Some Good PM Reading Material From CPM Group

The presentations of the CPM group regarding Precious Metal market trends. Among which:

Silver Investors and Prices by Jeffrey Christian, who was recently interviewed by TheStreet. See the video of interview: What's in Store for Platinum.
CPM Yearbook of Silver 2007
CPM Yearbook of Gold 2007
CPM The Future of PM Market presented at IPMI June 2007.

I especially recommend you to read the Silver Investors and Prices, and the Silver Yearbook 2007. Jeffrey made an observation of facts that most people, including me, have NOT thought about, i.e., supply surplus actually signals investment buying, squeezing out demand, therefore emerging and expanding surplus actually correlates to raising price and is very bullish. See page 9 of the yearbook. Jeffrey emphasis that

Surpluses and deficits are misunderstood in the silver market. Intuitive thoughts of silver investors is that a supply surplus probably means bearish for the market. It's actually the opposite! Silver analysts Ted Butler recently expressed the same opinion.

After some thoughts I agree. Investment buying and hoarding drives up price. We all know that. But what's little thought about, but which is also true, is investment buying drives OUT the consuming demand. It is basic physics! You have limited supply, so after investors buying and taking away a big chunk of the supply stockpile, whatever is left, is all you have to left for industry consumption. The more investors buy away, the less is left for the silver consumers to consume, and the bigger a surplus you have when you subtract what's left for physical demand from what's available from the total supply. And statistical data also support such a notion which defies intuitive logic on first thought, but is perfectly logical when you further thought about it.

But isn't it true in all precious metals where there is significant investment demand, not just in silver?! It is especially true in the palladium market, where the supply is tight and limited, and any significant investment demand will drive up price as well as squeeze away industry demand.

(Click on the chart to enlarge. Click here to see the original chart)

Look at the above chart, see the open interest at the bottom. When the open interest, signaling investment buying, really kicks in starting in the middle of 2003, the metal price also started raising up. Johnson Matthey has been claiming a massive palladium supply surplus for 6 years in a row and painting a very bearish picture of the palladium price trend. But the market totally disagree with them. The supposedly massive surplus is all soaked up by investment demand, and is actually caused by investment demand. So that is very bullish for palladium and SWC.

Examples of investment buying of physical palladium includes the London ETF Security and the ZKB Palladium ETF of Zürcher Kantonalbank in Switzerland. According to a recent presentation by CPM Group, as of the end of May, 2007, these two ETFs already hold a total of 162K ounces of palladium and 50.4K ounces of platinum. That's barely a few weeks after the initial inception of these two ETFs. The ZKB Palladium ETF planned to reach 200K ounces within one year. But it reached 133K ounces within the first two weeks!!! Of course, one should not forget that Novartis Pension Found is spending 1% of their portfolio to buy physical palladium! For comparison the whole world produces about 7M ounces of platinum and palladium each per year.

Note on July 5th: Previous London ETF palladium holding stood at 29K ounces as of July 1st. I looked today and its now 33K ounces. I wish I could find a web link to getupdated holding information of the ZKB Pallatium ETF. Note on July 22nd: Now London ETF has 39K ounces palladium, an increase of 10K in just 3 weeks.

SWC and Palladium - One Year Chart

I put the one year chart of SWC and palladium together. So you can see the contrast, The red is palladium, and the blue is SWC:



In one year, palladium is up a lot, and SWC is back to where it was and even lower? What a great deal. You have a stock that is fundamentally more bullish than one year ago, at a price even cheaper!

SWC's Metal Hedging and Forward Sell

Many people are concerned about SWC's metal hedging and forward sell contracts becaue the company loses profit due to such contracts when the metal price is booming. We know those hedging contracts should expire in the next few years so it is not a problem in long term. But nevertheless let's analysis exact what kind of impacts these hedging and forward sell contracts have on SWC's quarterly results.

Those contracts are documented in SWC's Q1, 2006 quarterly report. It's on page 12 and page 13. Let's look at platinum first. In 2007, 14% of the platinum mine production is subjected to a celling of $850. On top of that, certain amount of platinum mine production is subject to forward sell price. For Q1, 2007, the forward sell is 25K ounces at $898 per ounce.




