Which Is My Favorite PGM Stock?

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Platinum Group Metals (PGM) were the best performing metal for the year 2012, along with silver. Both showed an average rise of 6% for the year. PGMs are expected to perform strongly in 2013 as well. Why? That has been explained with the help of future outlooks for three stocks in this space:

Eastern Platinum (NASDAQOTH: ELRFF)

The Street is forecasting sales of $12.3 million with a cash cost for the quarter of $919/oz.

The company is expected to report EPS of $0 on Mar. 6. As the company continues to be in cash conservation mode, the Street looks forward to hear from the management on 2013 cash cost guidance, which is estimated to be $1,039/oz, and sales guidance, which is estimated at 55.8koz in 2013.

North American Palladium (NYSEMKT: PAL)

NAP reported strong production figures of 44.3koz (relative to the Street’s estimate of 40.0koz) for DecQ12. Sales are estimated to be $40.9 million with cash costs of $361/oz for the quarter. The strong set of production numbers puts NAP's YTD production at 164koz, beating the high end of its 150-160koz full year guidance.

The company is expected to announce its earnings on Feb 22.

Stillwater Mining (NYSE: SWC)

In one of my earlier posts, I mentioned how this stock is ready to be short-squeezed. It is to be noted that a deficit of palladium is around the corner. The reasons are:

1)      Production bottlenecks in South Africa, which accounts for almost 35% of global palladium supplies;

2)      Shrinking supplies of palladium in Russia, which accounts for 15% of global palladium supplies;

3)      Recovering global demand, driven largely by improving global auto sales, especially in the US.

In this situation, those PGM players that have a large exposure to palladium and platinum sales will benefit the most. The following chart shows the situation:

 

<img src="/media/images/user_15211/capture2_1_large.PNG" />

The chart clearly shows that both Stillwater and North American Palladium (PAL) have an ideal mix of revenue streams to benefit from the ongoing surge in demand for both platinum and palladium. Also, North American Palladium has sizable exposure to gold, which means that it can also benefit from an unexpected rise in gold prices in the future (The market is currently bearish on gold, which means a decline in gold prices has already been factored into the stock).

The Street estimates Stillwater to post EPS of 5 cents on revenue of $216 million. The company is expected to report on Feb 18.  

Foolish Bottom Line

PGMs are expected to perform strongly in 2013, especially in the first half, in which the supply of PGM metals remains a issue. However, what remains to be seen is how much these expected gains have been priced in:

 

<img src="/media/images/user_15211/capture4_5_large.PNG" />

The chart shows that where Eastern Platinum and North American Palladium have already witnessed enormous amounts of gains, Stillwater has hardly moved when compared to them. Therefore, Stillwater is currently my favorite stock in this space. 


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