Auto Industry “Big Switch” = 10 Bagger from “The Most Envious Palladium Property in the Western Hemisphere?”

Teaser pick from Burgess revealed

By Travis Johnson, Stock Gumshoe, September 21, 2010

I’ve gotten a lot of questions about Luke Burgess’ latest teaser ad for his Underground Profits newsletter, all about what he’s calling “Lake Superior’s $1.9 Trillion Secret” …

… and that crafty “Lake Superior secret” phrase might sound familiar — it was used by Greg McCoach’s copywriters a few years ago to pitch some other mining stocks in the region (well, they’re published by the same company — so it could easily be the same copywriter just stealing from himself). At the time (this started back in 2007, in the early years of the Gumshoe), McCoach was pitching, in various teasers, Polymet Mining, Duluth Metals, and MetalCORP … and back then it was “Lake Superior’s $2.6 Trillion Secret,” so I guess we are seeing some deflation creep in even in teaserland.

Those earlier teases relied more heavily on the nickel and copper in the old mining districts north of Lake Superior, though the mines teased also hold some platinum group and precious metals — today, however, it’s all about palladium, one of those aforementioned platinum group metals (PGM).

And Burgess believes not only that we’re close to another swing in the palladium/platinum price relationship, but that he’s identified “The Most Envious Palladium Property in the Western Hemisphere” for the benefit of his subscribers (pretty sure he means “envied”, but we’ll let that go).

Now, let me be clear: this gives me the heebie jeebies, if only because Burgess is using a tiny, microcap stock to build a reputation for this just-launched newsletter, and really, he can’t help but drive up the price at least a little bit in the bargain and, therefore, look wise for recommending a stock that goes up (at least for a little while). I expounded on this more thoroughly when he teased Ely Gold about a week ago, you can see that article here if you want more of my blather.

But still, heebie-jeebies or not: He teased, you asked, and so the wheels are in motion. Release the Thinkolator!

The underlying argument for palladium’s impending price increase is the swing in demand — historically, we’re told, the auto industry has switched from palladium to platinum and back for their catalytic converter needs (apparently those two metals are the best catalysts for these converters, and they are the primary industrial demand driver for both metals — though platinum, as you probably know, also has some jewelry demand). When platinum gets much more expensive than palladium, the auto industry does the switch to palladium; with palladium gets expensive, they switch back to platinum, etc.

We’ve looked at palladium teasers before — there are a couple obvious companies, including Norilsk Nickel, the world’s dominant producer in Russia (NILSY on the pink sheets, I think), and Stillwater Mining (SWC, the major US producer — I wrote about this one last year and it’s up dramatically since then, largely thanks to the fact that palladium has more than doubled). There’s also North American Palladium (PAL), which shut in its Lac des Iles mine for a while when prices were low but is producing again — I think they’re still trying to expand an underground mine to succeed the almost played-out open pit.

And that leads us into today’s stock, which apparently has a mine (or potential mine) that’s roughly sited between Lac des Iles and the Marathon mine, which is owned by Marathon PGM, which in turn is being bought out by Stillwater (at a big premium) in a deal announced this week. It’s also not too far from the Duluth Complex, home to projects by Duluth Metals and Polymet.

Here’s how Burgess puts it in his ad:

“I recently uncovered an exciting junior exploration and development mineral company with over 100,000 hectares of mineral projects located smack-dab in between the two largest palladium deposits in North America.

“To the west is North American Palladium’s Lac des Iles Mine — one of the largest palladium mines in North America. Lac des Iles has 3.7 million ounces of palladium resources and is projected to produce 140,000 ounces next year.

“To the east is Marathon PGM’s Marathon Mine, containing 2.4 million ounces of palladium reserves plus 3.0 million ounces of palladium resources. It was just bought by Stillwater Mining (NYSW: SWC) for $118 million….

“Every junior palladium explorer wants land around them.

“This junior company has already made the discovery of a palladium deposit on one of its many mining claims of under 500,000 ounces of palladium.

“But the company is actively working to upgrade and increase its palladium resource base.

“The target: 2.6 million ounces of palladium-equivalent resources.”

So those are our clues so far: a rough location, a size (over 100,000 hectares), a dicsovery of “under 500,000 ounces” … anything else?

“Right now, the stock is trading at $0.50. The company is working on a new resource estimate that’s due out in the next few weeks.

“In the meantime, they’re working on putting together a Preliminary Economic Assessment and are still actively exploring additional zones of mineralization with potential to grow the resource base for their project.

“In the near term, I expect to see shares of this company double as palladium prices rises in the face of a global supply deficit.”

And finally, in the little satellite image accompanying the ad, we learn that this project has 730,000 ounces of palladium resources.

