Even After 40% Gain in 2014, Stillwater Mining Has More Potential on Platinum Supply Disruption

06/06/2014 5:50 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

This platinum miner has been on a tear as of late, so now it's time to decide whether to sell or hang on in the hopes the stock will run up some more. As of today, June 6, MoneyShow's Jim Jubak is hanging on and raising his target price.

Jubak's Picks portfolio member Stillwater Mining (SWC) has been on a tear in 2014 that has pushed the shares of this platinum miner up 38.25% for 2014 through June 5.

At the June 6 close of $17.34, the shares are pushing up against my target of $18 a share.

So, the burning question is can the stock run some more or is it time to sell?

Looking backward, the numbers are generally positive. On May 1, the company reported first quarter earnings of 15 cents a share, 6 cents a share above the Wall Street consensus, on a 2.8% increase in platinum and palladium production. All-in sustaining costs fell to $788 a mined ounce, for $845 in the first quarter of 2013. Revenue fell 12.4% year over year to $219.5 million versus the $234.5 million consensus.

Looking forward, though, I'm left wishing that the company's next earnings report was sooner than August 7.

But I do have a way to a good read on the direction of the market for platinum and palladium. I listen to what Johnson Matthey has to say about the market. The company plays the same role in the platinum/palladium market as Deere (DE) does in the farm sector. As a big consumer of platinum for the catalysts and catalytic converters it produces, the company keeps a very close watch on supply and trends for these metals. Johnson Matthey also refines metals such as platinum and silver, giving it another take on this market. (Johnson Matthey produces about one third of the catalysts used to reduce pollution from automobiles. With emissions standards getting tighter around the world, this is a good business to be in. Unfortunately, the London-based company doesn't trade with any liquidity in New York, with average volumes of 300 to 600 shares a day. If you can trade in London, though, I'd strongly suggest taking as look at the shares with a symbol of (JMAT:LSS)).

What's Johnson Matthey's most recent take on the market? It doesn't see platinum and palladium prices climbing abruptly as a result of the now four-month old strike at South African mines. But the company doesn't report earnings again until August 7 so that leaves me without funds. Jewelers and exchange-traded funds (ETFs) have relatively large inventories that have helped prevent shortages as a result of the strikes. Platinum prices are, in fact, down about 1.8% since the strike began in January 2014, even though, as a result of the strikes, demand is forecast to exceed supply by 1.22 million ounces in 2014, according to Johnson Matthey. That would be the biggest gap in more than 30 years.

Reason to sell Stillwater, no?

No. Because a recent agreement between Johnson Matthey and Stillwater Mining-the only US producer of platinum and palladium-suggests that Johnson Matthey is more worried about future shortages than its take on the current condition of the market suggests.

On May 16, the two companies announced a five-year refining and sales agreement for platinum and palladium. Johnson Matthey will buy all of Stillwater's mined palladium, and a big share of the company's mined platinum is at an annual price linked to industry benchmarks. (Stillwater does have the ability to opt out of the sales agreement at, what the deal calls, a nominal fee.) This sounds like an agreement designed to make sure that Johnson Matthey will have a solid non-South African supply because the company is worried about a continued shortfall in production from South Africa's mines.

In addition, Stillwater will use Johnson Matthey's refining services for all of mined and recycled production. (That will reduce Stillwater's need for working capital by $17 million to $22 million. Hello, bottom line.) Johnson Matthey will work with Stillwater to find material for the company's recycling operation. In the first quarter, a big part of the revenue shortfall was a result of a decline in production from Stillwater's recycling business. And Johnson Matthey will provide its proprietary market analysis services to Stillwater to optimize the two company's smelting and refining operations.

I see upside here in Johnson Matthey's decision to secure non-South African supply, in improved recycling revenue in a tight market, in a reduction in working capital that will help Stillwater's bottom line, and in cooperation on market intelligence.

As of June 6, I'm raising my target price on shares of Stillwater Mining to $22 a share from the prior target of $18.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.

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