Base Metals and Palladium

March 3, 2000

Palladium is in profound shortage, and Stillwater (SWC) under $20 a share here presents an extraordinary opportunity to buy into one of the great palladium deposits in the world that has yet to be noticed by The Hive. We expect palladium to burst into new all-time high ground, one of the few commodities that has been in a surreptitious Uptrend all decade -- remarkably without having attracted widespread attention.

 

We turned bullish on base metals, luckily catching the exact turn shown in the above chart. Without a doubt you can see for yourself that there are Uptrends in copper, nickel, aluminum and zinc even while the press and politicians insist that there is "no evidence of inflation." Furthermore, "commodity stocks" such as Phelps Dodge and Alcoa have registered powerful Upside Breakouts. While these stocks are attractive, by far the single most-bullish metal is palladium, not yet in the headlines, but headed straight for enormous publicity in "The Coming Palladium Boom," even though the metal is scarcely noticed today. The above excerpt about palladium is from our 20th Interim Warning Bulletin of last year, before Stillwater rose 67% from 19.34 to 32-3/8 to challenge its previous all-time high at 34-5/32, and that recommendation alone would have paid for IWB for years. The chart of palladium (next page) demonstrates its raging bull market as it rose 509% from 75 in Jun 92, to as high as 456.95 on 27 Dec 99, the only such pattern for any commodity in the world of which we are aware. Adding to the puzzle is the fact that palladium is actually a precious metal and, according to The Dines Wolfpack Theory (DIWPAT), it should be moving with gold, silver and platinum, but clearly it is not. Our Research Department had a deuce of a time figuring out the mystery behind this mind splitter, inasmuch as we know of virtually no other leading Security Analyst even aware of a palladium bull market, much less recommending investing in it, but we cracked it.

In our full coverage of the palladium situation in our last issue, we pointed out that palladium demand from the automotive industry had risen at a 30%-compounded annual rate the last seven years because it is the best available metal for use in anti-smog control devices. With increasingly-stringent environmental restrictions on automotive emissions, we see demand for palladium intensifying. Palladium has better cold-weather starting ability, and is superior at controlling pollution than platinum, which would be a substitute only at much higher prices. Scientists at automobile companies call palladium "the amazing metal sponge" because it can soak up as much as 900 times its weight in harmful gases; the auto industry consumes around 58% of annual supply. How could we be sure prices should go higher? One factor in demand is the increasing popularity of sports-utility vehicles which require more palladium for their catalytic converters. With the average car containing only about $70 of palladium, the incentive for automakers to look elsewhere is not that great.

Russia produces approximately two-thirds of the world's palladium, and the uninformed press parrots their explanations of why shipments are down; Russia blames it on "lack of export licenses," and other such nonsense. In fact, our Research Department has uncovered actual statements by Russian officials demonstrating that they very deliberately intend to restrict their output and gradually nurse prices higher to see what the market could bear, a new "OPEC" in the making, and you read it in TDL first! As outlined in the Mass Psychology book, the early stages of bull markets are somehow simply not noticed by the Mass, quietly creeping higher, surreptitiously, seeming to be "invisible." The Mass Psychology of people who buy commodities tend to not buy stocks and vice versa, so commodity stocks do not always move precisely in line with the underlying commodity and this presents an "Anomaly" that often provides us with a profitable opportunity. Specifically, in this case, palladium prices have gone up and up, but palladium-mining shares have had relatively limited rises, partially due to the "politically correct" prejudice against all mining stocks these days; the Mass is not focused on mining any more than they were on the Internet in 1993. As we ponder how to lead our TDLrs to profit, it seems to us that palladium shares are going to have a "catch up" move one of these days. Our Research Department has turned up a little-known fact, that the Russian palladium-producing company actually has a stock, Norilsk Nickel, and it is in a roaring Uptrend, having risen from 10 rubles in Jan 99 to over 100 this month. We hesitated to recommend Norilsk because there are no ADRs, it is a very difficult stock to buy, and we were not clear that the citizens of the city of Norilsk would be too keen on rewarding shareholders. In any event, we felt more secure in having recommended Stillwater Mining (SWC), our palladium recommendation of choice, with its outstanding deposit in Montana. Later when mutual funds awaken to the phenomenal profit opportunity, they will find that TDLrs, like Kilroy, had been there first! We took a long-term position in Stillwater a few years ago, patiently waiting for the mine to be built after many years of neglect under its previous owner, and it is not easy obtaining information on it, but the chart (left) is clearly bullish so we are prepared to recommend that strong positions be taken in it. Palladium is an extremely scarce metal, something you just don't go out and dig for like copper, so there are only a few producing mines in the world. Thus it will be that when Stillwater is bid up, they will look around and then discover [name of company deleted by TDL] which we wrote up in our last TDL, and while it is more speculative, both stocks could be bought and tucked away in the back of portfolios. It is slowly dawning on automobile manufacturers that palladium is a market "rigged" by the Russians, who are shrewdly doling out enough to avoid a buying panic, but at ever-higher prices, so we are now witnessing the beginning of stockpiling by General Motors and others, further aggravating the shortage. True, the Russians could at any time decide to dump all their palladium, but they would be crazy to do so, to deliberately destroy their near monopoly that provides them with such a wonderful gusher of hard currency. So we rely on their greed. Furthermore, we doubt that there would be any substitution by platinum until palladium got above $1000/oz, but that would also push platinum prices higher, and Stillwater produces platinum too! Those who originally followed us into Stillwater at $10.50 have nearly tripled their money, but we see no reason to hurry to disturb investments and, in fact, recommend adding to positions.

Electronics makers who use palladium in cellular phones, and who accounted for a quarter of all demand in 1998, are turning to cheaper substitutes such as nickel, which would reduce palladium use around 11%, but all the Russians need do is to supply less and the price keeps going up! Especially since President Clinton last month approved new rules requiring further cuts in vehicle emissions to reduce pollution, (he ordered allowable nitrous-oxide emissions reduced by about 90%, to be phased in over 5 years beginning in 2004). With the average car containing only one-sixth of an ounce of palladium, worth about $75 in a car selling anywhere from $20,000 on up, another ten or twenty dollars for palladium should not be an enormous concern to GM.

Merrill Lynch deserves credit as the only broker of which we are aware, paying attention to Stillwater, and the chart (top, right) shows that Merrill is looking for a very substantial increase in production after several years of stagnation, anticipating an explosive increase from the 400,000 ounces produced last year to an annual rate of 1.2-million ounces by 2002, which means Stillwater's earnings are about to rise importantly.

China is the world’s biggest gold producer with more than 355 tons annually. Australia is second.