“The World Will Turn to This ‘David and Goliath’ Miner … 114 Square Miles of Palladium”

Sleuthifying Peter Krauth's latest teaser for Real Asset Returns

By Travis Johnson, Stock Gumshoe, April 1, 2013

“The World Will Turn to This ‘David and Goliath’ Miner, Because We Have No Choice!

“114 Square Miles of Palladium… a $600-$700 Billion Discovery… and They Control it All!

“Today you were shown indisputable evidence of an immense cover-up being orchestrated by the Russian government.

“But thanks to a series of intelligence leaks from inside the Kremlin, along with an alarming paper trail of hard data…

“One of Russia’s most sensitive, State Secrets has been exposed.

“They will no longer be able to control the global market for a precious metal that’s 15 times rarer than platinum…

“And 30 times rarer than gold.

“Palladium.

“All signs now point to a complete depletion of Russia’s palladium reserves at their Gokhran Repository.

“That means 42% of the world’s supply of this precious metal may now disappear.”

That’s how the latest teaser ad for Real Asset Returns gets started — and indeed, it’s how many of the great mining teasers start, with a story about a terrible shortage and an ending government monopoly. That got everyone revved up for rare earths metals a few years back, and we’ve seen similar teaser pitches over the yeaers for upheaval and sudden shortages in other markets from uranium and cobalt to silver and tungsten.

Some of which cause price spikes in junior mining stocks, some of which cause real economic impacts, and some of which don’t end up having a “real” impact — either because the economy moves on and the market fluctuates and just absorbs any market movement with equanimity, or because the world isn’t as sensitive to that commodity’s price as one might have thought, or for whatever other reason.

But for junior miners and small producers, these kinds of themes — a substantial change in the market, a big shortage (even a temporary one) a price spike — can mean a world of difference. At least for their investors, who can sometimes enjoy a nice run up as enthusiastic natural resources speculators bet on the “next big thing” and flock to hear their presentations at mining conferences, and as all the mining newsletters flog their favorites.

Are we on the cusp of that happening for palladium now? Well, you never really know about the impact of these surges of enthusiasm until they end — but it looks like Peter Krauth’s publisher is at least trying to get us whipped into a little frenzy over the lesser-known PGM. PGM, by the way, stands for platinum group metals, which in practice mostly just means platinum and palladium. They are usually found together, in the few places where they’ve been found at all, and are somewhat interchangeable when it comes to their primary industrial usage as catalysts … though platinum is still far more popular than palladium in jewelry (there are also the “exotic” PGMs — ruthenium, rhodium, osmium, and iridium — but none of those are really investable).

The basic spiel is that we’ve got the perfect combination of Russian storage shortfall and South African mining labor unrest — perfect because those two countries dominate platinum and palladium production. And that’s the focus of the “special report” that they’re peddling:

“As this palladium crisis worsens, there is a small ‘David and Goliath’ miner the world will have no choice but to turn to…

“Because it’s now holding all the cards.

“That’s why I want to rush you the intelligence briefing Money Morning’s Natural Resources Director, Peter Krauth, has prepared.

“It’s called Russia’s State Secret Exposed: The 1,000% Windfall They Don’t Want You to Know About.

“Peter Krauth is recognized as one of the world’s foremost experts on natural resources and commodities.

“You will soon see this situation through his eyes. Everything you need to know is in this comprehensive briefing including:

“The Gokhran Cover-Up – Peter Krauth has been tracking down and investigating the intelligence leaks that are slipping out from the highest ranks of the Russian government, as well as from deep inside their palladium mines. He’s going to blow the doors off this cover-up so you can see how far it reaches.

“You’ll be shown shocking charts, a timeline of palladium depletion that strongly suggests Russia’s reserves are down to zero, plus you’ll see why South Africa will not be able to come to the rescue anytime soon.”

So who is our little “David and Goliath” miner? Well, you can probably guess just from looking at the price spike in the shares after investors were barraged with enticing teasers about them for a three-day weekend, but we’ll double check the clues just to be sure:

“One small miner controls 114 square miles of what could be the most palladium-rich land on the planet.

“Yet, after 20 years in business, this company has only mined .38ths of a square mile.

“That’s why Wall Street hasn’t caught on to this story.

“But that’s going to change very soon.”

And then we get a wee bit more hint-age:

“David and Goliath Opportunity #1: The 300%-400% Stock Play – This small miner is currently trading at well under $2.00 a share and Peter Krauth conservatively estimates it could potentially triple or quadruple in price in the next year alone.

