Silver and PGMs offer investors hope

Gold grabs most of the mining headlines, especially since its recent comeback, but other precious metals such as silver and palladium are also performing well in today’s market, giving miners new hope after a prolonged commodities slump.

The silver price — seen as both a haven for investors and an industrial commodity — hit a three-year high above US$19 per oz. in early September, while palladium surpassed US$1,700 per oz. due to tightening supply for the auto-catalyst metal.

While both metals have pulled back a bit since then — as has the gold price from a recent six-year high of US$1,550 per oz. — growing macroeconomic uncertainty could send the silver and gold price higher, while palladium will be supported by an ongoing supply deficit.

Rohit Savant, vice-president of research at CPM Group in New York, said the silver price is rising due in part to market uncertainty related to the ongoing U.S.–China trade war, and other factors such as Brexit and funding pressure in U.S. money markets.

“Declining yields and the increased demand for portfolio diversifiers at a time of increased stock market volatility [is also] expected to help drive silver prices up during the quarter,” Savant said in an email.

Load and haul trucks in the north pit at Anglo American’s Mogalakwena PGM mine in South Africa. Credit: Anglo American.

Bart Melek, head of commodity strategy at TD Securities in Toronto, has a “fairly positive” outlook for silver. He forecasts the silver price will reach an average of US$19.50 per oz. in 2020, up from his forecast of US$16.43 per oz. for 2019. Silver started 2019 at $15.44 per oz. and trades at US$17.57 per ounce.

“There will be a whole lot more investment” in the silver space, Melek said in an interview, citing an uptick so far this year.

Global silver investment has “increased appreciably” in 2019, according to a report from the Washington-based Silver Institute. It cites “fresh all-time highs” for silver in exchange-traded products, where 746 million oz. silver are allocated, and says global mint bullion coin sales have risen 30% year-over-year through July.

In the futures market, net long positioning on Comex at the end of July rose to its highest since November 2017, the report states, while high silver prices have helped boost related mining equities. The Solactive Global Silver Miners Equity Index, which includes international silver mining exploration and refining companies, is up 14% year-to-date and 19% year-over-year.

While silver is getting stronger, it could be held back by its industrial side, particularly as concerns mount about a global recession. One bad sign for the economy came on Oct. 2, when the closely watched ISM manufacturing index, a measure of U.S. manufacturing, fell to its lowest level since June 2009.

Despite the volatility, most mining companies feel optimistic that the worst of the commodities slump is behind them, and that precious metals are poised to benefit.

“Hard assets like silver, like gold, like PGMs, [will go] higher,” Randy Smallwood, CEO of Wheaton Precious Metals (TSX: WPM; NYSE: WPM), said in an interview.

He sees it in the market, but also in boardrooms, where more fund managers are showing up at mining investment meetings.

“We are seeing a bit of a wake-up,” Smallwood said, suggesting investors are looking for alternatives to “safe” investments, such as the U.S. dollar. “I get a sense that what we’re seeing is an increased appetite for precious metals.”

Silver accounts for 40% of revenues at Wheaton Precious Metals, but the company has also entered the promising palladium market with its July 2018 acquisition of the gold and palladium stream from Sibanye Gold’s (NYSE: SBGL) Stillwater mine.

“We felt good with [our investment in] palladium in the sense that we expect demand will increase,” he says.

Palladium prices are up more than 30% this year to US$1,636 per oz. due to supply constraints, and Savant of CPM Group expects the price will stay at elevated levels in the coming months amid strong demand from fabricators. The palladium price will also support platinum, Savant says, which has climbed to about US$900 per oz., but has not exceeded US$1,000 in recent years. At press time platinum was US$888 per ounce.

North American Palladium’s Lac des Îles palladium mine, 100 km northwest of Thunder Bay, Ontario. Credit: North American Palladium.

Savant says the biggest risk to platinum group metals such as platinum and palladium is a further slowdown in the auto sector.

RBC Dominion Securities recently started coverage of Toronto-based North American Palladium (TSX: PDL; US-OTC: PALDF), which is behind the Lac des Îles mine near Thunder Bay, Ont., with an “outperform” rating and $26 target, well ahead of its $19 price.

In a note, analyst Mark Mihaljevic cited the company’s “positive financial outlook, demonstrated capital returns through regular and special dividends, and unique exposure to palladium” at a time when prices trade near record highs.

Mihaljevic also cited the deficit in the palladium market — driven by growing demand from carmakers and a large supply shortfall — that pushes up prices, saying he expects the market deficit will continue through 2021.

According to Reuters, palladium has almost doubled in value from a low in August last year, due to tighter environmental regulations that force carmakers to buy more of the metal used in vehicle exhausts to reduce harmful emissions.

Mitsubishi analyst Jonathan Butler said manufacturers, which account for 80% of palladium consumption, have ramped up orders in recent weeks, which could send prices even higher.

“Over the next 12 to 18 months, we are probably going to see $2,000 in range,” Butler told Reuters.

Philip Newman at consultants Metals Focus told Reuters he expects an eighth consecutive annual shortfall in 2019 of about 617,000 oz. in the 10 million oz. a year palladium market.

RBC’s Mihaljevic is cautious longer-term, forecasting “an eventual rebalancing of the market” for palladium, “as supply and demand gradually respond to current prices, with the market and value chains in vehicle OEMs eventually arbitraging out the pricing differences between palladium and platinum via substitution.”

Michael Jones, CEO of Vancouver-based Platinum Group Metals (TSX: PTM; NYSE-AM: PLG), 50% co-owner of the palladium-dominant Waterberg project in South Africa, said the company has seen some increase in investor interest since palladium prices started rising.

However, he says the interest remains relative given the capital shortage across the broader sector.

“Frankly, we are caught up in the current mining malaise,” Jones said in an interview. “There just isn’t interest in where things come from.”

Jones says Platinum Group Metals has the support of its three largest shareholders: Hosken Consolidated Investments, with a 30% stake; Liberty Mutual Insurance, at 19%; and Franklin Resources (NYSE: BEN), with 17%.

“We are in a very fortunate position that we are supported by major owners that are long-term thinkers,” Jones said. “[Other] investors just aren’t here yet … they will come as the opportunity develops.”