A deepening deficit
The latest forecast released by Walter de Wet of Standard Bank points to a 2014 palladium market deficit of 2 million ounces. Back in April, when the South African miners' strike was in its fourth month, de Wet forecast a 1.5 million ounce deficit. Looking forward, for 2015 de Wet predicts a 1.3 million ounce deficit, and in 2016 he estimates the deficit will be 1.8 million ounces.
The best opportunities in palladium are outside of top producers South Africa and Russia. Unfortunately, there are few options.
Stillwater Mining (NYSE: SWC ) has an operational PGM mine in Montana, and is currently developing new PGM mines. The company posted strong results in 2013. Revenue increased 30% year over year. Its first quarter was mixed. The company reported EPS of $0.15, more than double the Capital IQ consensus estimate of $0.07, but according to two analysts revenue was a shortfall. Still, overall the company's financials are robust, with cash and liquid investments on hand. The company also continues to make money-conserving decisions even though its current financial state is strong, which shows good management and positions the company for more future success. When asked about the recent rally in palladium and platinum prices, the CEO said he would not immediately step up production just to cash in, a move many miners often do and then are put in in a bad place when prices level off. In addition, Stillwater has recently offered some union members buyouts to conserve money, and signed a supply agreement with Johnson Matthey.
The only other North American option is North American Palladium (NYSEMKT: PAL ) . North American Palladium's financial position is not as stable as Stillwater's. The company has struggled to maintain profitable operations for some time, and posted a per share loss in the most recent quarter. While a struggling company can make a great turnaround story, the company continues to acquire a great deal of debt to increase production, and given its struggles to consistently turn a profit, acquiring more debt puts investors in a risky position, for now.
The medium- and long-term case for palladium in strong, but unfortunately there are only a few options for investors outside of South Africa and Russia. The limited supply may provide even more support for the value of these investments, with Stillwater mining being the "safest bet", but North American Palladium should be watched to see if it could make a great turnaround story.