PAL

[David Randolph]

Here's an historical price chart of palladium:



It seems to be starting a new bull market, and there's ample justification for that:

«Softer than platinum, ductile and resistant to oxidation and high temperature corrosion, palladium is useful in eliminating harmful emissions produced by internal combustion engines. Autocatalysts are by far the largest user of palladium; autocatalysts convert over 90 percent of hydrocarbons, carbon monoxide and oxides of nitrogen produced in the exhaust from gasoline engines into carbon dioxide, nitrogen and water vapor.»

See other uses of palladium here: http://www.stillwaterpalladium.com/uses.html

Unfortunately I don't have as much time as I would like to cover PAL, so let me focus on my valuation model:

1) Dilution factor

Despite being a mining company, PAL has just about 1% average annual dilution rate over the past 6 years.

2) Revenue CAGR

There's no long term historical revenue growth trend, but over the past 6 quarters I see very strong growth: $14 M in Q3 2005, $22 M in Q4 2005, $26 M in Q1 2006, $31 M in Q2 2006, $37 M in Q3 2006, $43 M in Q4 2006 and the recently announced $68.4 M revenues in Q1 2007, with the company achieving profitability.

I see at least 100% revenue growth in 2007, say 75% in 2008 and 50% in 2009. I'm going to put 75% revenue CAGR in my three year valuation model, subject to revision later if needed.

3) Net profit margin estimate

Net profit margin in Q1 2007 was 8%. I expect this to expand to 10% in the future, but it can be a lot more, it depends on the future price of palladium and nickel

4) EPS multiple estimate

The Industrial Metals & Minerals industry trades at 22 times earnings, so I'll use this for my estimation.

The valuation model results are:



49% share price CAGR, and I believe there's plenty of upside to that net profit margin estimate, especially if I'm right and the price of palladium enters a new long term bull market.

Look what PAL's management said about the palladium market at its 1st quarter results:

«Palladium production at the Lac des Iles Mine is on track to meeting previously announced guidance of approximately 290,000 ounces and, as expected, average head grades in 2007 continue to align with historical averages for the mine. Management believes that the palladium market has broken out of prior years' surplus pressures into a demand-driven pricing environment. This is supported by the increasing global catalytic demand for clean air metals fueled by growing low-tolerance emission legislation.»

Trading Plan:

Buy PAL, 6.66% of capital as always.

[nicknite20]

David, thanks for the tip. Looks interesting.
Nick

[yukiii]

Cramer pumped this one up...

Consolidation is key in the nickel market right now, and Cramer's speculative play here is North American Palladium (PAL - Cramer's Take - Stockpickr).

The company has 22% nickel by revenue, and there is no analyst coverage of it, which means no one other than Cramer is paying attention, he said. "It is the single best play on nickel around."

Last year, PAL's realized price for nickel was $11.65 a pound, he said. Now nickel is trading at $23.85 a pound. This means that even if PAL didn't increase its nickel production at all, it would almost double its nickel revenues, Cramer explained.



In addition, PAL's exposure to nickel is unhedged, so it stands to gain with spot market prices, he said. And as nickel prices continue to escalate, PAL's production prices are going down. Someone should be willing to bid for this company, and market players should consider buying it, Cramer said.

However, people must only use limit orders when buying the stock, or they will be in pain, he stressed. And they should also space out their buys, Cramer advised. "There will not be a takeover tonight ... so take your time and do it right."

[DragonAMG]

When did Cramer pump this?  I try to stay away from stocks he pumps. 

Just out of curiousity yukii, did you buy it?

[yukiii]

When did Cramer pump this?  I try to stay away from stocks he pumps. 

Just out of curiousity yukii, did you buy it?

He been touting it since may 8th. No I didn't buy it. maybe a good short here....

[bmarc4211]

yukiii are you an only child that never broke the habit of looking for attention or do you just get off on always contradicting the opinions of David.  You obviously know how to invest and some value your thoughts, but your biased contradictions are inappropriate. 

[yukiii]

Just stating the facts, so people don't go blindly go into a trade, without the facts.
Last year I would just tarde on the advice and it worked out good, this year alot of the picks are at the top or bad selections not sure what the problem is. The Market keeps going up and david picks keep going down. I believe that means something. I am doing great with my other picks, and i am just trying to help you guys out. In the 3SF I only have GIGM, NVTL, SILC  and some CIMT at $7.60.

