Hedging Against Rising Palladium Prices using Palladium Futures

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Contents

Hedging Against Rising Palladium Prices using Palladium Futures

Definition:
A put option is an option contract in which the holder (buyer) has the right (but not the obligation) to sell a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).

For the writer (seller) of a put option, it represents an obligation to buy the underlying security at the strike price if the option is exercised. The put option writer is paid a premium for taking on the risk associated with the obligation.

For stock options, each contract covers 100 shares.

Buying Put Options

Put buying is the simplest way to trade put options. When the options trader is bearish on particular security, he can purchase put options to profit from a slide in asset price. The price of the asset must move significantly below the strike price of the put options before the option expiration date for this strategy to be profitable.

A Simplified Example

Suppose the stock of XYZ company is trading at $40. A put option contract with a strike price of $40 expiring in a month’s time is being priced at $2. You strongly believe that XYZ stock will drop sharply in the coming weeks after their earnings report. So you paid $200 to purchase a single $40 XYZ put option covering 100 shares.

Say you were spot on and the price of XYZ stock plunges to $30 after the company reported weak earnings and lowered its earnings guidance for the next quarter. With this crash in the underlying stock price, your put buying strategy will result in a profit of $800.

Let’s take a look at how we obtain this figure.

If you were to exercise your put option after earnings, you invoke your right to sell 100 shares of XYZ stock at $40 each. Although you don’t own any share of XYZ company at this time, you can easily go to the open market to buy 100 shares at only $30 a share and sell them immediately for $40 per share. This gives you a profit of $10 per share. Since each put option contract covers 100 shares, the total amount you will receive from the exercise is $1000. As you had paid $200 to purchase this put option, your net profit for the entire trade is $800.

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This strategy of trading put option is known as the long put strategy. See our long put strategy article for a more detailed explanation as well as formulae for calculating maximum profit, maximum loss and breakeven points.

Protective Puts

Investors also buy put options when they wish to protect an existing long stock position. Put options employed in this manner are also known as protective puts. Entire portfolio of stocks can also be protected using index puts.

Selling Put Options

Instead of purchasing put options, one can also sell (write) them for a profit. Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums. Selling puts, or put writing, involves more risk but can be profitable if done properly.

Covered Puts

The written put option is covered if the put option writer is also short the obligated quantity of the underlying security. The covered put writing strategy is employed when the investor is bearish on the underlying.

Naked Puts

The short put is naked if the put option writer did not short the obligated quantity of the underlying security when the put option is sold. The naked put writing strategy is used when the investor is bullish on the underlying.

For the patient investor who is bullish on a particular company for the long haul, writing naked puts can also be a great strategy to acquire stocks at a discount.

Put Spreads

A put spread is an options strategy in which equal number of put option contracts are bought and sold simultaneously on the same underlying security but with different strike prices and/or expiration dates. Put spreads limit the option trader’s maximum loss at the expense of capping his potential profit at the same time.

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Rising Palladium Prices using Palladium Futures

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. Support for this pricing relationship is based upon the argument that arbitrage opportunities would materialize if there is a divergence between the value of calls and puts. Arbitrageurs would come in to make profitable, riskless trades until the put-call parity is restored.

To begin understanding how the put-call parity is established, let’s first take a look at two portfolios, A and B. Portfolio A consists of a european call option and cash equal to the number of shares covered by the call option multiplied by the call’s striking price. Portfolio B consist of a european put option and the underlying asset. Note that equity options are used in this example.

Portfolio A = Call + Cash, where Cash = Call Strike Price

Portfolio B = Put + Underlying Asset

It can be observed from the diagrams above that the expiration values of the two portfolios are the same.

Call + Cash = Put + Underlying Asset

Eg. JUL 25 Call + $2500 = JUL 25 Put + 100 XYZ Stock

If the two portfolios have the same expiration value, then they must have the same present value. Otherwise, an arbitrage trader can go long on the undervalued portfolio and short the overvalued portfolio to make a riskfree profit on expiration day. Hence, taking into account the need to calculate the present value of the cash component using a suitable risk-free interest rate, we have the following price equality:

Put-Call Parity and American Options

Since American style options allow early exercise, put-call parity will not hold for American options unless they are held to expiration. Early exercise will result in a departure in the present values of the two portfolios.

Validating Option Pricing Models

The put-call parity provides a simple test of option pricing models. Any pricing model that produces option prices which violate the put-call parity is considered flawed.

