SWC Q2 Earning Estimate Updated

SWC did very well last Friday amid a bearish general market. The general opinion is it probably bottomed here. The attention now needs to be turned toward Monday August 6th's earnings release for Q2, 2007. I have previously estimated SWC's Q2 quarterly earning at around 26.5 cents per share. With updated information and more careful math, I attempt to give a better estimate here.

SWC's quarterly earnings fluctuate greatly, depends on the amount of recycled metal sold and the metal prices. SWC processes a variable amount of recycled metal during the quarter, but it is not always sold right away, some may be sold in the subsequent quarters. We know SWC does not hoard metal, so any processed recycled metal not sold within the quarter will be sold in the next quarter, adding to the revenue and gross profit.

Let's look at previous quarters to get some idea. In Q3,06, SWC processed 90K PGM metal, and sold 105K (49K Pt + 49K Pd + 7K Rh) for a revenue of $104.2M. Cost was $95.4M, averaging $0.9086M per K PGM metal. SWC sold more than it processed, part of the sell was from previous quarters.

In Q4, 06, SWC processed 104K ounces of PGM recycle metal, and sold 87K (40K Pt, 40K Pd and 7K Rh) for a revenue of $91.5M. Cost was $85.2M for the sold metal, averaging $0.9793M per K PGM metal. An extra 17K was left to be sold in future quarters.

In Q1, 07, SWC processed 87K ounces of PGM recycled metal, and sold only 70K (27K Pt + 37K Pd + 6K Rh) for a revenue of $70M. Cost was $66.2M for the sold metal, averaging $0.9457M per K PGM metal. The accumulated left over is now 34K ounces.

In Q2, 07, We already know the processed PGM metal is 93.1K (46.3K Pt + 39.2K Pd + 7.6K Rh). Plus the left over from previous quarters. The total is now 127.1K. How much will be left to next quarter? Let's assume 17K will be left over to next quater. That brings the estimated metal sale to 110K, 17K extra from the processed amount. Let's assume that the leftover from previous quarter is half palladium and half platinum, we will be talking about 54.8K Pt, 47.7K Pd, and 7.6K Rh, total 110.1K sold.

If we average the cost of three previous quarters, the cost is $0.9445M per K PGM metal. about the same with last quarter. The total cost is $104.0M.

The recycled metals are not hedged and are sold at market price. I looked up the metal average price for Q2 from KITCO. They are: $368 for Pd, $1288 for Pt, and $6090 for Rh. So the total sales revenue will be $134.42M. Subtracting cost $104.0M, recycling will contribute a gross margin of $30.42M. This is way much higher than the $3.8M margin in Q1, 07. That's an improvement of $26.62M on the recycling portion of business.

Now let's look at the mining side. Mine production is 30.6K platinum and 102.5K palladium, total 133.1K PGM, down from Q1's 144K. In Q1, 305000 tons of mines were milled, so proportionally, 23100 less tons of mines were milled. At cash cost of $136 per ton, that is a cost reduction of $3.142M on the up side.

Palladium production in Q2 is 102.5K versus 111K ounces in Q1, a reduction of 8.5K oz, using Q1 production price $377/oz, revenue reduced by $3.2M on the down side. But each ounce of production is expected to be sold for $384 based on the hedge price, a $7/ounce improvement. So that's an extra revenue of $0.72M on the up side. Combined, there is a down side of $2.48M.

Platinum production is 30.6K versus 33K in Q1, a reduction of 2.4K ounces, at Q1 price $915 per ounce, that's a revenue loss of $2.196M. Based on the hedge, 14% of the 30.6K, 4.284K, is obliged to be sold at $850 ceiling, and the forward sell oblidged SWC to sell 28K at $1000, so SWC had to purchase from open market 1.682K at $1288 to satisfy the contracts. When you average everything the sales price is $963, a $48/ounce improvement from Q1, for a total of $1.469M. Combined, there is a $0.727M down side.

So the total effect from mining production reduction, and metal price increase, contributed to a $0.065M down side of the gross margin.

Assuming there is no change in the administrative cost, then the recycling and mining combined, the profit margin is improved by $26.555M from Q1. If Q1 see a net loss of $1M, then we see a net profit of $25.555M in Q2, divided by number of shares 91.6M, the per share profit will be 27.9 cents for Q2. This will beat the analysts concensus of 3 cents by 9 folds!

Below is a complete set of the Canadian Big & Little Bear Constellation palladium coins. They minted less than 300 sets and there are probably less than 100 whole sets in the whole world since most people get one or two of them. One set on eBay is currently asking for US$6600!!!

