PGM outlook good for Canadian companies (May 10, 2010)

Platinum and palladium have made quite the comeback recently and analysts are forecasting that prices will remain strong going forward.

This is good news for a few Canadian companies like North American Palladium (PDL-T, PAL-X), with its expansion plans for the Lac des Îles palladium mine near Thunder Bay, Ont., and Marathon PGM (MAR-T), which is looking to finance a US$351-million platinum-group-metals (PGM) and copper project in Marathon, Ont.

In 2008, platinum fell from a high of US$2,252 per oz. to a low of US$774 per oz. but has now surged back up to US$1,700 per oz.

Palladium is a similar story, having dropped from US$579 per oz. to US$159 per oz. in a few short months, but recovered to the US$550-per-oz. range.

Most platinum and palladium comes from South Africa and Russia but supply has been decreasing over the last few years. South Africa has been dealing with political issues, power shortages and increasing production costs. Russia’s production comes mainly as a byproduct from Norilsk Nickel’s (MNOD-L) operations, while some additional supply also comes from old stockpiles.

“We don’t believe there’s much growth to be had out of South Africa or Russia,” says George Topping, a mining analyst with Thomas Weisel Partners. “We believe their production is going to continue to decline so we are expecting prices to move higher.”

World platinum production fell 2% to 6.04 million oz. in 2009 while palladium production was down 1% at 6.3 million oz.

Production from North America is limited to Stillwater Mining’s (SWC-N) Stillwater complex in Montana, which produced 407,000 oz. palladium and 123,000 oz. platinum last year, and North American Palladium’s Lac des Iles mine, which will produce 140,000 oz. palladium this year. Canada’s nickel mines also produce some platinum and palladium as byproducts.

However, as emerging economies like India and China outpace the West in car manufacturing, this won’t be the case for long.

However, as emerging economies like India and China outpace the West in car manufactur- ing, this won’t be the case for long.

“Many project the market for platinum and palladium moving into deficit with a bump in demand from the auto sector and supply problems from South Africa and Russian uncertainty,” says Chris Thompson a mining analyst with Haywood Securities.

Another reason for the price increases in platinum and palladium is physically-backed exchange traded funds (ETFs). According to GFMS, platinum ETFs accumulated about 390,000 oz. in 2009 and investor interest continues to surge. New platinum and palladium funds introduced by ETF Securities in New York in early 2010 were doing quite well. The platinum ETF had accumulated 340,000 oz. within four months time, while inflows into the palladium ETF have already eclipsed last year’s volumes at 600,000 oz.

North American Palladium president and CEO William Biggar says this investment interest for palladium is a result of the world financial crisis.

“Five years ago if you asked people about palladium they wouldn’t know what it was,” Biggar says. “The awareness factor is increasing with palladium especially with the ETFs because you are getting retail participation in these and also with the whole credit crisis that we had, your major institutions are looking to diversify into precious metals.”

North American has just raised $100 million in a bought-deal financing to pay for the development of the Offset zone at its Lac des Îles mine.

The company shut down Lac des Îles in October 2008 due to low metals prices with operations finally resuming in mid-April of this year. It’s anticipated that the Roby zone, where the company is currently mining, has enough ore to last two more years. In that time, North American hopes to have the Offset zone fully developed, transitioning seamlessly to the new zone.

A 2008 preliminary economic assessment on the Offset zone estimated that the Lac des Îles mine life could be extended by another 10 years, producing about 250,000 oz. of palladium per year. An updated study is being planned for August 2010.

Roby is mined via a ramp but to mine the Offset zone, North American wants to build a shaft. Biggar says the shaft could cost $80-$100 million.

The Offset zone has measured and indicated resources of 4.6 million tonnes grading 4.9 grams palladium and 0.4 gram platinum per tonne for 3.7 million oz. palladium and 303,000 oz. platinum.

At last count, the Roby underground mine has indicated resources of 3.3 million tonnes grading 7.61 grams palladium and 0.44 gram platinum for 805,000 oz. palladium and 47,000 oz. platinum.

When the mine was placed on care and maintenance in 2008, the open pit at Lac des Îles had less than one year of reserves.

Going forward, North American plans to focus on the Offset zone as well as the Cowboy zone. Cowboy was discovered last June less than 50 metres away from Offset. It extends for up to 250 metres along strike. Some of the best grades so far include 4 metres grading 5.1 grams palladium and 4 metres grading 3.88 grams palladium.

During the shut down North American bought the shuttered Sleeping Giant gold mine in Quebec, which it just brought back into production, as well as several nearby exploration properties but Biggar says the main focus is still palladium.

Topping of Thomas Weisel Partners says North American’s hefty $100-million financing and its diversification into gold gives the company some extra cushioning.

“Because, in the past, the company almost went under, it’s like being a recession child, you never want to take the chance that it happens again,” Topping explains. “It’s a case of making absolutely sure that if there was another downturn in the palladium market that the company has the resilience on the balance sheet. It removes any additional overhang that investors thought they were coming back to market to raise.”

Although Marathon PGM is still in the permitting phase for its copper- PGM project, the company is looking to China to ease some of the future financing risk.

President and CEO Philip Walford went to China recently to meet with potential joint-venture partners and would consider making an off-take agreement or selling a royalty.

Marathon hopes to start mining by 2012 or 2013. The operation would be a 22,000 tonne-per-day open-pit mine with an 11.5-year mine life.

The company expects to produce 37 million lbs. copper, 234,000 oz. PGMs plus gold, and 182,000 oz. silver per year over the first five years.

“It would be nice to say we were going to raise all the cash ourselves,” says Marathon senior geologist David Leng. “We are looking at a variety of options and if we do get a partner on board that would take a portion of the financing risk away.”

For investors looking for exposure to platinum and palladium miners, the choices in North America are limited. In addition to Stillwater, North American Palladium and Marathon PGM, there is Magma Metals (MMW-T, MMW-A) which has an early-stage exploration project near Thunder Bay, Platinum Group Metals (PTM-T, PLG-X) with exploration ground near the Lac des Iles mine and near Sudbury, Ont. and its Western Bushveld joint venture in South Africa. A feasibility study put production at 275,000 oz. platinum per year. There’s also Eastern Platinum (ELR-T, ELR-L, EPS-J) and Anooraq Resources (ARQ-V) which are listed in Canada but have projects in South Africa.