For Q1, 2007, SWC produced 33K ounces of platinum. So accordingly, 14% of 33K ounces, 4.62K ounces, was sold at at the celling of $850. Then 25K is sold at forward selling price of $898. The remaining portion, 3.38K ounces, is sold at market price of $1149 per ounces. The total would be $30.260M, averaging $917 per ounces.

Now let's say in Q2, 2007, all the productions are the same, let's see how much improvement SWC will get due to improved platinum price:

Total 33K platinum mine production:
4.62K ounces at $850/oz
22K ounces at $941/oz (forward sell for Q2,07)
6.38 ounces at $1300 market price.

Total sales will be $32.923M, averaging $998 per ounces.

So all things equal, mine productions of platinum would improve SWC's quarterly gross earning by $2.663M, or about 3 cents per share.

In Q1,07, SWC also recycled 37K ounces of palladium, 27K ounces of platinum, and 6K ounces of rhodium, those are sold at market prices of $336, $1149, and $5052 per ounce respectively.

Right now the going price for the three metals are $380, $1300, $6020 per ounce. So the improvement in Q2 on the sale of recycled metals will be
37K * ($380-$336) + 27K * ($1300-$1149) + 6K * ($6020-5052)
= $11.513M

That's another improvement of $11.513M in gross income. So mine production and recycling combined, we should expect an improvement in gross income for about $14.176M, i.e., from losing $1.059M to gaining $13.117M. That would be a 14.3 cents quarterly profit before tax, for Q2, 2007. Or in other word, it will improve SWC's current P/E ratio down to 19.8. Very decent!!

Resource Investment Is Direction To Go

I believe natural resource investment is the direction to go to make big money in the next few years. We are only at the starting stage of the next round of commodity bull market. This current round of commodity is different from all previous ones in that some of the natural resources are really hitting the natural limit of how much nature can provide us. For starter, do a web search of "Peak Oil", or "Natural Gas Crisis".

To find the best resource player you concentrate on two things:

1.The best resource that will see incredible growth in the next few years. I believe my choice would be natural gas, palladium, silver, in that order. Nickel and copper would have been a better choice about two years ago. I owned PCU for more than a year but have sold it recently.

2.The current price/sales ratio, and the amount of underground reserves. Price/sales is a much more important indicator than price/earnings. That's because when the commodity price goes up, the gain in the sales revenue will be the gain in gross profit: You produce the same quantity of your product, at same cost, but they sell for more in the market. My favorite stocks with an amazing price/sales ratio, are SWC, NGAS and CHK. All of them have a price/sales ratio at 2.0 or below.

With a price/sales of only 2.0, any push up of the commodity price will further reduce the price/sales ratio, as well as boost the profit margin towards the theoretical limit of 100% of sales revenue. So as long as the commodity is bullish, the company stock would be incredibly bullish.

Is palladium bullish? Absolutely. I think I have made my case here. For further reading check out http://www.palladiumcoins.com/. For natural gas, I will explain why it is bullish later.

I recently noticed how some internet scams can boost a stock price multiple fold. One example is TRCR. See my comment section to see how it works. I have nothing for or against TRCR but just single it out for a good example. Do NOT touch such stocks with no real fundamentals.

Due Diligent Study - Johnson Matthey PGM Documents

For those of you who would like to do some due diligence study of the palladium and platinum market fundamentals, the Johnson Matthey annual reports are must reads. I have collected a few links here to some PDF documents:

Palladium 2007 Platinum 2007 Full Report 2007
Palladium 2006 Platinum 2006 Full Report 2006
Palladium 2005 Platinum 2005
Palladium 2004 Platinum 2004
Palladium 2003 Platinum 2003
Palladium 2002 Platinum 2002
Palladium 2001 Platinum 2001
Palladium 2000 Platinum 2000
Palladium 1999 Platinum 1999

Platinum Metals Review

Be aware that Johnson Matthey has their own agenda so take their data with a grain of salt. For a none-biased alternative source of statistics check out the USGS page on PGM metals.

Pocahontas Has A New Car!!

Q'orianka Kilcher, the 17 year old actress who played Pocahontas in the 2005 film The New World, received a new car.

It's not just an average car, but a futuristic hydrogen fuel cell car, FCX, produced by Honda!!!