Concentrated Short Getting Desperate!

I preciously discussed extremely narrow floats of SWC, and a possible TRAPPED big short player here. Latest data show that institutions loaded up even more long positions. And this trapped big short is becoming desperate in trying to unwind its short positions BEFORE the good earnings SWC will announce in a few days.

How desperate the concentrated short has become? SWC dropped 25% in just last four days, and that's on top of a 25% correction from recent high of $16.47, a correct which was triggered by an insignificant one cent quarterly loss in the first place. There is absolutely nothing that justifies such rapid and furious drop of a stock that has very bullish fundamentals. The only reason is this big short is hammering SWC by heavy shorting, hoping to trigger a panic sell from the long side, so that this big short can unwind its huge short position, which is as high as 6M shares.

But institutions are loading. Based on observation of the NASDAQ statistics. Total institution holdership see dramatic increase in recent days. They increase a net 1.4M long positions in just the past 16 days:
July 10,07: 36,354,783 shares
July 15,07: 37,144,283 shares
July 21,07: 37,429,043 shares
July 26,07: 37,736,888 shares

So who is buying and who is selling? The big institutions are massively buying cheap shares, and while some retail longs panic sold, more retail longs get an excellent entry point and they jumped in in recent days. So really the only big seller is the big concentrated short. Not only they could not unwind their positions, the accumulated even more short positions.

This short position MUST be unwind at some point. And it must be unwind before the big news of the earnings report. The big short must be pretty close to a panic, judging from how desperate they have become in hammering down SWC today.

Folks! Do your own DD. But I presented all the facts I know here. This is a rare opportunity to make some big money in a short period of time. Jump both feet on board tomorrow. But make sure you finish doing your own DD today!!!

As of this writting SWC closed the day at $9.29. I believe this is pretty much the bottom here. Big institutions, while they enjoy loading cheap shares here, would not allow it to drop too much and cause a panic within the long camp. Big boys have a short squeeze to do, remember! When big boys accumulate enough long positions, and the trapped short digged itself deep enough in a pile of short positions, big boys will launch the short squeeze. Besides many retail longs begin to jump in. Big boys do not want too many retail longs to spoil the fun, because retail traders tend to sell for profits too soon, diminish the effect of short squeeze.

So load it up before some one else does!

SWC Capitulated Today Rally Tomorrow?

I think SWC probably capitulated today with the 8.25% drop. In the past 3 days SWC had dropped 20%, from $12.36 to $10.01. If such a rapid drop is not a capitulation, I don't know what is. Capitulation many times indicate the end of a correct and the start of a new rally phase. So let's watch SWC carefully tomorrow.

Previously I discussed a possible big player trapped in too big a short position to unwind. I also discussed that the SWC earning for this quarter (Q2) may actually be very good, due to the dramatically increased metal recycling, and significant precious metal price increase, despite of the slight production shortfall from Q1. There is no rationality that SWC should fall so quick so hard.

My speculation is the trapped short may very well be aware that the SWC quarterly earning has got to be a good one. So they are desperate and they must try very hard to trigger a panic selling from the longs, so that they can unwind their short positions for a profit, before the good earnings will be announced in early August. So far, despite of the capitulation of SWC price hammer down, the volume really is not that impressive. So the trapped short has failed it ins objective of unwinding it own short positions.

I think, since the capitulation has occured, we probably see some nice reversal tomorrow and a big rally coming, leading to the quarterly earnings announcement.

I did not sell any of my SWC positions, and loaded up quite some call options about one hour before market close today.

Extreme Narrow SWC Floats Gets Narrower

I previously posted about the extreme narrow floats of SWC, and consider it one of the bullish reasons for SWC besides the fundamental reason of palladium bull. Latest data show that the narrow floats are getting even narrower.

Out of some 91.6M shares of SWC, most are owned by Norilsk and insiders, floats available to institution and retail investors are only about 42M shares. Institutions are getting an ever larger portion of that pie of float shares, squeezing out retail longs.

Shortly before the $8 bottom of SWC last year, the institution holdership was only 18%, less than 17M shares. Retail investors owned more than 25M shares of the floats. At the $8 bottom many retail longs could not take the pain and sold out to institutions. Shortly after the $8 bottom, NASDAQ statistics showed instititions owned nearly 38% of all the shares, just slightly less than 35M shares. The majority of the 25M retail longs were squeezed out.

The institution holdership is getting even higher. The latest data on bloomberg list the floats at 40.204M shares, which is slightly lower than previous data. Mean while NASDAQ.COM shows the institition holdership now stands at 37.429M (37.736888M on July 26) shares. So you subtract the two, and you see the retail investors now only own 2.775M shares of the float, that's far less than the 25M to 26M that retail investors once owned before the $8 bottom last year!

