Palladium Futures Index (PALLADIUM)

[Pro-Life]

From Bracelets to Pollution Fighter to An Iron Man's Heart, Palladium Gains Allure

http://www.kitco.com/reports/terry_june42010.html

4 June 2010, 9:59 a.m.
By Terry Wooten
Of Kitco News www.kitco.com

New York -- (Kitco News) --Palladium may not have the mystique of gold but it's gaining exposure as a fundamental industrial metal for automobile catalytic converters, as an investment instrument, as jewelry and now as one of the key elements in a popular science fiction movie.

As a metal, palladium has to compete with gold, silver, platinum and rhodium on several fronts, but its proponents feel it is making progress.

North American Palladium LTD of Toronto, Canada, operates one of only two primary palladium mines in the world. Jeff Swinoga, the company's Chief Financial Officer and Vice President-Finance, was one of the presenters at the 10th Metals and Mining Industry Conference sponsored by the New York Society of Security Analysts on Wednesday. NAP operates Lac Des Iles (LDI) palladium mine in Ontario, Canada and has the Sleeping Giant Gold Mine in Quebec. LDI has been producing palladium since 1993 and is one of only two primary palladium mines in the world.

Palladium is used in automobile catalytic converters, along with platinum and rhodium; and has become popular in recent years for jewelry, Swinoga said in an interview with Kitco News on the sidelines of the NSSA conference. It's less expensive than platinum, thus one of its good points. There is only 6 million ounces of annual global palladium production, with 45 percent coming from Russia, 41 percent from South Africa and 11 percent from North America, Swinoga said, citing figures from the CPM group.

In the current environment, production growth in both South Africa and Russia is uncertain, Swinoga said. The best way to increase production, he said, is through higher prices.

"Higher prices will promote development of mines in South Africa and higher prices will give more organic growth to projects that are near existing projects," he said.

Palladium was trading on the physical market Friday morning just below $440 per ounce. Johnson Matthey, the United Kingdom-based metals company, said last month in its annual survey that palladium could go above $700 an ounce later this year. The company said this was predicated on investors continuing to build on their large futures and ETF positions and on recovering industrial and automotive demand. Palladium prices, however, have dipped below the $475 level which Johnson Matthey said was unlikely.

Investor concern about South Africa , however, could hinder capital flow going into new production there, Swinoga said. One big concern is about electricity.

The country’s state owned company, Eskom, generates 95% of South Africa’s electricity as well as two-thirds of the electricity for the African continent. Eskom has 36 200 megawatts (MW) of net generating capacity, of which 32 100MW is coal-fired (90%). In 2008, due to the unavailability of coal and to a delay in new power stations being built, Eskom declared force majeure in turn affecting the mining industry and causing a spike in the price of palladium, platinum and rhodium.
During the load shedding of 2008, platinum went from $1700 to $2100, palladium from $390 to $560, and rhodium hit $10,000.
"Power is a key consideration," he said, because of the necessity to ventilate and refrigerate the air that goes down the deep and massive shafts. "Not only do you have to have a power source, you have to have a reliable power source because there are human lives down there," he said. "Going down to 100 meters or more the temperature actually increases to something like to 60 degrees Celsius."

The government and Eskom are taking steps to increase power production, trying to generate more revenue.

"So they are playing catch-up, and this will allow them to build more power plants," Swinoga said. "But of course it takes time to do that."

Investors are also concerned about higher royalties and the political environment in South Africa, he said. Even though the political situation in South Africa has gone well, "there are still special interest groups that could potentially call for nationalization of some of these mines," he said.
"So when you are looking as an outside investor you have a number of concerns about putting capital into his country," Swinoga said.

Concerns about Russia used to center on how much of a strategic stockpile the country had. Back in the 1980s, it was around 14 million ounces. Sources indicate Russia no longer considers palladium a strategic metal, and indicate the stockpile has probably dropped to around 1 million ounces.
"Whenever you have a stockpile there is the fear it will come to market and hit palladium prices and drive them down," Swinoga said. "I don't think we should be concerned about Russia stockpiling."

In the industrial sector, palladium is pitted mostly against platinum for catalytic converters. The price differential has helped palladium gain on platinum in this area. Platinum physical prices early Friday were around $1,520 .per ounce, compared to about $440 for palladium.

"It's really been a price-determining factor to use more palladium in catalytic converters because it is less expensive e than platinum," he said. Also, it is better for gas vehicles There are reports they are migrating more to palladium for diesel because of the low sulphur they have."

Automobile demand in the so-called BRIC countries--Brazil, Russia, India and China--will continue to support palladium. He noted the China demand in particular as a factor favoring palladium.

"Demand will be predicated on light vehicle production ad in emission standards control," Swinoga said.

The increase in industrial trucks will be important, too, he said, because they need more palladium in their catalytic converters. Light vehicles use about 4 grams of palladium in their emission control devices, while larger vehicles such as a Ford F-150 or a Chevrolet Silverado use about 16 grams. "So the loading of palladium quadruples for the average vehicle with bigger motors," Swinoga said.

Having jewelry in jewelry showrooms and the growth of exchange traded funds (ETFs) has given palladium a lot of exposure, he said. Jewelry stores have begun to market the amount of palladium in a ring or bracelet, making it more likely it might be kept for investment.

ETFs have provided wide exposure to palladium from an investor's perspective because it is now easier to invest in the metal directly, Swinoga said. There are ETFs for gold, silver, palladium and platinum. Palladium ETF holdings are about 800,000 ounces, he said, two to three times greater than platinum.
"This shows that the awareness is growing," he said, noting the combination of uses in autos, jewelry, dental and in the investor demand.

Swinoga thinks investment in platinum will grow as will industrial use, even though there may be some bumps along the road upwards. He said not a lot of people know about palladium but the awareness is growing.

" In Ironman2, Ironman has a palladium heart," Swinoga said. "A new color for Mercedes is palladium, and the BMW- 3 Series has palladium silver leather. "

Swinoga said Investors like the metal's appearance, they like the fact it is backed fundamentally and that it has recovered nicely with the industrial demand for cars.

"So you have the best of both worlds, where the industrial world and the precious metals world meet," he said.

By Terry Wooten; [e-mail]

Daniela Cambone contributed to this report