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Falling Palladium Prices using Palladium Futures

Palladium producers can hedge against falling palladium price by taking up a position in the palladium futures market.

Palladium producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of palladium that is only ready for sale sometime in the future.

To implement the short hedge, palladium producers sell (short) enough palladium futures contracts in the futures market to cover the quantity of palladium to be produced.

Palladium Futures Short Hedge Example

A palladium mining firm has just entered into a contract to sell 10,000 troy ounces of palladium, to be delivered in 3 months’ time. The sale price is agreed by both parties to be based on the market price of palladium on the day of delivery. At the time of signing the agreement, spot price for palladium is USD 185.40/oz while the price of palladium futures for delivery in 3 months’ time is USD 190.00/oz.

To lock in the selling price at USD 190.00/oz, the palladium mining firm can enter a short position in an appropriate number of NYMEX Palladium futures contracts. With each NYMEX Palladium futures contract covering 100 troy ounces of palladium, the palladium mining firm will be required to short 100 futures contracts.

The effect of putting in place the hedge should guarantee that the palladium mining firm will be able to sell the 10,000 troy ounces of palladium at USD 190.00/oz for a total amount of USD 1,900,000. Let’s see how this is achieved by looking at scenarios in which the price of palladium makes a significant move either upwards or downwards by delivery date.

Scenario #1: Palladium Spot Price Fell by 10% to USD 166.86/oz on Delivery Date

As per the sales contract, the palladium mining firm will have to sell the palladium at only USD 166.86/oz, resulting in a net sales proceeds of USD 1,668,600.

By delivery date, the palladium futures price will have converged with the palladium spot price and will be equal to USD 166.86/oz. As the short futures position was entered at USD 190.00/oz, it will have gained USD 190.00 – USD 166.86 = USD 23.14 per troy ounce. With 100 contracts covering a total of 10000 troy ounces, the total gain from the short futures position is USD 231,400

Together, the gain in the palladium futures market and the amount realised from the sales contract will total USD 231,400 + USD 1,668,600 = USD 1,900,000. This amount is equivalent to selling 10,000 troy ounces of palladium at USD 190.00/oz.

Scenario #2: Palladium Spot Price Rose by 10% to USD 203.94/oz on Delivery Date

With the increase in palladium price to USD 203.94/oz, the palladium producer will be able to sell the 10,000 troy ounces of palladium for a higher net sales proceeds of USD 2,039,400.

However, as the short futures position was entered at a lower price of USD 190.00/oz, it will have lost USD 203.94 – USD 190.00 = USD 13.94 per troy ounce. With 100 contracts covering a total of 10,000 troy ounces of palladium, the total loss from the short futures position is USD 139,400.

In the end, the higher sales proceeds is offset by the loss in the palladium futures market, resulting in a net proceeds of USD 2,039,400 – USD 139,400 = USD 1,900,000. Again, this is the same amount that would be received by selling 10,000 troy ounces of palladium at USD 190.00/oz.

Risk/Reward Tradeoff

As can be seen from the above examples, the downside of the short hedge is that the palladium seller would have been better off without the hedge if the price of the commodity went up.

Learn More About Palladium Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Hedging Against Rising Platinum Prices using Platinum Futures

Businesses that need to buy significant quantities of platinum can hedge against rising platinum price by taking up a position in the platinum futures market.

These companies can employ what is known as a long hedge to secure a purchase price for a supply of platinum that they will require sometime in the future.

To implement the long hedge, enough platinum futures are to be purchased to cover the quantity of platinum required by the business operator.

Platinum Futures Long Hedge Example

An automaker will need to procure 5,000 troy ounces of platinum in 3 months’ time. The prevailing spot price for platinum is USD 964.00/oz while the price of platinum futures for delivery in 3 months’ time is USD 960.00/oz. To hedge against a rise in platinum price, the automaker decided to lock in a future purchase price of USD 960.00/oz by taking a long position in an appropriate number of NYMEX Platinum futures contracts. With each NYMEX Platinum futures contract covering 50 troy ounces of platinum, the automaker will be required to go long 100 futures contracts to implement the hedge.

The effect of putting in place the hedge should guarantee that the automaker will be able to purchase the 5,000 troy ounces of platinum at USD 960.00/oz for a total amount of USD 4,800,000. Let’s see how this is achieved by looking at scenarios in which the price of platinum makes a significant move either upwards or downwards by delivery date.

