently derided and
rejected, atomic power, turned out to be the answer to yet another
of our most vexing environmental pollution issues?
That's just one more reason why I have suggested both yellow
cake
and
white cake for dessert…
Disclosure:
We and/or those clients for whom it is appropriate are currently
long PALL, SWC, PAL and/or PLG.
The Fine Print: As Registered Investment Advisors, we see it
as our responsibility to advise the following: we do not know
your personal financial situation, so the information contained
in this communiqué represents the opinions of the staff of
Stanford Wealth Management, and should not be construed as
personalized investment advice.
Past performance is no guarantee of future results, rather an
obvious statement but clearly too often unheeded judging by the
number of investors who buy the current #1 mutual fund only to
watch it plummet next month.
We encourage you to do your own research on individual issues
we recommend for your analysis to see if they might be of value
in your own investing. We take our responsibility to proffer
intelligent commentary seriously, but it should not be assumed
that investing in any securities we are investing in will always
be profitable. We do our best to get it right, and we "eat our
own cooking," but we could be wrong, hence our full disclosure as
to whether we own or are buying the investments we write
about.
See also
From the Vault: Silver Overdone Now, But Headed
Higher in 2011 - David Morgan
on seekingalpha.com