I see many of the new selections not much effort was put into them, and they are dead money,
David keeps saying I believe it will go up based on hope not facts.
I was in EXM when it was $10 and bought and sold it a few times, don't know why anyone would pick it at its high, ouch

JAKK is famous for no growth and again another pick at the top......

If you want to lose your money go ahead, I don't like to give any up.
I said CIMT was a 50/50 gamble but again you guys went blindly into it.

If the selection are good I won't say anything, but there was to much negitive things to say about most of the selections lately.

I think you need a new plan to make selections as I stated before. I would sell off most of these and start all over. Just keep GIGM, NVTL and SILC, CIMT.

I think i proved myself, that i am right more then wrong.

Anyways if you don't want me around, I can always leave and go my way.....
3 S on Fire portfolio is up 18% ytd same as my mutual fund, David I know you can do better.

[johnwho44]

Yukii...you have a point there.  I value your opinion.  It helps me make decisions.  Keep it up.  Thanks.

[Dory99]

Yukiii,

  I've done quite well with many of David's picks so I cant complain; however, I believe that your voice adds value to this forum and I, for one, hope that you stick around...nothing wrong with a dissenting opinion. We're all big boys and girls.. from thesis and antithesis comes synthesis!

[David Randolph]

Just stating the facts, so people don't go blindly go into a trade, without the facts.

Usually you post your personal opinion, not facts.

Last year I would just tarde on the advice and it worked out good, this year alot of the picks are at the top or bad selections not sure what the problem is.

That's your personal opinion on the picks selected. I disagree with your opinion. Talking about the facts, in 2006 the Main Portfolio was up 20%, in 2007, not yet 5 months into the year, it is up 18.4%. So, the fact is the portfolio is doing much better this year, in fact, twice better.

The Market keeps going up and david picks keep going down. I believe that means something.

The Main Portfolio has been trading sideways, not down, as some holdings are going through corrections:

I am doing great with my other picks, and i am just trying to help you guys out.

Sure you are. You provided a lot of help to people that followed your article and buy of THCH:

In the 3SF I only have GIGM, NVTL, SILC  and some CIMT at $7.60.

I hope you don't have CIMT at $7.60. Everybody is free to pick the stocks he thinks are the best, my selection is the stocks everybody sees in the Main Portfolio. But I do find it strange that you're holding NVTL, after what you wrote about it on April 25.

I see many of the new selections not much effort was put into them, and they are dead money,

Not much effort? Again, that's your personal opinion, I strongly disagree. Perhaps, for example, you put a lot more effort when you were recommending BBC, when the stock was above $11, saying others didn't knew the company well, just before plunging to less than $2 and being removed to the Pink Sheets:

and they are dead money,
David keeps saying I believe it will go up based on hope not facts.

They're not dead money, my picks take time to rise, as it happened in the past. Hope? I don't know where to find hope in what I write, I make analysis and formulate expectations about the future, that's not hope.

I was in EXM when it was $10 and bought and sold it a few times, don't know why anyone would pick it at its high, ouch

Sure you did. But in your 215 posts I don't see any talking about EXM while it was below $20.

JAKK is famous for no growth and again another pick at the top......

JAKK has been enjoying strong revenue and profit growth, it doesn't matter if it was achieved through organic growth or acquisitions, since there wasn't any dilution either.

If you want to lose your money go ahead, I don't like to give any up.
I said CIMT was a 50/50 gamble but again you guys went blindly into it.

The Main Portfolio is up 18.4% in 2007, nobody that is following it is losing money. CIMT wasn't a 50/50, there was seasonality involved. Anyway, people buying when I recommended buying are losing just 5.5% on that holding. Nobody was blind, I gave all the facts and wrote the stock could go down 20% if EPS were lower than $0.03 in this quarter, but that wouldn't mean anything for the long term.

If the selection are good I won't say anything, but there was to much negitive things to say about most of the selections lately.

The recent selection still didn't have time to prove itself. No stock is down more than 10% from my buying point. Give them more time to get into the green.

I think you need a new plan to make selections as I stated before. I would sell off most of these and start all over. Just keep GIGM, NVTL and SILC, CIMT.

You would, but I won't.

I think i proved myself, that i am right more then wrong.

You didn't prove anything. I have here a dozen of other examples where your picks were a disaster. If you want to prove something, set up a portfolio, put your trades with the right price at the right time, do that for 2 years and then we can talk. This would be great ... do you want to have your own portfolio at 3 Stocks?

