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Company: Magma Metals Limited ASX Code: MMWShare Price: $0.65Market cap: $106mRecommendation: ‘Speculative Buy’ 

Risk aversion and precious metals often go hand in hand. But during the financial crisis those that weren’t ‘yellow’ failed to service their royal reputation. Whereas gold has remained perilously close to record highs, its precious metal cousins fell by the wayside.

Now weighing in 20-40% below their 2008 peaks – the performance of silver, platinum and palladium have more closely followed the industrial metals. The latter two fall into the category of Platinum Group Metals (PGM’s), and are subject to a greater degree of industrial demand than gold, hence their recent declines can be linked to the economy.

More specifically, Platinum and Palladium demand is linked to the auto industry. Their most important application is as catalytic converters in vehicle exhaust systems. Palladium also has a number of electronic applications which have seen its price follow the fortunes of the technology sector in the past. For example, Palladium’s chemical stability and electrical conductivity make it an effective and durable alternative to gold for plating in electronic components. Platinum is currently trading around US$1,400/oz, but got as high as US$2,300/oz in March 2008. Palladium is currently trading at US$360/oz, having been as high as US$595/oz in 2008.

During the heady days of the dot com boom, Palladium’s links to electronics demand saw its price reach over US$1,000/oz. Right now with economic recovery front of mind, the demand problems which plagued the fortunes of these metals in 2008 have faded, while their precious metal properties gives them an attractive inflation hedge.   

Speculation aside, we favour the outlook for emerging platinum explorer, Magma Metals. The company’s key focus is the Thunder Bay region of northwest Ontario, Canada. This area is known for hosting the polymetallic ‘Lac des Iles’ mine. Although depressed prices forced the mine’s temporary closure last year, Lac des Iles has a world class production profile. Prior to last year’s shut down, the mine boasted annualised production of 270,000oz palladium, 20,000oz platinum, 20,000oz gold, 3m lbs nickel and 5.6m lbs copper. Could Magma’s future be just as vibrant?

Magma’s acreage spreads 20-60kms south east of Lac des Iles. Initial exploration has focussed on the Thunder Bay North project. It is still early days, but drilling has been very encouraging, outlining consistent polymetallic mineralisation across several target zones. The frequency of 30-50m thick intercepts grading 3-4g/t PGM has been a highlight. Grades appear to be just as impressive as those reported at Lac des Iles, and the shallow nature of the mineralisation could pave way for an open pit operation. In September the company released a maiden resource estimate for the project of 8.18Mt @ 2.38g/t PGM’s, 0.29% copper & 0.20% nickel. This equates to 690,000oz of Platinum, which the company believes could be ‘substantially increased’ by further drilling. Drilling to expand the resource is ongoing while the company has commenced a scoping study to assess the project’s potential economics. The study is due for completion midway through next year and positive results could send the share price higher.

The stock has a strong institutional following. Major shareholders include Anglo American, Anglo Pacific Group, Acorn Capital and AMP, several of which have been buyers over recent months. Although the company has plenty of cash on hand ($13m) to support its current exploration program, the presence of these ‘big swingers’ offers confidence when its comes to future funding demands. We rate the stock a ‘speculative buy’, but recognise that it is still early days and risks are high. Weakness in platinum prices is the key source of downside risk, while drilling results and the scoping study could send the share price higher.

Tim Morris is an analyst at wise-owl.com. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

 

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