Resource World Magazine

28 www.resourceworld.com j u n e / j u l y 2 0 1 4 b r o k e r ' s p i c k s A l f S t e w a r t P latinum, palladium and rhodium are metals that are collectable like gold and silver. They are also vital indus- trial metals used in a number of applications. These metals occur together in nature and are collectively referred to as Platinum Group Metals (PGM's). Platinum is histori- cally the most important PGM. South Africa produces 80% of the world's platinum. Most of its mines are deep underground mines that have harsh working conditions for miners. The industry has been losing money and has struggled with production costs, despite a growth in demand of 5% per year. This resulted in a strike shutting down mines in the Rustenburg area. It impacts produc- tion from Anglo American, Lonmin, and Impala Platinum. The likely result of the strike is a permanent reduction in PGM supply from South Africa. Palladium has emerged as an important PGM metal for industrial use. It has been used as a low cost substitute for platinum in automotive catalytic converters. South Africa produces about 40% of the world's palladium supply, and Russia produces another 40% of global supply. The industrial demand for platinum, palladium and rhodium varies by car size, engine type and relevant emission standards. The average PGM content of a catalytic converter in the three largest automobile producing areas of the world is roughly as follows: 4 grams in North America; 6 grams in Europe, and 2 grams in China, where regulatory requirements are not yet as tight and cars are smaller. At present, the 4 gram average in North America is made up of about 3½ grams palladium (substantially up recently from 3 grams), no platinum (down recently from ½ gram) and ½ gram rhodium. The 6 gram average in Europe is split 50/50 between platinum and palladium with ½ gram of rhodium somehow in the mix (a modest recent change from 3 grams plati- num, 2½ grams palladium and ½ gram rhodium). The 2 gram average content of a catalytic converter in China is mostly palladium. One can see that China, the world's largest growing auto market has scope for significantly increased PGM con- sumption due to its low palladium content per vehicle, combined with pressing air pollution concerns. Various experts on PGM supply and demand have stated that the markets for these commodities are now in a defi- cit position, and that the platinum price should move from US $1,400 to $1,700 per ounce later this year. This is antici- pated to occur as South African stockpiles of PGMs are depleted. Palladium is also expected to rise and the wild card here is political uncertainty regarding Russia. As a supplier of 40% of the world's palladium supply, Russia is not averse to "manag- ing" the supply of palladium to maximize its profits. The crisis in the Ukraine could result in higher palladium prices due to trading sanctions by the West followed by Russian retaliation, or escalating global tensions could boost both platinum and palladium prices due to safe haven demand for precious metals. All of this leads to the enhanced attrac- tiveness of Stillwater Mining Company [SWC.U-TSX; SWC-NYSE], a Montana- based mining company that mines and refines PGMs from its mine in south cen- tral Montana as well as recycles PGMs from used catalytic converters. It pro- duces 500,000 ounces of palladium (70%) and platinum (30%) per year. It has a global resource of 25 million ounces. The geological setting is very much like the mines in South Africa, though the grade is higher. It is cash flow positive with $500 million in cash and no debt. Stillwater is fairly valued at current market prices, but there has been a sur- prising lack of publicity about long term effects of the strike in South Africa on the global supply of platinum and palladium. I predict that the strike, chronic unprofit- ability of the deeper South African mines and shortage of supply will lead to materi- ally higher platinum and palladium prices. Stillwater Mining Company is my preferred way to play this idea. The ore horizons that Stillwater mines are thin and must be accessed by underground development which will limit expanded production. Stillwater's ore is relatively palladium-rich, compared to South Africa's mines which is good as the pal- ladium supply/demand balance is tighter than platinum. The ore is also continuous and will provide for years of mining as the seams run deep. n This article expresses the opinions of author, and not necessarily those of Raymond James Ltd. Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guar- anteed. As an investment in Delphi Energy is not suitable for all investors, a recommen- dation would only be made after a personal review of an individual's financial objectives. Raymond James Ltd., member– Canadian Investor Protection Fund. Stillwater runs deep www.resourceworld.com

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