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So that’s probably enough, right? Well, it turns out that I think the 730,000 ounces is off by a bit, but it’s a reasonable error… this must be Magma Metals (MMW in both Canada and Australia, MMTDF on the pink sheets … most of the trading volume is in Australia). And yes, it’s teensy tiny, be careful (market cap around $100 million, probably quite susceptible to big jumps even if just you — yes, YOU, buy it on a market order on a whim … assuming that you like the stock, of course).

And the 730,000 number comes, I think, from the total indicated and inferred resource estimate, which stands now at 732,000 ounces … but that’s for platinum-equivalent ounces, which measures the platinum, palladium, rhodium, etc. by the platinum price. The total resource estimate for palladium specifically is 324,000 ounces (so I guess that’s the “less than 500,000 ounces” discovery). They also have some smaller projects in Western Australia for base and precious metals, but the Thundery Bay North palladium project is really their primary asset right now.

Just incidentally, they’ve also got a Burgess on the board — though not Luke, this is Terry Burgess, CEO of Oz Minerals. I assume there’s no relation, but it caught my eye.

So what’s it worth? Well, that’s always an open question, and investors always have to decide for themselves what potential Magma might have to expand their resources or build on what they’ve discovered in Thunder Bay North, but we do have the recent buyout of Marathon PGM to give some indication of the value of a palladium mine to at least one buyer — Marathon PGM’s project was more developed, with claims of proven and probably reserves in addition to the resources (reserves requires much more drilling and evidence of feasibility of production).

Marathon’s mine had booked, as of January, proven and probably (mostly proven) reserves of almost 2.5 million ounces of palladium and a bit under 700 ounces of platinum. Resources add about as much again, about 3 million more ounces of measured, indicated and inferred platinum in the planned open pit mine.

And Marathon is being acquired for about $118 million — they also own some other base metal projects, but I think we can ignore those for our current purposes, as we ignore Magma’s Australian projects in this simplistic look. So that means that they’re paying (if we also ignore the platinum and other reserves — we’re pretending that we only care about palladium, remember?) roughly $47 per ounce of palladium reserves, or about $21 per ounce of reserves+resources. Marathon is still exploring, but since they’re further along probably the potential for dramatic increases in reserves and resources is less than for Magma’s project. And remember, that buyout, from a strategic buyer, came at a huge premium of almost 90% over the previous stock price of Marathon PGM shares.

If we apply that same calculation to Magma and their younger discovery, we remind ourselves that they have 324,000 ounces of palladium resources — those should be significantly less valuable than actual booked reserves, but let’s assume that we use the same multiplier of $47 per ounce (still ignoring the platinum, which is more economically critical for Magma than it is for Marathon).

That would mean this particular prospective palladium mine might be worth $47 X 324,000, which is just over $15 million. Magma is currently priced at 52 cents and has 196 million shares outstanding, so the company is valued at about $102 million at the moment. So even if you include the platinum, and generously value the company based on unproved resources, it’s hard to make a case based on the resources they’ve reported so far — which, even though this is a non-scientific, jotting on the envelope type of calculation that fails to account for a lot of things, tells me that investors are probably either very excited about palladium over the next several years, or they think that Magma is going to discover a lot more resources, and book substantial reserves, in the platinum group metals.

Will that happen? Beats me, but if I were investing based on an imminent palladium surge (remember, palladium is already largely consumed by the auto industry — the amount can change, but this isn’t a new development), I’d probably stick with the established producers like North American Palladium or Stillwater Mining — both are also pretty small, highly levered to palladium, and fairly speculative, but they’re at least able to produce the metal now.

But I’ve never owned a palladium miner and certainly am no expert on this relatively minor metal — what do you think? Riches ahead, or too speculative for you? Let us know with a comment below.



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George Hale
George Hale
September 21, 2010 2:58 pm

Very intereting article. I got the previous ad about Lake Superior and was wondering about it.

I have also readf many stories about electric cars in the near future. They don't need catalitc converters as far as I know!!!

How will that affect the palladium market ???


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Tom Szabo
September 21, 2010 5:57 pm

I was wondering why Mamga popped at the start of September and confounded my plans to buy around 40 cents. In any case, neither NA Palladium nor Stillwater can produce palladium at a decent PROFIT and that should temper any buy advice. Marathon's PGM ounces are very low grade compared to Magma whose ounces are in part open-pittable. And even if just talking about palladium, you don't value a company by excluding its most valuable resource, which in the case of Magma is in fact the platinum (and this is also what makes the company arguably worth the current market cap given there are virtually zero platinum dominant PGM plays outside of South Africa). That said, Magma is still primarily an exploration play with most of the value attached to the blue sky potential. Disclosure: I own Magma.

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September 21, 2010 7:32 pm