When it comes to investing in mining stocks, one has to consider two factors: the underlying fundamentals of the precious metals, and the operational efficiency of the mining stocks.
While mining stocks themselves can’t predict the price of the underlying precious metals, what they can do is run their operation as smoothly as possible. As well, one should take a look at precious metal mining stocks in areas of the world that are less likely to suffer from political obstacles.
An interesting report by the company Johnson Matthey stated that it’s highly likely that the palladium and platinum market will be in a deficit. Such a scenario would certainly be bullish for precious metals mining stocks, which aren’t affected by operational issues, such as being located in South Africa. Jonathan Butler, the author of the report, states that he believes there will be a significant reduction in the supply for two precious metals: palladium and platinum. (Source: “Platinum Market Forecast to be in Deficit in 2012,” Platinum Today, November 13, 2012, Johnson Matthey.)
The report states that for the palladium sector, there will be a two-million-ounce swing from a surplus to a deficit this year. According to the findings within the report, palladium supplies from South Africa are forecasted to decrease by six percent this year, along with a decrease in the sale of Russian stock of precious metals. Conversely, palladium demand for catalytic converters is expected to rise seven percent, to what the report states is a new high of 6.5 million ounces.
Because a large part of the supply disruptions stem from South Africa, one should be cognizant of precious metals mining stocks that are not located in that region. Unfortunately, there aren’t that many to choose from since South Africa has an abundant level of many precious metals.
One of the interesting mining stocks that have popped up on my radar is North American Palladium Ltd. (NYSE/PAL, TSX/PDL). This is one of the more interesting precious metals miners because it trades in Canada as well as the U.S., which could allow for currency diversification, while also having its flagship mine located in Canada, away from any political instability. The company is also one of only two primary palladium producers in the world. (Source: North American Palladium Ltd., last accessed November 22, 2012.)
For third-quarter 2012, which ended September 30, North American Palladium reported revenue of $36.2 million, as compared to $38.3 million in the third quarter of 2011. The company reported that part of the reason for the decline in revenue was lower palladium prices. If the report on the supply and demand dynamics, which I cited earlier, is accurate for precious metals such as palladium, then the commodities market should see higher prices, which should benefit a stock like North American Palladium. (Source: “North American Palladium announces third quarter 2012 results,” North American Palladium Ltd., November 7, 2012.)
As with many mining stocks, the company experienced operational issues. In this instance, North American Palladium’s mine flooded due to severe rain, which cost the firm $1.6 million in expenses for the third quarter due to water pumping. Such issues can and do occur with many mining stocks, which is a possibility that investors must be aware of in addition to the volatility of prices for the precious metals.
Chart courtesy of www.StockCharts.com
This is a three-year weekly chart of North American Palladium. As is quite evident in the chart, this stock has seen a significant decline in share price. With a chart such as this, I would certainly not recommend buying shares at this point. What I do suggest is to keep this stock on one’s radar to see if two things occur: 1) the supply and demand of precious metals such as palladium really does go into a large deficit, which should see the price of the commodities increase, and 2) operational issues are resolved and the company is able to resume production at or above guidance levels.
To both of these points, the share price of the stock should start moving past the $2.00 mark if the situation was improving for the company. If we see mining stocks that have been under pressure stop their decline and start moving up, this would be a sign that large investors believe in the company’s future viability. I would stay on the sidelines and wait for the criteria I mentioned earlier, along with a sustained and significant move up in the stock price before thinking about investing in this company.
Article Source:http://www.pennystockdetectives.com
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