PGMs Hit
Paydirt
by Wade Black
Personal Finance
The
current hoopla over fuel cells and the rising demand for cell
phones have helped double the price of platinum and triple palladium's
price. And it ain't over yet.
Platinum and palladium,
the two most abundant of the platinum group metals, or PGMs,
have had huge price gains in the past six months. Growth Portfolio
pick Stillwater Mining (ASE SWC $40.75), the largest North
American producer of the metals, has profited mightily from this
trend.
Stillwater's position
as the top domestic producer is secure for the near term, especially
in light of its aggressive campaign to triple its production
during the next few years.
But the action we're
seeing today in PGMs is only the tip of the iceberg. The industrial
attractions and demand for the metals is fevered, but we haven't
even considered the value placed on platinum as jewelry in Asia.
Japan's long recession
has held back much of the demand and as the Chinese begin to
tap the vast potential of their country's resources, the demand
for platinum jewelry is on the rise. Even domestically, the American
public has begun to value the metal. Its understated elegance
is in stark contrast to the gaudiness of gold and the lower relative
value of silver.
As the prices of PGMs
continue to rise, the development of other properties is of keen
interest to mining companiesand investorsworldwide. The world's
largest producers are in South Africa, where its Bushveld complex
is their equivalent of Montana's Stillwater complex, but on a
much larger scale. Buy up to 45.
World Class PGMs
Both
Anglo-American Platinum (Amplats) (Nasdaq AAPTY $25.50)
and Impala Platinum (Implats) (Nasdaq IMPAY $34.25) mine
the metals in South Africa, and are traded in the U.S. as ADRs.
These companies make Stillwater's production look like a drop
in the ocean and they're a great way to play PGMs as well.
Southern Africa has
the world's largest deposits of platinum and palladium. The rally
in PGM prices has set the companies in the region on an expansionary
trackImplats and Amplats will double production in the next 10
years, adding 3.4 million ounces of platinum to global supply.
New mining operations and boosting recycling activities would
be the key drivers of supply for both firms. Buy Amplats up
to 31 and Implats up to 40.
On the North American
side, very little exploration has been done to find new supplies
of the metals. But as the price keeps climbing, new ideas are
cropping up. The only other producer north of the Rio Grande
is North American Palladium (Nasdaq PDLCF $5.97), which
has a small, open-pit mine in Ontario, Canada.
It's a wee operation
and its proven and probable reserves are small as well. It may
not be able to economically mine its property much longer. North
American Palladium is a hold, keep an eye on its expansion plans.
In Zimbabwe itself, internal political instability is being stirred by the ruling political party as general elections approach; elections are in late April. Old ethnic tensions have resulted in many demonstrations and peaceful occupations of white-minority owned farms.
Any action against the farmers has been ruled illegal by the country's courts. Therefore, it's unlikely the ruckus will persist after the general elections. That means investors will again focus more on the compelling fundamentals of the nation's impressive natural resource base, including Zimplats.
Another factor contributing to the selloff in Zimplats is a newswire mistake about the company's shareholders. The Australian Stock Exchange erroneously stated that Australia's Delta Gold Ltd. has sold almost its entire position in Zimplats, although Delta sitll had a 51-percent majority stake.
Media coverage of the Zimbabwe elections had been negative in Australia, where most of Zimplats' shareholders are. Their loss is our gain.
Zimplats is focused primarily on boosting new mining operations. Zimbabwe has the world's largest undeveloped PGM resources, which will be an unparalleled opportunity for the company in coming years as demand for catalytic converters, cellular phones and mobile devices booms. Zimplats is a speculative buy up to 33 cents for very aggressive investors only.
If you don't enjoy the inherently speculative nature of mining companies (especially ones without mines), another way to play the PGM game is through Johnson Matthey (Nasdaq JMPLY $24.75), a London-based refiner and metals marketer.
In addition to being the world's largest producer of catalytic converters, JM has an airtight marketing agreement with Anglo-American Platinum. Its shares can be bought on the London exchange, although ADRs representing two shares trade on the pink sheets in the U.S. under the symbol JMPLY. Johnson Matthey is a buy up to 845 pence, or 27 dollars for the ADRs.
Editor's Note: Wade Black is chief financial officer of Leeb Brokerage Services. Mr. Black's comments appeared in Personal Finance, 1750 Old Meadow Rd., Ste. 301, McLean, VA 22102, 1 year, 24 issues, $69.
