Stillwater Mining Or North American Palladium?

By Matt Cavallaro | January 13, 2012 AAA

There used to be a couple of good options for investors seeking a pure play on miners in the platinum metals group. Those were Stillwater Mining Company (NYSE:SWC) and North American Palladium Ltd. (AMEX:PAL). Stillwater chose to follow a broader trend where miners attempt to diversify their portfolio of assets, and has become more leveraged to copper and gold than platinum metals. Now, there's really only one choice for investors seeking direct exposure to a platinum metals miner. (To learn more, check out Platinum Metals Is Looking Good.)

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Demand Firm, Supply Glut Exhausted
Platinum and palladium, like gold and silver, are precious metals. But these metals don't trade all that similarly to their more widely recognized stores of value. In fact, platinum and palladium are extremely sensitive to fluctuations in the business cycle, and the stock prices of miners of these metals are highly correlated to industrial usage.

Platinum, which is a relatively scarce resource, has a variety of uses, including jewelry fabrication, industrial, electronic and chemical applications. Platinum prices rebounded sharply after the financial crisis. Yet the ETFS Physical Platinum Shares (ARCA:PPLT) is down roughly 7% over the past two years as underlying platinum prices have softened. There could be value in this exchange-traded fund (ETF) if the recent decline in platinum prices triggers increased demand, particularly given a good year of auto sales.

Palladium, a less well-known metal, is found primarily in Russia, South Africa, Montana and Ontario. Palladium prices peaked at the turn of the century above $1,000 per troy ounce on anticipated demand for its use in catalytic converters that reduce exhaust emissions. Over 50% of palladium demand derives from the automobile industry. In addition, palladium is used in electronics, dental and refining products.

During the 2000s, the Russian government flooded the market by selling off huge stockpiles of palladium left over from the Soviet era. Prices plummeted within a few years of the peak, and once again during the financial crisis. Since then, palladium is one of the hottest metals. Over the past two years, ETFS Physical Palladium Shares (ARCA:PALL) is up around 46%, topping the approximate 43% rally from the SPDR Gold Trust ETF (ARCA:GLD). There's speculation that the Soviet stockpiles may be exhausted and the supply-demand relationship is now tilted in palladium's favor. This is a big positive for miners. (For more information on investing in metals, read A Beginner's Guide To Precious Metals.)

North American Stands Alone
Stillwater, the largest American miner of palladium and platinum, benefited from firmer prices during the third quarter. Net income jumped from just under $5.9 million in the same period last year to roughly $40.7 million, on approximately a 77% year-over-year increase in revenues. The good quarterly results were much needed. Shares of Stillwater were hammered over the summer after the company announced the acquisition of Canadian miner Peregrine Metals for about $487 million. The market was not pleased. Post-acquisition, the company is more leveraged to copper and gold, rather than the platinum group of metals.

Meanwhile, North American Palladium still primarily mines for platinum and palladium, although it does produce gold and other base metals. The company has recovered from a disastrous first quarter earlier in 2011, announcing in the November earnings report that the company will begin mining the LDI palladium mine via shaft during the fourth quarter of 2012. With several mine expansions and developments coming online this year, it should be able to deliver consistent earnings growth. The stock could capture investors looking for a miner of platinum and palladium now that Stillwater is spread out.

The Bottom Line
Most investors look to gold, a metal that has had quite a run over the past few years, for commodity asset allocation. With the dollar strengthening on the breaking back of the euro, that play has risks. Alternatively, the platinum group of metals (which does have some inflation hedge pricing) is heavily influenced by industrial demand. That positioning could be an important catalyst for Stillwater and North American.

There are some headwinds. Platinum prices are down sharply since the last quarter and that could hurt revenues. Longer-term, in the transition towards electric vehicles that have no emissions, palladium is not needed. However, electric vehicles still represent a very small percentage of total sales and will likely remain so for some time.

In aggregate, these miners should be able to grow revenues as the demand for platinum metals is strong. Investors may not be done beating up Stillwater for the Peregrine acquisition. Although the mining segment does offer relative value after a very difficult 2011, and Stillwater has rebounded nicely off the 52-week low. More importantly, Stillwater is no longer a pure play on platinum metals. North American Palladium offers direct exposure to platinum and palladium, and the earnings capability of a well-positioned miner. (For related reading, see Investing In The Metals Markets.)

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At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.

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