Considering the anticipated shortage of platinum group metals, the prospects for the auto industry to sell 15.3 million cars this year, and a pending mine expansion, you’d expect palladium miner North American Palladium Ltd (USA) (NYSEMKT:PAL) to be doing much better than it is. But other than a few brief periods of rising expectations, its stock has been on a slow, steady decline.
Still you’ll want to do your own due diligence before buying in to see if this is really a chance to pick up a quality stock at a severe discount.
North American Palladium snapshot
| Market Cap | $262 million |
| Revenues (TTM) | $156 million |
| 1-Year Stock Return | (44.8%) |
| Return on Investment | (3.1%) |
| Dividend and Yield | N/A |
| Estimated 5-Year EPS Growth | 0% |
| 52-Week High | $3.06 |
| Recent Price | $1.48 |
| % Below 52-Week High | (51.6%) |
| CAPS Rating | **** |
Source: FinViz.com. N/A = not available; North American Palladium doesn’t pay a dividend.
Let’s just make sure there’s nothing more seriously wrong with it before you go and plug it into your portfolio.
Platinum records
Although platinum group metals have some diverse applications in industry and jewelry making, the primary use is in the auto industry’s catalytic converter exhaust system, according to NAP’s primary competitor, Stillwater Mining Company (NYSE:SWC). The U.S. Geological Survey estimates that as much as 58% of palladium goes toward the auto industry, with 26% used for jewelry. Electronics and dentistry account for other significant usages.
So the health of the auto market remains of paramount concern, and in the U.S., at least, it seems to have regained its footing. According to the analysts at WardsAuto, seasonally adjusted light vehicle auto sales will reach 15.33 million in 2013 based on February’s sales numbers, an increase from January’s 15.22 million SAAR. Sales have been stronger than expected, with General Motors Company (NYSE:GM), Chrysler, and Ford Motor Company (NYSE:F) all recording better-than-expected sales. The industry sold 12.8 million vehicles in 2012.
The growing demand for cars will place new demand for platinum group metals, even as supply concerns mount. South Africa has been beset by strikes, and Zimbabwe said last month it would seize dozens of hectares of land leased by platinum miner Zimplats Holdings. It’s a smaller amount than what comes from top producer South Africa and second place Russia, but it adds to the supply constraints already being felt. Earlier this year, it was rumored that Russia’s state stockpiles had almost been exhausted, as inventory sales plunged 68% in 2012. Russia flooded the market for years with inventory sales, keeping prices in check, but now they’ll probably be on the rise once again as that supply dries up.
Unclogging the pipes
The real problem for North American Palladium Ltd (USA) (NYSEMKT:PAL) is the expansion of its Lac des Iles mine in Quebec, which is taking longer than anticipated to get up and running, leading to higher costs than expected. Although it expects the mine to be fully operational by the end of the third quarter and anticipates its cash costs to be in a range between $375 and $425 an ounce, cash costs are expected to spike to around $600 an ounce.
North American Palladium Ltd (USA) (NYSEMKT:PAL) is trading for around $770 an ounce today, up $40 an ounce from a month ago, and I think we’ll probably see it testing the $800 level sooner or later. Because Stillwater Mining Company (NYSE:SWC) diversified away from platinum group metals to gold and copper — and not without a lot of dissent from shareholders — I see North American Palladium Ltd (USA) (NYSEMKT:PAL) as the one to best cash in on the better opportunities in palladium and platinum.
I’ve noted previously that Anglo American, the world’s biggest platinum miner, is cutting production in South Africa 20% this year in a bid to shore up profitability, and with NAP’s problems depressing its share price, it becomes a potential takeover target. Would that make Anglo interested in acquiring the miner? No such rumblings have been rumored just yet, but if the platinum metals market continues to look as attractive as it appears, it seems to me it would be one large miner that might look for strategic alternatives to quickly get back in the game.
Let me know in the comments box below if you think North American Palladium Ltd (USA) (NYSEMKT:PAL) is more attractive as a standalone company or as an adjunct to some larger player.
The article There’s a BOGO Sale on North American Palladium originally appeared on Fool.com and is written by Rich Duprey.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors and owns shares of Ford.
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