Scenario #1: Platinum Spot Price Rose by 10% to USD 1,060/oz on Delivery Date

With the increase in platinum price to USD 1,060/oz, the automaker will now have to pay USD 5,302,000 for the 5,000 troy ounces of platinum. However, the increased purchase price will be offset by the gains in the futures market.

By delivery date, the platinum futures price will have converged with the platinum spot price and will be equal to USD 1,060/oz. As the long futures position was entered at a lower price of USD 960.00/oz, it will have gained USD 1,060 – USD 960.00 = USD 100.40 per troy ounce. With 100 contracts covering a total of 5,000 troy ounces of platinum, the total gain from the long futures position is USD 502,000.

In the end, the higher purchase price is offset by the gain in the platinum futures market, resulting in a net payment amount of USD 5,302,000 – USD 502,000 = USD 4,800,000. This amount is equivalent to the amount payable when buying the 5,000 troy ounces of platinum at USD 960.00/oz.

Scenario #2: Platinum Spot Price Fell by 10% to USD 867.60/oz on Delivery Date

With the spot price having fallen to USD 867.60/oz, the automaker will only need to pay USD 4,338,000 for the platinum. However, the loss in the futures market will offset any savings made.

Again, by delivery date, the platinum futures price will have converged with the platinum spot price and will be equal to USD 867.60/oz. As the long futures position was entered at USD 960.00/oz, it will have lost USD 960.00 – USD 867.60 = USD 92.40 per troy ounce. With 100 contracts covering a total of 5,000 troy ounces, the total loss from the long futures position is USD 462,000

Ultimately, the savings realised from the reduced purchase price for the commodity will be offset by the loss in the platinum futures market and the net amount payable will be USD 4,338,000 + USD 462,000 = USD 4,800,000. Once again, this amount is equivalent to buying 5,000 troy ounces of platinum at USD 960.00/oz.

Risk/Reward Tradeoff

As you can see from the above examples, the downside of the long hedge is that the platinum buyer would have been better off without the hedge if the price of the commodity fell.

An alternative way of hedging against rising platinum prices while still be able to benefit from a fall in platinum price is to buy platinum call options.

Learn More About Platinum Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Growing demand and uncertain futures: the rise of palladium

With growing demand thanks to its uses in cutting car emissions, palladium is enjoying a boom, with prices rising over 100% in three years. This surge in demand, however, means that there are few well-established palladium mines. With this lacking tradition of secure palladium production, questions have been raised about the future of the metal, and the mining industry’s ability to produce it.

Palladium has enjoyed a strong few years. The platinum group metal has seen increasing demand and prices due to its usage in catalytic converters in cars, which are becoming mandatory as the automotive industry looks to clean up its environmental performance. Figures support this growth: global production reached 214 tonnes in 2020, compared to annual gold production of around 175 tonnes, and the metal saw its price skyrocket from $562.98 per ounce at the end of 2020 to $1,261.78 per ounce three years later, an increase of 124%.

This growth has also encouraged a number of new players to step onto the global palladium stage, with miners of all sizes suddenly interested in the metal. With the majority of the world’s palladium produced by a single company – Russia-based Norilsk Nickel, which was responsible for 41% of global production in 2020 – other miners are looking to develop new projects to challenge this monopoly.

However, the bubble could be set to burst, as the automotive industry, which has been singularly responsible for the growth in demand for palladium, might be cooling on the metal’s potential, as supply begins to catch up to demand. With new palladium mines already in the permitting, or even operating, stages, questions remain about the future of palladium, and for how much longer it will be a strong investment.

New and resurgent projects

The surge in demand for palladium has seen all manner of miners flock to the metal. Canadian miner Ivanhoe has completed a feasibility study at its Platreef mine in South Africa, a project in which it owns a 64% stake, and aims to produce 219,000 ounces of platinum a year. Similarly, the Lac Des Illes mine in Canada restarted production in 2020 after a two year hiatus due to resurgent prices. Its owner, North American Palladium, plans to continue underground operations until 2027, and produce 2.32 million ounces of the metal over the next eight years.

However, the former project is not exclusively a palladium operation, while the latter boasts a short lifespan and a history of uncertain finances; regarding new, specialised palladium mines, US-based Platinum Group Metals (PGM) is one of the companies investing the heaviest in new palladium operations.

“The Waterberg mine would be one of the largest low cost [platinum group metals] mines in the world, with palladium as the dominant metal,” said PGM CEO Michael Jones, when asked about his company’s new Waterberg mine in South Africa.

