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"A looming supply shortage stands to push palladium prices sharply higher over the next couple years, and North American Palladium (PAL) is sitting on one of the world's biggest deposits," notes Nathan Slaughter.
The editor of Street Authority Market Advisor explains, "The company has several promising gold mines under development that could soon produce over 80,000 ounces annually.
"Believe it or not, there are only two mines on the planet that yield palladium first and foremost -- it's a by-product everywhere else. And one of those mines belongs to North American Palladium.
"The Lac des Iles (LDI) site in Ontario, Canada, is a geological treasure trove. The mine spit out 95,000 ounces of palladium last year. And expansion projects underway will soon have that total rising swiftly.
"Production rates are forecast to climb 75% this year to 165,000 ounces. From there, they will ratchet up to 190,000 ounces in 2012, 200,000 in 2013, 220,000 in 2014, and 250,000+ thereafter.
"That aggressive growth curve can send earnings soaring, even if prices don't move. Ordinarily, such an increase might be accompanied by a sharp rise in costs.
"But that's not the case here. In fact, the transition from ramp mining to shaft mining is expected to lower extraction costs from $283 per ounce today to $150 per ounce.
"I don't need to explain what the combination of triple-digit production growth, falling costs and rising palladium prices can do to cash flows -- and share prices.
"Better still, these projections don't include three new zones (dubbed Cowboy, Outlaw, and Sheriff) that have been discovered over the last couple years.
"And there's icing on the cake -- solid gold icing. In May 2009, the company acquired the Sleeping Giant gold mine in Quebec, a proven performer that has yielded over one million ounces of gold over the past two decades.
"But NAP is confident it can squeeze out much more. Management has begun drilling 600 feet deeper to access three new mining zones.
"Once it hits pay dirt, gold production is projected to double from 17,000 ounces last year to 30,000 ounces this year -- and on up to 50,000 ounces next year.
"There's more in the pipeline, including Vezza (which has the potential to produce 39,000 ounces of gold annually), and Discovery (which could add 44,000 ounces per year).
"As early as next year, the company could already be producing well over 80,000 ounces of gold -- equivalent to $1.1 billion in sales at today's prices. Keep in mind, the entire company only has a market cap of $1 billion.
"North American Palladium has been spending heavily to boost production, sacrificing profits today for a rich payoff tomorrow.
"The shrewd move into gold will help diversify the income stream and should be a growth driver. But my real interest in NAP is the Lac Des Isles mine, which will almost print money if palladium prices revisit their former highs.
"Long-term, North American Palladium could ultimately provide triple-digit returns."
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