“David and Goliath Opportunity #2: The 1,000% ‘Quick Hit’ Payout – Peter Krauth has identified a very potent options target on this stock that could rapidly multiply your rewards in no time whatsoever.

“It trades at 1/4 of the price of the shares and he believes it could return up to 1,000% in the next 6 months.”

Enough for you? OK, yes, as you have probably already guessed … Krauth is teasing North American Palladium (PAL in NY, PDL in Toronto)

And it does indeed also have options trading — which is pretty rare for a $1 stock that has a market cap of only a couple hundred million, though it’s a bit more understandable if you scroll the chart back a bit and note that a couple of years ago this was a $6 stock (and before their open pit mine played out and they started working on developing the more expensive underground operations, it was in the $10-12 neighborhood).

So … unlike many teaser picks in the natural resource space, North American Palladium is an actual miner — not just an explorer. They’ve guided that their expansion projects in the underground mine will enable them to get production for 2013 to hit somewhere between 150-160,000 ounces. Which is slightly less than they produced in 2012, though the hope is that their large land position and potential exploration targets will let them improve on this in the future by growing the mine. They’re still in the middle of a fairly expensive capital investment program, which has them planning to spend almost $80 million on this underground shaft mining this year — a substantial amount, considering they only booked $160 million in revenue on the 163,000 ounces of palladium they sold last year.

And the expansion of this mine — their Lac de Iles mine in Ontario, not far from Thunder Bay, which has been producing palladium for 20 years (though they shut down for a while several years back to switch to underground mining) and is one of the world’s only primary palladium mines — has been expensive for a long time. According to their cash flow statements, they’ve put $600 million into capital investment in just the last four quarters — I didn’t look into exactly what those expenses are, but with a fairly high cost of mining they’re going to have to produce a lot of palladium for a lot of years to repay that investment … or palladium is going to have to get a lot more expensive.

Which is possible, sure — palladium was down around $300 the last time we took a close look, several years ago, and is now back to near $800 … though to a large extent that’s because auto sales in the US went from under ten million in the recession to over 15 million now, and global auto sales have perked up as well. Palladium, like platinum, is primarily used for catalytic converters — so when auto demand jumps the price goes up, and when the gap between palladium and platinum widens the manufacturers can swap back and forth between the two metals.

You can see the latest investor presentation from North American Palladium here — it covers basically the same bases as Krauth’s teaser pitch, with the claim that their property is uniquely valuable because of exploration upside (most of the neighborhood hasn’t been drilled and explored, apparently) and because there are so few palladium producers out there, with both South Africa and Russia offering political risk along with their palladium. From my quick look at their presentation and their historical numbers, it looks like they need something to keep palladium prices high or rising if they’re going to put up substantially better numbers this year or next.

The palladium market is small, with an expectation that there will only be about five million ounces produced from Russia and South Africa combined this year (that’s why we’re using up stored palladium, apparently — just the auto market alone consumes about six million ounces a year now), so they are a decent part of the junior world of palladium production with their 160,000 ounces, but they can’t really have any impact on the market — future prices, on the supply side, will be based on how much palladium the big nickel and platinum producers spit out. Large producers like Anglo American Platinum are trying to rationalize the market by cutting costs (thus, in part, the strikes at their Bushveld mines in South Africa), but of at least equal importance will be Chinese demand for nickel — most palladium is produced as a by product of nickel mining, particularly by Norilsk in Russia, so, as with other byproduct metals, they are somewhat subject to market forces outside their control.

Which means I have no idea what will happen with palladium prices — most experts seem to think they’ll stay in the $700-900 range this year, which seems perfectly reasonable to me, and that would mean that if North American Palladium sells 160,000 ounces of palladium (that’s their top end projection) they can hope for revenue of around $140 million. The average analyst estimate is for $170 million in revenue this year and over $200 million next year, so I have no idea where they get those numbers. The cash cost per ounce is about 50% of current prices, we’re told, which is comparable to last year — so I’d guess we wouldn’t be absurd if we expected numbers to be similar to last year’s ignoring the $70 million capital investment they’re making this year and assuming that production hits their target.

