Stillwater Mining Company (SWC)

Still Water Mining (SWC) closed yesterday at $10.68.

These guys produce palladium and platinum -- over 450,000 ounces of palladium and 135,000 ounces of platinum annually. Production problems and labor disputes have put a short-term pall over the stock. The twelve-month price target on the stock is $25 per share.

Earnings came out recently - not disastrous, but not great, either. The main thing that Wall Street is upset about is the production numbers. Year over year production was down 7%. Without any context, that is a big deal.

But several things impacted the quarterly production numbers: they lost seven days of production due to a strike; they lost employees due to a restructuring of the work schedule; and they experienced equipment failures and mining inefficiencies.

Are we really surprised that they were experiencing “mining inefficiencies” and “equipment failure” during a quarter in which their miners were striking? Do you think that some elements of their workforce were sending a message?

The good news is that their labor woes appear to be behind them, and that none of this is earth-shattering stuff - this is business as usual for most companies.

The thing to focus on is that at these prices, their palladium reserves are currently valued at less than $20 per ounce while spot market palladium trades above $360!

Long story short, these guys have huge reserves of essential industrial metals at very, very cheap prices. But the really juicy piece of the pie is that MMC Norilsk Nickel, the massive Russian mining company, already owns 50% of Still Water Mining, so don’t be surprised if they make a bid for the other 50% of SWC when palladium prices start cooking again.

With or without a takeover deal, though, the stock deserves a hefty premium considering that the market is valuing their palladium reserves so cheaply, matched with the fact that those reserves are in the most politically secure country in the world - Billings, Montana, USA to be exact.

In every long-term bull market, there is always a sector that underperforms. One of the biggest bow-wow commodities right now just happens to be palladium. Palladium is a precious metal, the primary use of which is in automobile catalytic converters. A more recent source of burgeoning demand has been in the jewelry market. Asian jewelers in particular are using palladium in lieu of the far more expensive platinum. Because it’s cheap, cheap, cheap. We are in a long-term global commodity bull market, and palladium will participate. The macro drivers for sustained demand for palladium are well-entrenched.

The Chinese are in the massive process of transitioning from a bicycle nation to a car nation. Chinese consumers purchased more than seven million cars last year, up 25% from the year before. In fact, it’s estimated that by 2015, China will eclipse the United States as the world’s largest car market.

China and India’s growing car market, along with Chinese consumer demand for palladium jewelry, as well as the growth in Western demand for autos all appear to be setting the stage for a multi-year run in palladium prices.

The market is giving us a chance to get into palladium cheaply. The same way it gave us the chance to buy the Copper stocks, Zinc stocks, Oil Service stocks and Aluminum stocks cheaply in the past.

The Russians have a chokehold on palladium prices, being responsible for fully 50% of the world’s supply of palladium. Back in 2000 - 2001, they displayed this power by holding back palladium exports. In short order, palladium prices skyrocketed to more than $1,300 an ounce. Palladium today trades at about $360 an ounce after reaching as low as the $150s after the Russian squeeze.