Stillwater: Platinum Lining

06/17/2014 9:00 am EST


Frank Holmes

CEO and CIO, U.S. Global Investors, Inc.

All eyes are on South Africa, where a labor strike, now in its fifth month, has brought a halt to the production of platinum and palladium, explains Frank Holmes, CEO of US Global Funds and editor of Frank Talk.

As a result, platinum prices have inched up 8.25% this year to just under $1,500 an ounce, while palladium prices have surged 19.28% to over $850 an ounce, a three-year high.

The downside to this activity is that even before the strike broke out in January, platinum and palladium had supply issues.

One of the primary reasons for this is that approximately 80% of palladium and 70% of platinum production is concentrated in only two countries, South Africa and Russia.

Now, with the former country in the throes of its costliest strike ever and the latter experiencing economic sanctions because of its aggression against Ukraine, the world faces an even greater shortage risk of the precious metals.

The worldwide demand for palladium is strong, driven predominantly by the automotive industry, which uses 67% of the metal's global supply to manufacture catalytic converters, or mufflers.

Because a growing number of countries are tightening carbon emission standards, the demand for the metal is increasing. So too are supply deficits, which might soon reach a 30-year high.

The largest South African producers have, so far, managed to make good on their deliveries by tapping into their reserves. But the well is drying up fast.

As worrisome as this news might sound, there is a silver—or, shall I say, platinum—lining. The strike in South Africa and Western tensions with Russia have given Stillwater Mining Co. ( SWC), the only US producer of PGMs, an opportunity to grow its global market share.

The company, which we own in our US Global Resources (PSPFX:US) and US Global Gold and Precious Metals (USERX:US) funds, announced in a press release last month that it has agreed to a five-year, multimillion-dollar refining and sales contract with Johnson Matthey, the third-largest manufacturer of auto catalysts in the world.

Located in Billings, Montana, Stillwater extracts its PGMs from the J-M Reef in southern Montana, the only known large-scale source of the rare metals in the US. The mine contains some of the world's highest-quality ore grades.

Although McMullen sees the strike in South Africa as an opening to a stronger foothold in the global PGM market, he is hesitant to ramp up production too impulsively.

Speaking with the Wall Street Journal, he explained that he would prefer to keep production costs down to maximize shareholders' returns. Stillwater's net income in the first quarter, $19.6 million, was up 34% from the same time a year ago.

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