So that would lead us to expect them to come quite close to breaking even on the income statement, probably late this year, and continuing to expand either their debt or their share count gradually to cover the capital costs. Analysts think they’ll put together many years of 50% earnings growth now, which I expect would depend either on some substantial new discoveries to expand their mine (they have plenty of idle processing capacity thanks to their days as a much larger producer) or on much higher palladium prices. The forward estimates for earnings have been cut in half over the past few months, but the average estimate is still for eight cents in earnings per share in 2014, which would give them a forward PE ratio of about 20 at current prices — that average encompasses an estimate of a 27 cent profit and one of a continued loss of two cents a share, so you can see there’s a lot of room for error based on your production or price assessments.

I’m sure we’ve got some folks out there in Gumshoeland who follow platinum and palladium far more closely than I do — so whaddya think? Will we see skyrocketing prices thanks to low platinum or nickel production? Is North American Palladium your pick for a continuing palladium resurgence? I have to admit to being a wee bit skeptical, since they haven’t been able to sustain any advantage even as palladium prices doubled over the last five years, but I expect that if you dig more deeply into their operations you’ll find reasons for optimism if you’re looking for ’em. Let us know with a comment below.

Oh, and we were teased that Krauth also touted an options play — based on the huge volume in these options today and the now-large open interest, I’d assume that he’s touting the September and/or January $2 calls. The September calls would run you about 25 cents a share (so $25 per contract), so that would mean your break even would come if the price gets over $2.25 between now and late September, so you’re counting on roughly another 50% gain in the stock over about six months (that’s on top of today’s 15% gain). The third quarter is when North American Palladium is expecting that they’ll get to their next expansion milestone as they develop their shaft mining operation, so it’s possible we’ll have more news from that by September, but I don’t know what impact it might have, if any, on the share price… $2.25 would be about 30X the average earnings forecast for 2014, though it’s somewhat rare for miners, particularly those who are seen as having “exploration upside,” to trade very tightly to what would seem like average PE ratios for other companies.

The short answer? If palladium keeps going up, probably North American Palladium will probably do very well both because revenues will increase and because they’ll enjoy being in the crosshairs of enthusiastic resource invesetors. If Palladium is flat or down from here, and doesn’t get above $800 an ounce to stay, it’s hard to see them making a profit on their existing mine over the next couple years.

Related Gumshoe Articles

The Second “Last Five Minutes” Play from Peter Krauth

Sniffing out another Real Asset Returns teaser -- "The outlook for copper is doubly hot"

5 Comments Read More

What to buy in “The Last Five Minutes” (Real Asset Returns)

Sniffing out the dividend-raising play teased by Peter Krauth

16 Comments Read More

Leave a Reply

32 Comments on "“The World Will Turn to This ‘David and Goliath’ Miner … 114 Square Miles of Palladium”"

avatar

investletters
Member
0
investletters
April 1, 2013 3:29 pm
Great article, Travis. We personally would be VERY hesitant to get back into this stock, as we ‘had a bad experience’. A quick double years ago and a limit order to sell that was $0.05 too high – then the stock hit the skids. This stock never traded as well as Stillwater (SWC), our preference if we wanted to play that sector, I suppose (though we don’t follow it much). Casey Research and some others have recommended the Sprott Physical Platinum and Palladium (SPPP) but right now it’s hard to get too excited about the sector. Your gumshoeing looks pretty… Read more »
barndoor
Irregular
14
barndoor
April 1, 2013 3:34 pm
Re: “when the gap between palladium and platinum widens the manufacturers can swap back and forth between the two metals.” I’m not an expert but it’s my understanding that… 1) Pall is the less expensive choice for gasoline engines (at current pricing even though more Pall is used in each cat. converter.) 2) Plat is the *only* choice for diesel engines (higher temperatures are involved) Personally, PGMs are needed and undervalued relative to gold. If you can invest in PGMs that do not have African labor issues or Russian tactics as downsides then so much the better. Maybe after the… Read more »
sagenot
Guest
0
sagenot
April 1, 2013 4:23 pm

You’re correct Paul, the diesel engines can’t use platinum for their cat. converters. Krauth
wrote about this mine over a month ago, & with the metal’s scarcity now confirmed, you’d think the price w/b more sensitive to that. It’s been as high as $12/$13 in the last 4, 5 yrs. Unless auto manufactures limit diesel productions from here out, we should experience a price comeback soon. There is about 22% institutional holders which should matter too.

sam
Guest
0
sam
April 1, 2013 7:22 pm

If Paul is correct, you mean the diesel engines can’t use palladium for their cat, not platinum.

Dave
Guest
0
Dave
April 2, 2013 3:37 am

Paul is correct and sagenot got it backwards. However, this is changing and Pd is now substituted for 50% of the Pt in diesel catalysts due to the price differential. But the differential is moving in Pt’s favor now.