Just pause for a moment, think about the ramifications. Honda will be producing these vehicles, next year, in 2008, not one by one, but on an assembly line! And it is not just Honda. Other major auto makers are big into the fuel cell thing, including GM and Ford. See FuelCellToday.com for more fuel cell related news.

Hydrogen fuel cells uses platinum and palladium as catalyst. Just think about the demand of these two metals. The whole world only produces 7 million ounces of palladium a year, or 220 metric tons. I do NOT think the world has any where near enough palladium and platinum to allow fuel cell vehicles to become popular. But even just a few millionaires order a fuel cell vehicles, that's enough metal demand to drive the price sky high. You would thought automakers are joking. But it's no longer a joke when not one, but several auto makers already put down tens of billions of dollars researching this thing. And they actually produced a prototype which Pocahontas is driving on the San Francisco streets! They are dead serious!

This is good bullish news to SWC stock holders. Of course I already made the case that SWC should gain 2000% based on reasonable P/E=10 and the metal price should quadruple.

SWC Has Bottomed And Turned Around!

It now looks like SWC has bottomed in recent correction, and is turning back up. From here on it should take about 1.5 months to get back to $16 and beyond. I am glad that I sold some SLV to load SWC two days ago at $11.40. Not glad that I only sold a small portion of SLV to load SWC. Had I been a gambler I would have sold everything and buy SWC.

There is no question in my mind that SWC should be doing very very good. Palladium is too important a metal to be priced so low. Something as rare as platinum, as useful as platinum and even more, and 10 times more rare and 10 times more useful than gold, is now priced below gold price? That doesn't sound right. After adjusting for inflation, current palladium price is historical low, not historical high. Look at the many important applications of palladium. Besides industry application of palladium in traditional and new technologies, I believe the three most important bullish driving forces of palladium are:

1.Auto catalyst. The auto industry switched from palladium to platinum some time ago because palladium was more expensive. Then why wouldn't they switch it back. It's about time.

2.Jewelries. People need a white and pure precious metal for certain jewelries. Pd 950 is whiter than platinum. It is a pure metal, not an alloy, it is wear resistant, will not tarnish like silver does. The weight is light. The price is affordable. Especially the weight being light is very important in some jewelry applications, like big ear rings and engagement rings.

3.Investment demand. Some investors are determined, based on their judgement of the palladium fundamentals, that palladium price will see dramatic increase. So there are increased investment demand. Such demand further pushes the metal price higher, attracting more investment demand. This trend will feed itself and could really corner the palladium market, which is very narrow in terms of US dollars. Just look at the bottom of the chart, see how open interest and trade volume all see dramatic boost after summer of 2003.

(Click on the chart to enlarge. Click here to see the original chart)

Inquiry mind wants to know how many different palladium coins have been minted. Here is a link to the statistics. Interesting, one set of 4 palladium four season constellation coins minted by the Canadian Royal Mint, now costs US$6600 on eBay . There were only 300 sets minted! Wish I could have bought one set cheaper.

SWC is next Apple, 20 Folds in 4 years!

I now put more than half of my portfolio in SWC, stillwater mining company. Incredible bullish fundamentals here, but few people know, because few people have any idea what is Palladium and Platinum, the main products of SWC. They do not know why palladium is bullish. At first look people are scared away by the seeming high P/E ratio of SWC, currently stands at 165. That makes SWC extremely cheap to buy here. Let me explain below.

SWC is the ONLY United States mining company that produces the precious metal palladium and platinum. The only other places that produce these two metal in significant amount are Norilsk in Russia, South Africa, and PAL in Canada.

If you bought stocks of Apple Computer, AAPL, on April 17, 2003, four years later now, you would have made 19 folds profit from your original investment. But SWC will be the next AAPL, meaning the stock price will increase 20 fold from current $12 a share, to $240 a share, in the next four (4) years.

How come? The current price/sales ratio of SWC, i.e., the ratio of stock price, divided by annual sales revenue per share, is very low. It currently stands at 1.71. A low price/sales of 1.71 and a high price/earning of 165.0, means only a tiny fraction of the sales revenue goes into the earnings. You divide the two ratios and get earnings/sales = 1.04%. So only one percent of the sales revenue goes into the earnings.

The beauty of bullish commodities like precious metal is that as metal price increases, the company does NOT need to increase production. It simply produces the same amount of metal, at the same cost, but any increase of sales revenue due to metal price increase directly goes into gross profit.

