This Stock Is Ready To Be Short Squeezed in 2013
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Stillwater Mining Company (NYSE: SWC), which engages in various stages of pruducing and marketing palladium, platinum, and platinum group metals (PGMs), has exposure to one of the most compelling 2013 supply/demand stories among the mining industry. It is entering the execution phase of its company-specific investment cycle, following two years of acquisitions and financings. I believe the execution mode will be much more shareholder-friendly than the acquisition and financing mode. I also believe Stillwater is well positioned as the only U.S. equity investment vehicle poised to benefit from the improving platinum group metal's (PGM) supply/demand fundamentals and underappreciated growth potential.
The Business Drivers
Stillwater shares should benefit from what I believe will be the emergence of a prolonged deficit in palladium driven by:
1) The production constraints and cost pressures in South Africa, which accounts for ~35% of global palladium supplies;
2) Dwindling Russian strategic stockpile sales which have historically accounted for ~15% of annual global palladium supplies; and
3) Recovering global demand, driven in large part by the improving global automobile sales – automotive demand accounted for 67% of total PGM demand in 2012. The US Auto SAAR hit a 15.52 million mark in November, marking the highest SAAR since five years.
I believe Stillwater will also benefit from the transition from investment and financing mode to execution mode. During 2010-11, Stillwater acquired two large greenfield growth projects (Marathon and Altar), began development of two near-mine brownfield expansion projects (Blitz and Graham Creek), and completed a number of JVs and external financings. I believe this has helped Stillwater to fill its project pipeline and reposition the balance sheet. Looking ahead, in my view, 2013 will be a year of execution, progressing on project development while managing a steady-state production at Stillwater’s two core assets (Stillwater and East Boulder). This should result in relatively greater commodity-driven share price movements.
It is important to understand the end markets for PGM products. Platinum and Palladium have four major end markets.
As we can see, automotive demand is a key driver of platinum and palladium given that both metals are used in the production of catalysts in order to control exhaust emissions. With a dramatic rise in the awareness regarding environmental related issues, the use of these metals is on the rise to produce environmentally-friendly engines.
Given the tension surrounding the economic environment, we know that demand for gold jewelry will be on a decline for the time being. Tiffany & Co., one of the high-end jewelers has already stated that the industry will be facing difficulties in attracting demand from high-end customers due to concerns regarding the fiscal cliff.
Therefore, it is important to analyze the different revenue sources for the various PGM players. I have shortlisted Impala Platinum Holdings (NASDAQOTH:IMPUY) and North American Palladium (NYSEMKT: PAL) to compare their exposure to Stillwater.
The chart shows that Stillwater has the best mix of revenue sources to benefit from the surge in platinum and palladium demand. Also its 1% revenues coming from gold signifies that its revenues will not be affected by a decline in the demand for gold in the near future. Impala also seems a nice stock to benefit from an expected rise in demand from platinum and palladium given that 83% of its revenues come from the two metals (lesser than 94% of StillWater’s revenues, but more than 75% of North American Palladium’s revenues).
The upside case of $18 assumes a 1.3x P/NAV (Stock price/Net Asset Value), based in part on the forecasted 2013 palladium price estimate of $850/oz, and a forecasted long-term palladium price estimate of $900/oz. The downside case of $9 assumes a 0.8x P/NAV, based on a lower 2013 palladium price assumption of $580/oz.
The NAV for Stillwater stands at $15 per share, driven in part by the long-term (i.e. 2016 and beyond) palladium price forecast of $900/oz. Given significant cost pressures in South Africa coupled with expected supply constraints, I believe the longer-term palladium pricing should improve and approach historical highs. In summary, Stillwater stands to be the derivative beneficiary of what I believe to be the most compelling supply/demand outlook within U.S. metals & mining.
It is important to note that the stock has been shorted in large quantities. Currently, 14% of the float has been shorted. However, given a bright future and a 150% expected rise in 2013 earnings, the stock is ready to be short-squeezed.
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