The retail longs now only own 2.775M shares, however the outstanding shorts on SWC dramatically increased from last month's 5.284M shares, to now 6.0125M shares short. The outstanding shorts are more than twice the retail long positions. That means even if all retail longs sell their SWC positions here, there will NOT be enough shares to allow shorts to buy and cover. How are the majority of shorts going to unwind their short positions?

It really perplexed me how the short interest would have dramatically increased from June 15th's 5.284M, to July 13th at 6.0125M. If you look at the chart, the plummet started in May 7th was largely done on May 18th, and SWC was just trading sideway ever since. A reasonable shorts would have covered and take profits and walk away. How come short interest see such a dramatic increase from mid June to mid July?

Very likely, I guess there is one big player gets trapped in too big a short position to unwind here. They can not unwind here because there are just not enough shares to buy to cover. Any attempt to buy and cover in significant amount will pop up the stock price. So they have to buy themselves time and prevent SWC from going up by shorting more, piling on more short positions, and hence digging themself deeper in this hole where they hold too much short position to unwind now.

If this trapped big short player exists, the friday plummet with big volume is probably their last ditch effort to take the opportunity of a presumed bearish news release, hammer the stock down, force the longs to sell and so they can cover their shorts. But it looks to me they have failed miserably. There was no panic on the long side. The support was firm at $11.20. Not only longs did not sell, they bought the dip at the $11.20 line. Most of the sells were the short selling of this one big short player. So the big short ended carrying an even bigger short position instead of covered their positions. Many yahoo SWC message board postings also confirm that the majority of retail longs bought instead of sold on Friday.

I see a fierce short squeeze coming once we see a nice precious metal rally. It is coming right now as the US dollar is at the brink of falling below the psychological line of 80.0. BTW I also note some unusually high volume of palladium future trading on Friday July 20th, several times higher than usual, although I have no explanation what caused the unusual high volume.

SWC Q2 Earning Estimated is 26.5 Cents Per Share!

Today both the SWC production numbers and metal prices for Q2 are known. One can crunch some numbers and get a pretty good estimate of SWC Q2 earnings.

Reduced mine production in Q2 versus Q1 hurts a bit, but the dramatic increase of metal recycling will absolutely move things up and lead to a very profitable quarter. Let's use the Q1 data as starting point and do the calculations.

In Q1, 305000 tons of mines were milled. Q2's metal production is 133.1K ounces versus Q1's 144K. So proportionally, 23100 less tons of mines were milled. At cash cost of $136 per ton, that is a cost reduction of $3.142M on the up side.

Palladium production in Q2 is 102.5K versus 111K ounces in Q1, a reduction of 8.5K oz, using Q1 production price $377/oz, revenue reduced by $3.2M on the down side. But each ounce of production is expected to be sold for $384 based on the hedge, a $7/ounce improvement. So that's an extra revenue of $0.72M on the up side. Combined, there is a down side of $2.48M.

Platinum production is 30.6K versus 33K in Q1, a reduction of 2.4K ounces, at Q1 price $915 per ounce, that's a revenue loss of $2.196M. However each ounce of platinum production is expected to sell for $950, a $35/ounce improvement, for a total of $1.071M. Combined, there is a $1.125M down side.

So far, reduction of production combined with improved metal price contributes a $0.463M on the down side.

Now the big good news is on recycling. In Q1, SWC recycled 27K platinum, 37K palladium and 6K rhodium, totalling 70K, for a total cost of $66.175M. This Q2, SWC recycled 46.3K platinum, 39.2K palladium and 7.6K rhodium, totalling 93.1K, proportionally, there is an extra cost of $21.84M on the down side.

Using the Q1 recycling metal price, $336 palladium, $1149 platinum and $5052 rhodium, the extra metals recycled mean an extra revenue of $0.7392M + $22.1757M + $8.0832M = $30.998M on the up side. Now you see recycling is BIG!

But the recycled metals are sold at improved market prices and not hedged. The market price for Q2 are $368 palladium, $1300 platinum and $6150 rhodium. So the extra revenue due to price improvements are: $1.2544M + $6.9913M + $8.3448M = $16.5905M.

So far everything tallied up, the net upside is $25.2855M. In Q1 SWC lost $1M. In Q2, the net change is $25.2855M up side improvement, so gross profit will be $24.2855M, or roughly $24M, at 91.585M shares, that is 26.5 cents per share gross profit. Since SWC enjoy loss carry over from previous years, no tax needs to be paid. So that gives us 26.5 cents per share net profit for Q2.