The numbers certainly support this claim; a PGM feasibility study, published in September, noted that 63% of the mine’s total resources were palladium, and that there would be 19.5 million ounces easily accessible as reserves. The project will cost around $874m to build and PGM expects to produce around 420,000 ounces of palladium a year, close to double that of Ivanhoe’s Platreef project, and has the financial support of industry heavyweights Implats and JOGMEC, which have purchased stakes in the mine of 15% and 13% respectively.

This support could be crucial, as PGM aims to deliver lofty financial rewards for its investors. The company expects an after-tax net present value of $982m, using spot metal prices as of 4 September 2020, and an after-tax rate of return of 20.7% at these prices. The mine is also expected to operate for a staggering 45 years, and should PGM’s predictions come true, this could be one of the most profitable mines in the sector.

New technology and old minerals

Projects like these have been able to move ahead because of what Jones calls “solid underlying demand,” influenced primarily by the automotive industry. Palladium is a key component in catalytic converters, devices which are used to filter out the more harmful gases from car exhausts, and a global shift towards cleaner, greener vehicles has helped platinum considerably.

“The increased emission standards in China, a move away from diesel in Europe – to gasoline – and large SUVs and trucks in the USA has all favoured an increase in palladium demand for catalytic converters,” said Jones.

“Going forward, hybrids are expected to grow to 20% of the power trains on the road for cars. Again these cars have small gasoline engines and palladium bearing catalytic converters. Also emission standards are getting tougher and tougher, which again increases palladium loadings per car. The future looks very strong on the demand side.”

In its 2020 annual report, chemical analysis firm Johnson Matthey noted that palladium demand had increased from 9.3 million ounces in 2020 to 10.1 million ounces in 2020, with the automotive industry driving this demand; the desire for palladium increased from 7.9 million ounces to 8.6 million ounces in the autocatalyst sector alone over this period.

Palladium has also seen increased demand due to a burgeoning recycling industry, with many car manufacturers looking to disused older vehicles, constructed before environmental considerations were so pressing, as a source of palladium. A ThermoFisher report found that in 2020, 41.2 tonnes of palladium were recovered from spent catalytic converters alone, creating a parallel industry of recycling, reprocessing and re-selling that, combined with similar efforts to use platinum and rhodium, was worth around $3bn.

The value of this industry also highlights an important element of the palladium trade, that despite growing demand, supply will continue to be limited by a relative absence of large-scale palladium mines, a situation Jones and PGM aim to fix.

“Resources in general have been underfunded for ten years,” said Jones. “In the next ten years, a lack of world class discoveries will start to have an impact on the global supply chain. The next commodity cycle will be very interesting across a host of commodities in my opinion.”

Challenges ahead

Despite the obvious potential for investments in palladium, challenges remain ahead as the mining industry looks to rapidly scale up operations to meet this growing demand. Public opinion and legislation often change faster than roads can be built and mines dug into the ground, and Jones highlighted the disparity between mining ambitious and infrastructure as a key challenge ahead.

“Challenges in the project include developing the regional infrastructure of 35km of road and 70km of power lines,” he said. “Water infrastructure also needs to be developed.”

This lack of development also means the future of palladium is particularly difficult to predict. The recent surge in demand illustrates how quickly interest in a commodity can change, and considering much of the optimism in palladium is based on this interest, companies such as PGM are hesitant to make too many predictions about the future of the mineral.

“In the longer term, out to 2030 and beyond, it is more difficult to predict,” said Jones. “If pure battery cars gain traction this would be potentially negative for the palladium market.”

With this uncertainty in mind, it is ultimately difficult to approach PGM’s Waterberg mine with anything other than scepticism. The company plans to operate the mine for 45 years, close to three times the length of time that the Lac Des Illes mine operated for before its closure; with a historical benchmark of 17 years for a large-scale palladium operation, and inherent uncertainty in the sector, PGM’s plans are nothing short of highly ambitious.

Yet Jones remains confident that a combination of technological innovation and strong demand could help palladium continue its growth.

“However, interestingly we are working with Anglo American on a lithium battery that uses palladium and platinum [which] could be a whole new area of demand,” he said. “We are still at the lab testing and patent application phase but it looks very promising.

“On the supply side, palladium-dominated deposits are very rare. Deep, narrow platinum mines that are closing have palladium as a by-product and, despite the move up in palladium prices, the platinum mines are shrinking. This tightens the palladium market even in a rising price environment. In the next ten years, things look very strong.”

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