Many investors in gold mining stocks have been disappointed over the past few months, as their shares have languished. Since November’s low, gold has gone down slightly, currently trading at $1,665 an ounce. Obviously, mining stocks need the commodity to increase in price for their shares to appreciate.
However, there are two precious metals that have seen a spectacular rise in prices since November: platinum and palladium.
Platinum was trading at approximately $1,545 in early November; now it’s just less than $1,700 an ounce, up 10%. Palladium has outperformed these other precious metals, as it was trading at $590.00 an ounce in early November, and it’s now at $750.00, up more than 28%!
When it comes to investing in mining stocks involved in extracting precious metals, it’s crucial to understand the underlying fundamentals of the commodity market.
Obviously, the two main determinants of price for precious metals are supply and demand. The precious metals of palladium and platinum are heavily used in the construction of catalytic converters. As many of you are aware, last year was an extremely strong year for car sales in many parts of the world. This is expected to continue through 2013.
While high-priced precious metals are causing a decline in jewelry demand, the large demand for automobile sales appears to be more than enough to compensate for any slack in the market. With interest rates so low in America, I don’t see a significant move up over the next six to 10 months, and this will continue to drive strong automobile sales in 2013.
According to automotive market research provider LMC Automotive Limited, in 2012, global car sales totaled more than 81 million units for the first time ever; and the research provider expects this number to rise to 83 million vehicles in 2013. (Source: Ibid.) This seems to be a logical estimate, as central banks around the world continue to provide easy monetary policy and data are showing that many of the world’s economies are beginning to accelerate.
On the supply side, South Africa is a massive producer of platinum and palladium. The country has suffered significant supply disruptions, impacting many mining stocks that are active in that region. According to Barclays PLC, platinum and palladium production will drop 2.7% in 2013, reaching a level not seen in 13 years. (Source: “Platinum Supply Falls to 13-Year Low as Mines Close: Commodities,” Bloomberg, February 5, 2013.)
According to the Department of Mineral Reserves in South Africa, mining stocks based in that nation closed nine platinum shafts in the second half of 2012. Part of that was due to labor problems, and some companies are reducing production to increase profitability. As costs rise for many mining stocks around the world, production must be curtailed to prevent losses. With the price of the precious metals rising, this helps alleviate some of the rising costs that the mining stocks are incurring.
As an investor in precious metals mining stocks, this information can be both positive and negative. Clearly, precious metals mining stocks located in South Africa might suffer additional problems if labor issues are not resolved. Even if the price of precious metals continues to rise, if the South African mining stocks are unable to extract the precious metals from the ground and can’t increase production, this does not help revenue growth.
One company that investors in mining stocks related to the precious metals platinum and palladium might be interested in researching further is Stillwater Mining Company (NYSE/SWC). The advantage of this precious metals miner is that its main mines are located in the U.S. While it does have properties in Canada and Argentina, clearly, the risks are far lower than those of South African precious metals mining stocks.
Chart courtesy of www.StockCharts.com
The stock has clearly outperformed many other precious metals mining stocks over the last several months. If the supply situation continues to remain tight and demand meets expectations, this should be extremely bullish for both the revenue and earnings of this company.
The real question to ask is: will the supply disruptions end anytime soon? Obviously, no one can predict the future, but this is not the first time that South African workers have caused disruptions. In addition, demand for automobiles is set for another strong year in 2013. I would certainly delve into the upcoming earnings release by Stillwater and take that information into account before considering any investment.
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