Palladium: A Precious Play

11/05/2004 12:00 am EST


Eric Roseman

Editor, The Commodity Trend Alert

When investors consider precious metals, they most often turn to gold and silver. But Eric Roseman, editor of Commodity Trend Alert says, "Palladium remains the cheapest precious metal today." Here, he looks at the what he calls "the cheapest palladium company on the planet."

"The precious metals could be poised for another major rally as we approach the fourth quarter--typically the strongest time of the year for the precious metals. My guess is that a slowing US economy will become very evident following the elections. That's when we should see the precious metals embark on another impressive rally. And one winner over the last year has been Canada's largest producer of palladium-- North American Palladium (PAL AMEX). We first re commended the stock in late September last year, and it scored a 124% total return through April 2004. We were lucky and jumped-ship last April as the stock began to crater along with the entire precious metals sector. But the technical and fundamental picture is improving for the metals complex and the chart looks good for North American Palladium following a severe 49% decline from the stock's 52-week high.

"After hitting a peak of over $1,000 an ounce just three years ago, the spot price of palladium tanked to a low of just under $190 an ounce late last year. Palladium is probably one of the greatest contrarian speculations in the commodities complex now. It has all the ingredients for a major secular rally later this decade because the big sellers of this white metal have already ‘dumped’ their share of the commodity. In other words, the big bulk of the selling is now behind us. It's been that way for almost a year, yet the spot price languishes for a song. Another bullish factor helping palladium is platinum's relatively expensive price at $850 an ounce. Both metals are used for automobile catalytic converters. But industry prefers platinum because it's a far more effective metal in converters and requires a much smaller application than palladium. As platinum eventually regains lost ground--it's down almost 20% from its April high, palladium will be viewed as a cheaper alternative.

"North American Palladium is Canada's only primary producer of palladium with a stock market capitalization of $300 million dollars. The company also produces gold, platinum, copper, and nickel. The stock offers a leveraged play primarily on palladium prices. Indeed, this is actually a value stock in a universe of generally very expensive mining companies. The company trades at just 17.7 times trailing earnings, has a very attractive $1.12 free-cash-flow per share in its coffers and sells at a low 1.62 times price-to-book-value ratio. This compares very favorably to the majority of mining concerns around the world which sport very high premiums to their underlying assets. But not PAL. This is the cheapest palladium stock on the planet.

"The bull market in precious metals has yet to commence its next leg. I think that next leg is only a few months away. If I was forced to wager a bet, I'd say 2005 will blow away the precious metals bull market of 2001-2003. The reason why the precious metals will take-off in the 2000s is not because of rising inflation; rather, it'll be because of a major economic or monetary event in the United States, or abroad, spilling over to America and the rest of the world. The dollar is the Achilles Heel of the global economy. I can't tell you when this shock will occur or what will trigger the next economic disaster. All I can say is that most hard assets (commodities), especially the precious metals, will benefit enormously from the dollar's day of reckoning. Palladium is dirt cheap and should be accumulated now at these low prices. The recent price setback is a ‘gift’ as far as I'm concerned. We are riding North American Palladium again this fall for maximum profits over the next 12-18 months. Get in now. Buy at market up to $8.75."

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