Metals might be a good commodity to invest in sometimes, but not all metals are created equally and not all are in ascendance all the time. Investing in businesses that extract, refine, and prepare the metals presents a different way to enjoy the benefits of price increases for the metal. Businesses have the benefit of charging more than it costs to extract the metal, especially if they process it into a form that is easier to transport and use. It also gives them the ability to reduce expenses to increase profitability and keep pace with price drops. Investing in the mining companies helps temper the cyclical nature of the commodities market.
1. Palladium Miners Seek Rare Metal
Stillwater Mining Company (NYSE:SWC) is the only palladium and platinum producer in the United States. It is also one of the largest producers in the world. There is a companion article to this one that goes over the metals in detail, but palladium is used in catalytic converters for cars. The demand is so great that the price of palladium is dictated heavily by the number of cars manufactured.
In early 2011, palladium was much higher than it is now. Using the ETF PALL as a proxy it touched $85 versus $70 right now. SWC was above $20, which is more than the $15 it sits at right now. Wells Fargo recently initiated coverage with an outperform, and that is only natural considering the market's overall outlook on palladium. A company like Stillwater will benefit as palladium demand increases.
The company is expanding production, but its present production is also in line with its estimates. That is a good sign because it means the decisions the company has been making have yielded the expected results. The company has a solid cash position, but earnings are on the decline. That might explain why the stock has not benefited with the positive sentiment about palladium yet. Stillwater will probably head above $25 as palladium rises, as long as the company does not make any serious missteps.
2. Aluminum Demand Growing Slowly
Alcoa Inc. (NYSE:AA) is as stagnant as ever, but the long-term outlook is still good. Alcoa is a huge producer of aluminum, and aluminum is the most used non-ferrous metal on the planet. It is also one of the most abundant, but during times of peak economic output Alcoa can deliver some serious returns. Aluminum has many demand drivers so no one thing drives the price like palladium. Aluminum is used in automobiles as well, but the increase in that demand is not going to affect the entire market. Global economic growth is the critical catalyst for Alcoa. The company is making lemonade out of lemons by cutting costs and gaining some savings from scale by expanding production.
The Alcoa earnings call had some guidance for demand growth. The numbers sound conservative, which is why I am inclined to trust them. The company does not want to over promise, and I think the goal should be to present as negative an approach as possible while still being positive overall. No aiming for the stars to hit the moon. You aim for Everest and pray for the moon. China is the main driver of growth at 11%. Other growing economies will lead to positive surprises but there are not any specifics given for countries like India. North America is a respectable 4%, but Europe is at -1%. If European demand growth can flip positive and start recovering it would be a good sign for the company and the world economy. Overall the demand for 2013 is estimated to be 7%, which is higher than 2012's 6%.