The current earnings/sales = 1% that means the price is barely high enough to pay for the cost. If the price just doubles, then sales revenue will double, but the cost remains the same. That means earnings/sales will improve to 50%. That is a huge improvement, 50 fold improvement, from 1%. Not only earnings/sales improves 50 fold, but the denominator itself, sales revenue, doubles. So it would actually be a 100 folds increase of earnings.

Think about it, it merely takes the metal price to double, to improve SWC's current P/E ratio by 100 fold, from 165.0 down to 1.65!!!

If the metal price further doubles, then sales revenue has quadrupled, with earnings/sales now stands at 75%. So that would be an improvement of 75% * 4 / 1% = 300 folds, of the net earnings. That means the P/E ratio will be pushed down to 165.0 / 300 = 0.55. Extremely low.

Of course the stock price of SWC would have to increase dramatically to bring P/E ratio to a number that makes more sense. How about the stock price increase 20 folds. That will then bring P/E to 0.55 * 20 = 11.00. That is a P/E number that looks more reasonable. But really that is still way too conservative. A stock that grows so rapidly really deserves a P/E several times higher than 10-ish. So SWC might actually increase more than 20 folds in 4 years!!!

Of course, that assumes that palladium price really does go up quadruple in 4 years, from current $375 an ounce to $1500 per ounce. Whether SWC can go up 20 folds in 4 years depends on this, and this alone, that palladium price MUST quadruple in 4 years. If palladium price does not move, then SWC is not going any where.

For palladium price to quadruple in 4 years, the price of the metal will have to increase 40% annually, or increase by 9% per quarter. Will this be possible? Palladium price has already doubled in the past two years! It only needs to keep this pace for four more years.

I will discuss why palladium price will keep increasing at rapid pace in the next article. But in short, it is a supply/demand thing. The supply is limited. The whole world produces no more than 7 million troy ounces of palladium per year. One troy ounce is 31.1 grams. What about the demand side?

1. The auto industry, which is the largest consumer of palladium, is increasingly switching away from platinum, which is now almost four times as expensive as palladium, and back to use palladium in their auto catalyst application.

2. The demand in the jewelry industry. Palladium jewelries are rapidly becoming ever more popular, especially in China. And it is picking up in the United States recently. I suspect that China is only a rehearsal and the real fun would be in the US and Europe market. The physics property makes palladium a suitable metal for jewelries. The lighter weight and affordability makes palladium the only plausible choice in many jewelry applications.

3. The dental application. Traditional dental filing material is a silver-mercury alloy based material. Mercury is extremely toxic. Modern technology found that a palladium based solution is much better and none-toxic. Japan has mandated that all dental fillings MUST be done using palladium. Other countries may follow suit and pass similar laws. Any one in the know will reject mercury and prefer palladium in dental care. There is not enough palladium even if a good fraction of the world's population demand palladium for their dental cares.

4. Investment demand. Palladium is one of the four precious metals. As US dollar and all the world's paper fiat currency loses their value over time rapidly. There are growing interest of investing in precious metals. Palladium market is extremely narrow. Even the smallest investment demand will cause significant market price rally, which in term will attract more interest demand. Recently Novartis Pension Fund in Switzerland announce that they will invest 1% of their portfolio in buying physical palladium. That would buy about 4.5% of the world's whole year output of palladium. This one fund purchase may be just the tip of iceberg. Investment demand like this will corner the market and cause palladium price to go sky high!!! Remember the Hunt Brothers and Silver Thursday?

I believe right now SWC is the best buy after its stock price has corrected and bottomed due to a recent insignificant earnings miss, after an incredible rally in the previous two months. The fall from $16.50+ to $11.20 is way oversold, on such a bullish stock.

This chart of palladium future clearly shows dramatically growing investment interest in palladium starting from the second half of 2003.

Read this web site to understand the important applications of palladium.
http://www.palladiumcoins.com/uses.html

USGS data on PGM metals.

Welcome To JJ2000426's Blog!

Welcome!

This is my blog. I will be talking about stock picks and investment strategies. Please come back often. You can often see me post on finance.yahoo.com message boards. I frequent these boards:

SWC, NGAS, SLV, MGN, CFC, CTX, PAAS, SLW, JRCC.