See http://ceoblog.zecco.com/2011/01/platinum-vs-palladium-which-is-the-best-autocatalyst/

Ken
Guest
0
Ken
April 1, 2013 3:50 pm

As an owner of some goodly amount of Pd, I don’t see an immediate jump coming. I think the Gumshoe’s analysis is pretty accurate. Better money to be made in Ag. JMHO.

Duncan
Guest
0
Duncan
April 1, 2013 4:08 pm
I caught PAL on the down-slide when the ratios of platinum and gold reversed. Since in their case, the palladium and platinum are co-mined, the price of platinum is more important than nickel. My own decision was based on what looks like an increasing demand for vehicles in China and their soft commitment to requiring US and European style environmental controls on new vehicles. Hoping to avoid South African labor issues, I went with the North American supplier. I’m currently in the hole, but optimistic longer term than September or January. As a snide comment to their copywriter, you can’t… Read more »
Duncan
Guest
0
Duncan
April 1, 2013 8:48 pm

Hey, did you guys buy in to day or what? The equity advanced 20% in today’s market, and suddenly I’m out of the hole. Thanks wherever due. I’m okay to eat crow on this.

Sam J
Guest
0
Sam J
April 2, 2013 11:50 pm

Duncan, you’re being biased (or just overly snide). Of course it makes sense to say something is more rare. Saying “twice as rare” is the same as “half as abundant.” Something that’s 1-in-a-million is a thousand times rarer than 1-in-a-thousand. Rareness can have degrees. I’ll certainly agree that sometimes a teaser’s “math” is all wet, but don’t indict a statement just because you don’t like the phrasing.

whatch
Member
15
whatch
April 6, 2013 4:24 pm

I disagree Duncan. If the one is 30X more abundant than the other. Then it makes perfect sense to say the other has a 30X rarity value (1:30) or 3000% assuming 30= 100% of the one and 1= 100% of the other. How ever you look at it though. One seems to be more readily available and cheaper than the other in this case. And any interruption in supply vs demand of any commodity though perhaps small usually will at least temporarily impact price. That’s my nickels worth anyway.

ben
Guest
0
ben
April 1, 2013 4:28 pm

if you want to buy stock in the david and goliath miner what would you look for

baygreen
Member
32
April 1, 2013 4:43 pm
I am with Paul on the hype and out of Africa sounds like we have seen that movie, and the options from Travis is right on in my book. I will wait to the planes altitude comes down to get a little and I am sure that there will be plenty of time to get more, I don’t think I will wake up some day and see a five or ten bagger while I was asleep. Just like the uranium Russia hype for last year, I think they will happen but there will be plenty of time to get in… Read more »
JOHN M CHENOSKY, PE
Guest
0
JOHN M CHENOSKY, PE
April 1, 2013 7:34 pm
Travis there is a Swiss Metals Dealer that deals in the metals you say are not investible, as well as others. The problem is they are grouped for you as apposed to purchase of specific metals and the size of the “grab bag” is predetermined. They are stored overseas in Panama or Switzerland out of the reach of our confiscators. The only problem I have had is they are not in a hurry to sell me anything, as a suggested I only wanted to invest under $50K. Instead of waiting I bought me a bunch of metals that I didn’t… Read more »
Tim
Guest
0
Tim
April 2, 2013 12:31 am
Ditto the outlook of Roger Bond. I noticed a nice spike in my shares in PAL on 4/1/13, so maybe the buzz has sparked some interest. PAL is expecting to significantly ramp up production through the next two years and most of that production capacity is already in place as per the mill capacity. PAL has very little ownership by management. That is, not so much skin in the game other than the few incentivization options and a few warrants? That management put together and started up the buy out and re-start of the Sleeping Giant GOLD mine into gold’s… Read more »
Peter
Guest
0
Peter
April 2, 2013 3:24 am

I get my palladium exposure via SandstormMetals and Energy (SND.v)

ves
Guest
0
ves
April 6, 2013 2:19 pm

Palladium, and copper and gas, all at rock bottom price and with less risk.
I think the same thing about it.
Copper production start fast, in the month of May.
Palladium later this year. The 8 gas sources should therefore dewaters,
All this in 2013, Which promised to be an exciting year.

Jim
Guest
0
Jim
April 2, 2013 12:41 pm

New management is in place. Gold division has been sold. Don’t give advice if you are not paying attention.

