A Well-Positioned Platinum Pick

09/27/2012 2:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

On the heels of his call to buy platinum and palladium, MoneyShow's Jim Jubak, also of Jubak's Picks, follows up with this stock primed to rise on potential supply shortfalls.

I added platinum and palladium miner Stillwater Mining (SWC) to my Jubak Picks portfolio with my September 25 post on the disruptions in the South African mining industry.

Strikes have shut down parts of the industry, and I think the settlement of the strike at Lonmin (LMI in London or LNMIY in New York) was just a temporary pause in the strife. Since that settlement, strikes have spread to the gold mining sector, to coal, and to transportation. So, yes, I think there’s a good chance of further supply disruptions at South African platinum producers.

Under the circumstances, the pullback at Stillwater Mining as the strike moved toward settlement—shares were down 13.3% from September 14 to September 21—created a good opportunity to buy into an ongoing supply disruption.

As of the September 21 close at $12.06, the stock had already retraced 41.6% of its gain from the price on August 10 of $9.49. A 38.2% retracement, technical analysis says, is often a good level for a buy after a gain and sell-off. Since then, the price has retreated a bit more, to close at $11.43 on September 25.

Why pick Stillwater? The stock has a very high correlation (R-square of 85) to the price of the platinum group of metals. (Stillwater’s production is 23% platinum and 77% palladium.) The company’s production is all in the United States (so no exposure to South Africa). And the company’s earnings are extremely sensitive to the price of the platinum group of metals, with every $100 increase in price per ounce turning into a 40 cents a share increase in annual earnings per share.

In addition to any boost in the price of platinum and palladium from the strikes in South Africa, Stillwater Creek is on scheduled to begin tunnel boring at new mines Blitz and Graham Creek in 2012. That would let the company add new reserves to its balance sheet.

As of September 25, I’m setting a target price of $15 a share by June 2013.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Stillwater Mining as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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