Back in September, a strange story broke that never really made it into U.S. headlines.
A major company publicly announced it wanted to purchase up to $2 billion worth of precious metals from the Russian Central Bank, and Bank of America-Merrill Lynch had expressed interest in financing it.
So far, not too bizarre, but here is the thing: Russia’s Norilsk Nickel and a group of investors wanted $2 billion worth of palladium.
The very same Norilsk that produces about 40% of the global supply.
Around the same time, Russia and Zimbabwe announced they would jointly mine platinum in the Darwendale district in Zimbabwe.
The $1.6 billion investment by Russian state corporations would lead to the creation of the country’s largest platinum mine.
Russia already accounts for 12% of global platinum production, second only to South Africa at 75%.
Plus, Zimbabwe just nailed platinum miners with a 15% export tax for unrefined ore to force mining companies to develop a very costly refinery.
On the surface, neither investment makes a whole lot of sense, but there is a strong undercurrent here. One that reflects a developing opportunity for us to pull in some hefty profits.
Struggling to Meet Demand
So here we have news of Russian companies, at the heart of Putin’s inner circle, moving into a massive mining investment in an adverse climate.
Then we have a mining company moving to buy a whole lot of what it is already pulling out of the ground at the fastest pace in the world.
What we’re seeing is a Russian move to simply maintain market share in key strategic metals right as market and political forces converge to create a structural global deficit.
Norilsk’s proposed $2 billion palladium acquisition is not a market-cornering move. It is meant to guarantee the availability of stock for long-term customers.
In fact, Norilsk’s CEO and co-owner, Vladimir Potanin, is so convinced the market will be in a supply deficit that he would put his own money into palladium if the company ruled there was no conflict of interest, according to the Moscow Times.
Potanin is hardly alone in his assessment. Results published a week ago from a Reuters survey of 32 analysts, traders, and market participants mirrored the sentiment.
The consensus forecast is for palladium prices to average $845 per ounce in 2015, up from $799 per ounce last year.
The 2016 forecast extends those gains up to $900 an ounce.
Reuters quoted Sharps Pixley CEO Ross Norman as saying, “Of the four metals, palladium remains once again our firm favorite. We foresee another positive year for palladium based upon attractive supply/demand fundamentals, despite the backdrop of a relatively weak global economy.”
As for platinum, South Africa — which accounts for three-quarters of global supply — saw a 16% drop in production in 2014.
Costly and deadly protests and miner strikes have forced companies to shutter mines, and the root of the unrest is far from resolved.
The Big Picture
Platinum and palladium are interchangeable as essential components of catalytic converters.
Automakers don’t maintain production of catalytic converters from both sources though. They tend to chase whichever offers the most attractive price:
1990 to 2001: Palladium prices soared 1,263% from $80 to $1,090 an ounce, platinum prices fell 27% from $444 to $326.
2002 to 2009: Platinum prices rose 597% to $2,273 an ounce, palladium prices fell 85% to $164 an ounce.
Since then, palladium has been the favored metal and platinum has slumped.
But as you may have noticed, prices of both metals have consistently trended upwards alongside automotive demand, and in spite of the ebb and flow.
Annualized gains since 1990 come out to 7% for platinum and a hefty 35% for palladium.
That is exactly why Norilsk is moving to secure supplies for customers. It doesn’t want to lose them to competitors. Plus, whatever it buys today it can sell for more down the road.
At the same time, a switch to platinum as a favored metal is virtually guaranteed with the gradual convergence of palladium and platinum prices.
Securing a stake in a project that will become Zimbabwe’s biggest mine is worth dealing with unfavorable conditions right now.
The Big Prize
In 2013, 15 million cars were sold in the U.S.A. Last year, 16.5 million were sold.
But that pales in comparison to China, which surpassed 20 million cars sold in 2013 and is expected to account for 30% of global sales by the end of this decade.
Yet, catalytic converters have only recently become mandatory in China.
According to Rick Rule, chairman and founder of Sprott Global Resource Investments, “The Chinese government has proposed air quality standards over five years that would quintuple the loadings of palladium in gasoline engines in China.”
If palladium can’t take the demand, platinum will fill the void. Yet, neither metal will see the supply growth to maintain current prices.
Demand for catalytic converters is projected to DOUBLE, growing at 11.3% a year from $6.7 billion in 2012 to $14.22 billion by 2019, reports consulting firm Frost & Sullivan.
With that kind of growth, China could easily absorb all of the platinum and palladium Russian companies can get out of the ground, possible expansion of sanctions be damned.
As for us, investing in anything related to Russia is a big risk these days, along with miners operating in Africa exposed to unrest and oppressive tax headwinds. Geopolitical risks should be avoided at all costs for investors with limited funds to spread around.
However, we do have some options. One of the best is situated in U.S.- and investor-friendly Canada.
With 5 million ounces of palladium, another 5 million of platinum, and a total of $16 billion in recoverable deposits, this $57 million company is well-positioned for what is coming…
