by Nathan Slaughter, editor Street Authority Market Advisor
A looming supply shortage stands to push palladium prices sharply higher over the next couple years, and
North American Palladium (
PAL) is sitting on one of the world's biggest deposits.
The company has several promising gold mines under development that could soon produce over 80,000 ounces annually.
Believe it or not, there are only two mines on the planet that yield
palladium first and foremost -- it's a by-product everywhere else. And
one of those mines belongs to North American Palladium.
The
Lac des Iles (LDI) site in Ontario, Canada, is a geological treasure
trove. The mine spit out 95,000 ounces of palladium last year. And
expansion projects underway will soon have that total rising swiftly.
Production
rates are forecast to climb 75% this year to 165,000 ounces. From
there, they will ratchet up to 190,000 ounces in 2012, 200,000 in 2013,
220,000 in 2014, and 250,000+ thereafter.
That aggressive
growth curve can send earnings soaring, even if prices don't move.
Ordinarily, such an increase might be accompanied by a sharp rise in
costs.
But that's not the case here. In fact, the transition from ramp mining
to shaft mining is expected to lower extraction costs from $283 per
ounce today to $150 per ounce.
I don't need to explain what
the combination of triple-digit production growth, falling costs and
rising palladium prices can do to cash flows -- and share prices.
Better
still, these projections don't include three new zones (dubbed Cowboy,
Outlaw, and Sheriff) that have been discovered over the last couple
years.
And there's icing on the cake -- solid gold icing.
In
May 2009, the company acquired the Sleeping Giant gold mine in Quebec,
a proven performer that has yielded over one million ounces of gold
over the past two decades.
But NAP is confident it can squeeze
out much more. Management has begun drilling 600 feet deeper to access
three new mining zones.
Once it hits paydirt, gold production
is projected to double from 17,000 ounces last year to 30,000 ounces
this year -- and on up to 50,000 ounces next year.
There's
more in the pipeline, including Vezza (which has the potential to
produce 39,000 ounces of gold annually), and Discovery (which could add
44,000 ounces per year).
As early as next year, the company
could already be producing well over 80,000 ounces of gold --
equivalent to $1.1 billion in sales at today's prices.
Keep in mind, the entire company only has a market cap of $1 billion.
North American Palladium has been spending heavily to boost production, sacrificing profits today for a rich payoff tomorrow.
The
shrewd move into gold will help diversify the income stream and should
be a growth driver. But my real interest in NAP is the Lac Des Isles
mine, which will almost print money if palladium prices revisit their
former highs.
Long-term, North American Palladium could ultimately provide triple-digit returns.