CIBC World Markets upgraded North American Palladium Citing an improved balanced sheet and a serious supply disruption in platinum group metals production because of South African labour unrest, CIBC World Markets upgraded North American Palladium to "sector performer" from "sector underperformer."
It also raised its price target to 60 cents (Canadian) from 50 cents.
North American Palladium's main asset is the Lac des Iles mine in Ontario. While far removed from South Africa, where most palladium is produced and subject to chronic labour issues, the company has consistently failed to deliver a mine that could generate positive free cash flows. The company's balance sheet also become increasingly stretched.
But a recent financing has removed the near-term funding squeeze and bought the company more time to put the mine on track, said CIBC analyst Leon Esterhuizen.
Meanwhile, a supply squeeze is intensifying in the sector. A three-month strike in South Africa affected over 60 per cent of the country's production should cut about 800,000 ounces of platinum and 400,000 ounces of palladium from the market. That's about 10 per cent of total annual platinum supply - including scrap and recycling - and 5 per cent of palladium supply, enough to tighten any excess inventories, CIBC said.
There has been some recent pressure on platinum group metal prices, possibly beause of the "buy the expectation and sell the fact" action as the strike actions continues.
"Still, we don’t think the time to be selling is now. Simply put, although it is week 11 of the strike, actual reductionsin metal supply to the market are only just starting to take effect," Mr. Esterhuizen said.
"And we don’t believe the rally is done yet. Indeed, we believe it could have quite some way to go. The metal lost to supply represents a very quick way to clear stocks that have been damagingprice appreciation,while some interestingnew ETF listings could upset demand by adding substantially more to an already supportive demand picture.
Mr. Esterhuizen also thinks the amount of metal lost to the strike activity could turn out to be significantly more than anticipated, given its prolonged nature and the difficulties that will be encountered upon restarting production - especially given exceptionally low morale among the workforce.