Anyways if you don't want me around, I can always leave and go my way.....

You stick around, sometimes your warnings and information are useful, but I think you should stop with the acid critics, because your ceilings are made of glass too.

3 S on Fire portfolio is up 18% ytd same as my mutual fund, David I know you can do better.

Lol, which one is your mutual fund, I bet it is in the top 2% of the US mutual funds.

My job is very hard to do and I do it with all the strength I have and with 100% honesty. I make mistakes like everybody else and I'm very far away from perfection.

I wish I didn't have to write this post, because I have more important things to do and already lost one hour and a half writing it ... next I'll post PAL's update.

[David Randolph]

PAL's revenues depend heavily on palladium and nickel:

«- Palladium sales in the quarter were realized at US$352 per oz compared to US$330 per oz in the comparable quarter last year, while by-product metal prices also realized considerable gains. Palladium accounted for 45% of first quarter total revenues while nickel continued to be an important revenue source at 28% of revenue.»

The prices on these two metals are much higher now than what they were in Q1:





So one should expect better financial results in Q2 than in Q1. And Q1 was already quite pleasing for PAL, as one can read at the earnings release.

I'll keep on holding PAL.

[pinoleropuro]

Thanks for setting things straight. lets just keep making money instead of little spats. Lord knows I need to make some mula I have another baby on the way and diapers are getting expensive.

[Amarens]

Hi David,

Had to applaud you on your respons to bmarc4211. He was getting a little under my skin. I especialy appreciated your last remark

"You stick around, sometimes your warnings and information are useful, but I think you should stop with the acid critics, because your ceilings are made of glass too."

Could not agree more. C'est la tone qui fai la musique. Opinions are good they help us all, but for crusades this is not the place.

Keep up the good work.
Amarens

[johnwho44]

David,

You're right about giving time for the stocks in the main portfolio to materialize.  After all, it's long-term investing.  Thanks for all your hard work.

[echo]

here's a good article on palladium which basically states that we're expecting growth. Good pick David, keep it up:

Palladium substitution caps platinum demand
Platinum's sister metal will be increasingly used in gasoline and diesel autocatalysts as a lower cost substitute.

Author: Tessa Kruger
Posted:  Tuesday , 22 May 2007

JOHANNESBURG - 

Growth in platinum demand is limited by its more affordable sister palladium increasingly used to manufacture both gasoline and diesel autocatalysts.

David Jollie of Johson Matthey told Mineweb the increased use of palladium in autocatalysts would not stop platinum demand from increasing but would place a ceiling on future growth.

This comes as the substitution of platinum by palladium in autocatalysts is set to grow this year and in future. Johnson Matthey is a speciality chemicals company focused on catalysts, precious metals and fine chemicals.

The use of palladium in autocatalysts grew to 4.02m ounces last year from 3.87m ounces in 2005 and the palladium component of a platinum-based diesel autocatalyst rose from a very low base (around 0%) to around 10% last year.

Gasoline autocatalysts comprised of about 70% palladium and the balance platinum in 2005 and just below 75% palladium and the balance platinum in 2006.

The growing price differential between platinum and palladium over recent years has provided car manufacturers an incentive to switch catalyst formulations for gasoline vehicles from those based on platinum and rhodium to palladium-rhodium technology.

"Auto makers have worked hard to minimise their precious metals costs since platinum started trading at a premium to it sister metal in 2001, by both thrifting and substituting it with palladium in gasoline catalysts," said the Johnson Matthey Platinum 2007 review.

"This trend has been ongoing for several years, but the switching process has not yet proceeded to its maximum extent."

Car manufacturers have the option of using different mixes of the platinum group metals in many of their vehicles' exhaust systems - particularly those with spark ignition engines.

The introduction of new emissions legislation also requires the development of new catalysts and presents the ideal opportunity for companies to replace previous platinum-based catalysts with palladium-based ones.

Palladium is also starting to gain a small foothold in the diesel vehicle market as it is being used in diesel oxidation catalysts and particulate filters.

And it is set to play an increasing role in diesel aftertreatment as platinum-palladium diesel autocatalysts were first fitted to vehicles in 2005. 

Mixed with platinum, palladium can maintain catalytic activity in diesel vehicles to enhance thermal stability at a reduced overall cost.

However, current technology only features palladium as a relatively minor precious metal component, alsongside platinum. Growth in the use of palladium will therefore only dampen growth in platinum consumption in this sector a little.