Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
By Sasha Cekerevac for Investment Contrarians
As readers of Investment Contrarians are probably well aware, precious metals have been hit hard this year. Along with the drop in the price of precious metals, mining stocks have also significantly declined in price.
However, I think we might be entering a period of increased demand that should see higher prices for the precious metals sector and the associated mining stocks.
Longtime readers won’t be surprised when I mention two precious metals that are developing increased demand from industrial use: platinum and palladium.
In past articles, I have written extensively on both of these white precious metals and that there will be significant imbalances in the market—not the financial (paper) market, but actual physical demand for these precious metals.
As the majority of demand for both of these precious metals comes from industrial use, specifically in the construction of catalytic converters for the automotive industry, it’s quite easy to see where demand and supply will be moving forward.
Mining stocks involved in both of these precious metals are having difficulty increasing supply. The two nations that supply most of these two precious metals are Russia and South Africa. Mining stocks have had a significant amount of trouble over the past year especially in South Africa, with labor issues causing disruptions in production and higher costs.
Demand comes from vehicle sales, and with the cheap money being pumped worldwide, this means affordable financing for millions of people. As you probably know, car sales in America are booming once again. But a huge market over the next decade will be China.
When you consider there are still hundreds of millions of people who don’t have a car but will, over the next decade, likely begin buying vehicles, there is a huge potential opportunity here. And it’s a strong driver of demand for both platinum and palladium.
While most precious metals have suffered this year, palladium is actually positive year-to-date and close to its highs. This just shows how strong industrial demand is and how low supply is coming from the mining stocks.
However, this is one difficult situation with both of these precious metals, since many of the mining stocks involved in producing both platinum and palladium are located in South Africa. Because of the potential for labor strikes, costs are beginning to rise and supply is not guaranteed.
While supply disruptions might be positive for the price of the actual commodity, mining stocks themselves could face pressure in earnings if a violent strike were to erupt in South Africa. Last year, there were labor clashes and even deaths involved, with the related mining stocks ultimately raising salaries.
In my opinion, both of these precious metals will be priced much higher over the next decade, simply from the increased demand and lack of new supply. However, one needs to be careful to avoid mining stocks in that region, as they could be extremely volatile.
There are two ways to consider investing in these precious metals. One is through a company called Stillwater Mining Company (NYSE/SWC), which is an American-based firm that not only produces platinum and palladium from mining operations, but also has recycling facilities for spent catalytic converters. The company is the largest producer of platinum and palladium outside Russia and South Africa.
Another option for playing mining stocks in this area is The Sprott Physical Platinum and Palladium Trust (NYSEArca/SPPP), a closed-end fund that holds both metals physically.
Let’s face it: both of these precious metals are difficult to find and are located in only a few places around the world. We simply can’t print more platinum and palladium. However, industrial demand will continue to rise, especially as hundreds of millions of people start driving cars. The supply-demand dynamic over the next decade is quite compelling, in my opinion, for mining stocks in both of these precious metals.
