Platinum, Palladium Stock Pick

NEW YORK (TheStreet) -- Current demand for platinum and palladium from the auto industry, jewelry segment, and as an investment choice is strong, while labor and safety issues are constraining supply. In this scenario of growing deficit, North American Palladium (PAL) is likely to surpass its production guidance to best Stillwater Mining (SWC), which anticipated production declines for 2010.

North American Palladium plans to significantly increase its production. Preliminary assessment at the Offset Zone in the Lac des lles mine near Ontario, Canada is positive and this could boost production. "The Scoping Study shows that the Offset Zone project is financially robust and will enable continuation and expansion of LDI's production, while benefitting from lower production costs," said Chief Executive William J. Biggar in a press release on Monday. The company expects the cash costs of only $132 per ounce at this mine, thereby creating a significant value to the company.

Meanwhile, Stillwater Mining adjusted its full year guidance downward on July 28 during second-quarter earnings release. The company has revised guidance for 2010 to 490,000 ounces at a combined total cash cost of $385 per ounce from 515,000 ounces at a combined total cash cost of $360 per ounce.

Production cost pressures, regulatory issues and labor concerns at the other mining companies could push up platinum and palladium prices, going forward. The South African production is plagued by inadequate investment in infrastructure development, labor strife, safety issues and the likelihood of stringent mining regulations, all of which could hamper supply.

Aquarius Platinum, a leading platinum and palladium producer, may shut its Blue Ridge mine in South Africa for up to seven months to revamp the mine following the death of two miners last month. Even though, the company swung to a net profit for the quarter ended June 30 on higher metal prices, earnings per share for the full year could be below analysts' estimates due to lower output and increase in unit costs by 5% on the interim safety measures.

Meanwhile, Impala Platinum expects a 25% drop in full year earnings per share due to an increase in share-based expenses.

A turnaround in the auto industry in July surged platinum and palladium demand. Automobile sales in the U.S. were up 6.7% to 1.04 million in July from 983,000 in June. Similarly, car sales in Japan and India zoomed 15.6% and 12.4% for July in comparison with sales reported in June. Although China's automobile production declined 5.2% in July, the overall improvement in global car sales helped palladium and platinum to reach their recent peaks on Aug. 02.

Between July 05 and Aug. 02, palladium and platinum for spot delivery on the COMEX edged up 18.7% and 6.4%, respectively. Palladium ETF ETFS Physical Palladium Shares ETF ( PALL) and platinum ETF ETFS Physical Platinum Shares ETF ( PPLT) registered similar gains of around 18.7% and 6.4%, respectively. During the same period, gold declined 2.2%, while silver rose 3.1%.

Platinum and palladium have more industrial uses than gold, and are more closely linked to growth. In addition to demand from the automobile sector, which accounts for more than half of palladium consumption, demand from investment and jewelry is on the rise. Growing investor interest in platinum and palladium encouraged Standard Bank to plan a series of commodity linked exchange-traded notes (ETN) for platinum and palladium on the Johannesburg Stock Exchange.

"Robust demand growth coming from the auto catalyst market and other industrial applications, and a lackluster and uncertain supply outlook, are projected to dramatically tighten the platinum group metals market into 2012," BMO Capital Markets said last week, reported The Australian.

BMO forecast platinum to average $1,636 an ounce this year and $1,800 an ounce in 2011, and palladium to average $480 an ounce this year and $700 an ounce next year. Palladium prices for spot delivery averaged $495 per ounce for the second quarter, and $469 per ounce for the first half of the year. Meanwhile, platinum prices for spot delivery averaged $1,632 per ounce for the second quarter, and $1,599 per ounce for the first half of the year.

Karvy Global Services (www.karvyglobal.com), a subsidiary of the Karvy group (www.karvy.com), provides specialized research in asset classes including stocks, mutual funds and insurance to leading Wall Street firms.

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