“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.
“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.Are you getting our free Daily Update
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“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.