Impala Is Still a Platinum Pick

01/25/2010 4:20 pm EST


Jim Jubak

Founder and Editor,

I’m going to take advantage of the selloff in emerging market stocks and global commodities on fears that China’s government might be about to slow China’s economic growth to buy shares of Impala Platinum (OTC: IMPUY) for Jubak’s Picks. (The stock is already a member of my long-term Jubak Picks 50 portfolio.)

My buy rests on three points.

First, despite a huge rally of more than 50% in 2009, platinum still sells far below its historical price ratio to gold. Right now, an ounce of platinum buys 1.41 ounces of gold. That’s about 23% below the ten-year average, according to Bloomberg. Recently, commodity money has started to move from gold to platinum in a bet that the price gap to the historic average will close.

Second, while platinum is a physical store of value like gold, it is much more widely used in industrial processes. About 70% of platinum demand in 2008 came from industrial uses (including the catalytic pollution control machinery in cars), compared with the 11% of demand for gold from industrial and dental uses.

That gives platinum big upside leverage to an improving global economy in general and increasing global automobile sales in 2010 and 2011. The Center for Automotive Research projects that US car sales will climb 20% in 2010, and General Motors China forecasts sales of automobiles in China will increase by at least 11% in 2010. Auto sales in China increased by 46% in 2009.

Third, thanks to the global correction in commodity and emerging market stocks, shares of South Africa’s Impala Platinum have dropped 11% from January 8 through late afternoon on January 25. (For more on buying in this correction, see this recent post.)

Earnings per share will be $1.15 in 2010, according to Deutsche Bank, and then more than double in 2011 to $2.21.

As of January 25, I’m setting a target price of $37 a share by September 2010. (It traded above $27 late Monday.)

Full disclosure: I do not own shares of any stock mentioned in this post in my personal portfolio. I will, however, buy shares of Impala Platinum three days after this is posted.

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