Of course this has NOT take into consideration that SWC might pay a bit higher per kilogram of recycling scrap metal, or that the metal may sell at slightly less than market price. But however you put it, I expect to see at least 20 cents per share net profit!

I think we are going to see SWC EXPLODE to the up side once the earnings is announced in early August, and it beats the street consensus of 3 cents by a huge margin!

SWC and PCU Compared: Both 20 Baggers!

The copper mining stock PCU closed on Mar 31,2003 at $14.60, which is dividend and split adjusted $5.14. Four years later PCU closed today at $109. That's a 20 bagger in 4 years.

I compare SWC of today with PCU of 4 years ago, and find there are lots of similarities.

On Mar. 31, 03, the market cap of PCU was $14.60 * 80M shares = $1.168B. Today, SWC has a market cap of $1.11B. Similar size.

In Q1, 2003 PCU sold 198.7M pounds of copper, sold at $0.76 per pound, total copper sales revenue was $151M. The stock price/sales ratio was 1.93. Less than 2.0. In Q1, 07, SWC sales revenue was $146M. The stock price/sales ratio is 1.90. Both stock has similar sales revenue, similarly low price/sales ratio of less than 2.0.

In Q1, 2003 PCU made a slim profit of $18M, which is a very small fraction of the sames revenue. So the profit margin of PCU was very thin, same is true for SWC, which hardly makes any money from its huge sales revenue.

But if the underline commodity is bullish, you could never judge the value by the low profit margin. Once the metal price goes up, the profit margin immediately goes up. Copper went from $0.76 to recent $3.60 a pound, slightly more than quadrupled. So when the commodity quadrupled, the PCU stock price gained 20 folds.

SWC today stands where PCU stood 4 years ago. SWC could well be the next PCU and gain 20 folds in the next four years. All it takes is for palladium price to quadruple, just like copper price quadruple. I think I have made a very solid case why palladium price outlook is super bullish. see my previous blog entries, and here, and here. Pallalunar

Note: David posted a good question, as copper went from $0.76 to $3.60, palladium also went from $142 to near $400. Why PCU boomed and SWC did not? Simple answer is before copper reach $0.76, copper mining was not profitable so PCU was flat before 2003, once copper reached that profitable threshold of $0.76 it really start to take off! For SWC, the profitability threshold is not at palladium $142, but at palladium price being $339. Last quarter SWC had a slight loss of one cent per share. So SWC should start to take off here because this is the threshold where SWC starts to make money. In the past when palladium was much lower, SWC was protected by palladium hedge sales contracts which guaranteed a floor price of $339-ish for more than 80% of the production. Those hedge put a palladium ceiling price at $1000 and limits 20% of the SWC production. We are far from hitting that ceiling yet and even when we do only 20% of the production will be hurt. See Q1,2006 quarterly report, page 12 and 13 for details of those hedges.

The mystery around the Russian palladium stockpile

In early 2003, the Head of Commodities Research of HSBC Investment Bank, Mr. Alan Williamson, gave a presentation on Russian PGM stocks. Through careful analysis of available data he believed the Russians had a 10 to 12 million ounces palladium stockpile, and very little platinum left, at that time. He painted an absolutely grim future of palladium price movement: "fundamentals of the (palladium) market look almost unreservedly grim, even allowing for a switch from platinum into palladium in the autocatalyst sector. We expect the market to move into structural oversupply, with ongoing downward pressure on prices as a result."

Of course, he is proven completely wrong today. Palladium price bottomed in 2003 right around the time of his presentation, at about $145, it then rallied in the next four years and almost tripled by today at $370. Curious though, all the supply side bearish facts he cited in 2003, were absolutely true, but the bearish prospect did not materialize. I guess that is because it has been extremely bullish on the demand side, on both industry demand and investment demand!

The author concluded in 2003 that there will be an over supply of palladium, due to the dumping of the 877169 ounces palladium that SWC received from Norilsk in 2003, and new mines in South Africa. He concluded that for price to remain stable instead of falling further, the Russians must purchase and re-stock more than 1 million ounces of palladium per year.

What really happened was the Russians have been selling off their stockpile at about 1.8 million ounces per year, in addition to any new mine production, and SWC sold out all of the 877169 ounces of Norilsk palladium between early 2004 and early 2006. With this huge presumed "over-supply" of palladium, the metal price instead rallied big time? What gives? It must mean there is a huge demand sucking up all the over supply and drive up the price!!!