Dave
Guest
0
Dave
April 2, 2013 3:29 am

It’s absurd to say that Pd is “15 times rarer than platinum”. It’s actually about 2 times as abundant as Pt. This is now reflected in their prices, which was not the case previously (Pd has been increasing relative to Pt and is now up to about half the price).

Also, the worldwide production figures for 2011 are 192 tons Pt versus 207 tons Pd (compared to 2700 tons of gold).

See also http://en.wikipedia.org/wiki/Abundance_of_elements_in_Earth%27s_crust

Martin Brown
Guest
0
Martin Brown
April 2, 2013 5:08 am
Just going back to the use of Palladium in catalysts, I don’t think it is as clear cut as Palladium for petrol and Platinum for diesel. It is my understanding that many diesel catalytic convertors use a blend of Palladium and Platinum – just as most petrol cats contain a mix of the two. Given the price differential research is underway to allow greater use of Palladium. Very informative article here which I think suggests that many diesel cats already use a 2:1 ratio of Plat to Pall. http://www.platinum.matthey.com/media/820249/09special_featurepdindieselcatalysts.pdf I have held PAL for a while now and would like… Read more »
whatch
Member
15
whatch
April 6, 2013 4:35 pm

You are correct Martin. Dave covered that earlier. My son owns a fleet and he has verified this for me so I have no reason to doubt you or Dave. I will check the links though and relay them to my son.
Thanks

proudgrampa
Guest
0
proudgrampa
April 2, 2013 4:39 pm

I decided to buy SPPP for exposure to this. Little to no mining risk.

1494miami
Member
0
1494miami
April 4, 2013 10:53 am

Does anyone know what “company” is the “David and Goliath” miner that Peter Krauth wants you to pay big $$$ for.

whatch
Member
15
whatch
April 6, 2013 4:39 pm

Reference the the Gumshoe article above John. It is explained there. If you don’t want to read it you can skip through the tease and get your answer.

jfenlin
Irregular
11
jfenlin
April 6, 2013 8:29 am

Can someone explain to me how Palladium is 15x rarer than Platinum?
What definitions/metrics get one there?
Would a widely recognized head of a prestigious universty geology department agree?

GSB JH
Guest
0
April 6, 2013 1:29 pm
If you are interested in exposure to platinum group metals, check out Colossus Minerals (TSE: CSI), which begins producing this year from their Brazilian mine and will ramp up to full production in Q1 2014. They will also produce gold and have incredibly high grades and low expected costs. Management is top notch and they have been conservative about production estimates and timelines to production, so hopefully they don’t have the typical delay times of new miners. Sandstorm has an agreement with Colossus, which is nice to see their vote of confidence. This would be another way to get exposure… Read more »
Myron Martin
Guest
0
April 6, 2013 1:34 pm
Have owned N. American Palladium for some time so identifying the HYPED UP teaser from Peter Krauth was easy. Long term I think it is a good bet, but I do not expect it will be as lucrative as the teaser (as is the case with most) at least in the short term. Sprott has a good reputation and their new entry could be a pretty safe long term bet. Another way to play this market is a new company in Que. that specializes in recycling catalytic converters for their platinum and palladium, the Co is Pro – Ore POI-V… Read more »
Knud Knudson
Guest
0
Knud Knudson
April 6, 2013 5:59 pm

What about PALL? Its the ETF for Palladium. I have done very well with it. Dropped on Friday, good entry point?

WijRos
Guest
0
WijRos
April 6, 2013 7:01 pm

The best way to tell the abundance is the known content in the earthcrust Palladium 6.3 ppb while Platinum content is 37 ppb is about 6 times as much than Palladium (ppb = parts per billion).
Just to be complete the Silver content is 79 ppb and the gold content is 3.1ppb.
One of the major problems with platinum and palladium are the high melting points resp. 1768 and 1555 °C. The lower melting point of Palladium is also its disadvantage what I understood..

WijRos
Guest
0
WijRos
April 6, 2013 7:07 pm

The most safe way to invest in PGM is to buy physical material with Hard Asset Aliance or in coins. In Europe however they charge VAT over the market price which make a lot less attractive to invest in physical material.

Phil Goldberg
Guest
0
Phil Goldberg
April 10, 2013 6:41 pm

My question is on holding physical material,such as gold. Have held gold wafers 5os bars for the past 20 years. What a surprise when I tried to sell……receive 40% less (approx ) than what gold is selling for,where is the profit ? Have I missed something ?

wpDiscuz