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.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Mutual Funds & ETFs

    ETF Analysis: WisdomTree International LargeCp Div

    Learn more about the WisdomTree International LargeCap Dividend fund, an income-based international equities ETF that focuses heavily on the United Kingdom.
  3. Mutual Funds & ETFs

    ETF Analysis: United States Gasoline Fund

    Learn about the United States Gasoline Fund, the characteristics of the exchange-traded fund, and the suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: United States 12 Month Oil

    Find out more information about the United States 12 Month Oil ETF, and explore detailed analysis of the characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Nasdaq Biotechnology

    Find out information about the ProShares Ultra Nasdaq Biotechnology exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  6. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily S&P Biotech Bull 3X

    Learn more about the Direxion Daily S&P Biotech Bull 3x exchange-traded fund, a new triple-leveraged ETF tracking biotechnology equities.
  7. Mutual Funds & ETFs

    ETF Analysis: First Trust Health Care AlphaDEX

    Learn more about the First Trust Health Care AlphaDEX exchange-traded fund, an indexed fund that uses an advanced stock selection methodology.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!