What happens now? The SWC selling off of Norilsk palladium, which supplied about 7% of the global demand, had been completed in 2006. And if the Russians had 10 to 12 million ounces stock pile of palladium in 2003 and has been dumping at a pace of 1.8M per year, they probably still have about 3M or 4M left. It won't last very long until it is completely depleted. Or if the Russians are rational and they do not want to run empty, they would now start to cutback or totally cut off the selling of their stockpile, or even start to re-purchase and re-stock!!!

If palladium has seen a price rally in the past four years amid the selling off of SWC Norilsk palladium at 0.5M per year, and the Russian dumping of 1.8M per year, totalling 2.3M "over-supply" per year, what would happen when this "over-supply" is removed from the market?

It would drive the metal price sky high!!!! And it would be an extremely bullish development for SWC share holders. - Pallalunar

Golden Proportion Rules. SWC Bottom Soon!

I am going to discuss some technical analysis of SWC chart, although I am not a big technical guy.



First graph. Let me circle out all four bottoms, the one in 2003, the one in 2005, and the one in 2006, and the current one. We see that all four point line on a perfect straight line!!!

More over, if you see the distance between the four bottom points, it looks like a Divine Golden Proportion. Could it really be Golden Proportion rule? I looked up the historic data on SWC. Sure enough it was a Golden Proportion Rule!

First bottom was on Mar. 20, 2003, the little peak between the double bottom. It traded as high as $3.18, Let's count it as $3.15.

Second bottom was on May 16, 2005. Price went as low as $6.05. From First to second bottom is 788 days. Golden Proportion says times 0.618034, which gives 487 days.

Third bottom was on Sep 15, 2006, the little peak between the double bottom. Stock closed at $8.39 that day. That was 489 days after the first bottom.

It looks like we are pretty close to the fourth bottom, but can not say the bottom has already occured. Based on Golden Rule, we take 487 days and further multiply by 0.618034, the result is 301 days. 301 days after Sep. 15, 2006 is July 13, 2007, which is next Friday!

A more amazing feature is the third bottom close price at $8.39, when divided by first bottom price of $3.15, the result is very close to the base of natural logarithm, 2.718. Actually if you use $8.56 to divide, the result is exactly 2.718!!!

Extrapolate the result, the fourth bottom price would be at $10.84. The ratio is $10.84/$3.15 = exp(0.618034)^2. Another Golden Proportion Rule!!!



Thus I predict a bottom on July 13th at $10.84, based on the Devine Golden Proportion Rule.

A nice set of palladium coins I recently received. You know what they are? There are no more than 100 whole sets like this the whole world around!

The Extreme Narrow Float of SWC

I have emphasised that SWC float shares available to retail investors are extremely narrow, and outstanding short shares too high, and cited it as one of the bullish reasons for SWC. Let's do a very careful analysis of the numbers.

According to SWC Q1,07 quarterly report, bottom of page 7, Total outstanding shares are 91,514,668 as of Mar.31, 2007. (Email from SWC says on May 1st, 91,686,297 shares)

Most of the SWC shares are owned by Norilsk after the Norilsk palladium transcation in 2003. How many shares? From SWC 2003 Annual Report page 5 we know Norilsk initially acquired 45.5M newly issued shares, paid with $100M cash and 877,169 ounces of palladium. Then Norilsk made a tender offer and acquired from open market an additional 4.35M shares at average cost of $7.50 per share. So Norilsk should own a total of 49.85M shares of SWC. (Email from SWC says 49,813,222 shares)

Other insiders are the managements: My tally is the management personels own a total of 1,180,337 shares as the latest known at the time of writting. Once subtracted Norilsk and insider owned share, the remaining float of SWC is 40,484,331 shares. That's the float available to institution and retail investors. (Accurate number is 40,692,738. Bloomberg says 40.204M)

The latest known institution ownership is 37,348,005 shares. (July 10,07: now 36,354,783) (July 15: 37,144,283)(July 21: 37,429,043)(July 26: Now 37,736,888).

So, after subtracting institution ownership, the float left owned by retail investors is 3,136,326 shares. Barely over 3 million shares. (2.775M if you use Bloomberg float and NASDAQ institution holdership number.)

The outstanding short shares, as of June 15,07, is 5,284,169 shares (July 13: now 6.0125M). That's even much higher than retail long positions. That mean even if ALL retail investors sell their long positions, there are not enough shares available to allow shorts to buy and cover.

A fierce short squeeze will happen, it is only a matter of time. During the short squeeze some retail longs might be eager to sell to lock in profit, but it will be far from enough to allow shorts to cover. This looks very bullish for SWC.