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Wednesday, January 26, 2000

Fuel Cells: A Call for Platinum and Palladium

by Carolyn Pritchard carolyn@smallcapcenter.com

January 17, 2000 The fuel cell revolution is poised to take the transportation business by storm over the next decade or two - but there's an annoying obstacle that could de-rail the train.

Platinum and palladium - the two metals essential in the manufacture of fuel cells - are expensive and in short supply. While a quiet palladium rush is now developing, thanks to a handful of junior mining companies, the worry is it won't produce results quickly enough.

Experts believe Canada has significant geological potential for these metals, but point out that it takes an average of seven years to get from exploration to a producing mine.

Among the small and micro caps now looking at this potential bonanza are North American Palladium Ltd. (TSE: PDL), Avalon Ventures Ltd. (CDNX: V.AVL), Starcore Resources Ltd. (CDNX: V.SOE), Freewest Canada Resources Inc. (MSE: M.FWR), Mustang Minerals Corp. (CDNX: V.MMIN), New Millennium Metals Corp. (CDNX: V.PGM) and Altoro Gold Corp. (CDNX: V.ATG).

Ballard Power Systems (NASDAQ: BLDP) - the acknowledged world leader in fuel cell development, refuses to talk about this issue - even to the point of not disclosing just how much platinum/palladium they'll need for commercial production. Contacted in Vancouver by smallcapcenter.com, Ballard head purchaser Todd Patterson declined comment on any and all questions about palladium and platinum supplies.

A week ago, Ballard unveiled its newest fuel cell, the Mark 900, at the Detroit Auto Show. The company also announced that, pending commitments from automakers, it plans to build a manufacturing plant in the next two years for the Mark 900's production, valued at $350-$400-million. Ballard projects that 250,000 to 300,000 fuel cell units will be produced in the first year alone.

Mining consultant Jim Bond speculates that a 50-kilowatt fuel cell uses somewhere between 1-1 1/2 oz. of palladium and platinum. That means that on the conservative side, if Ballard produces 250,000 units in the first year, it would require 250,000-375,000 oz. of palladium and platinum.

Bond does not foresee the supply and demand of these two metals (part of the Platinum Group of Metals or PGM) evening out in the next 5-10 years. "Environmental concerns - environmental pressures - which translate into government pressures, will continue to increase, causing world supply to decline," says Bond. "But the significant political problems in South Africa and the draining of [PGM] stockpiles in Russia are both having an impact on the world supply of PGM now, and I really think that could worsen. I think there will be a definite shortfall [of platinum and palladium] for the next 5-10 years."

In the meantime, the scarcity of these metals has rendered them two of the most expensive commodities on the market, surpassed only by fellow PGM member rhodium. Last Friday afternoon, platinum was fixed at $429 an ounce and palladium was at $439.

Johnson Matthey, a specialty chemicals company and arguably the world's leading experts on palladium and platinum, published their semi-annual platinum review in November, 1999. In it, they estimated that world supply of platinum in 1999 would fall 340,000 oz to 5.06 million ounces. But they estimated demand would rise 200,000 oz to a new high of 5.59 million oz, rendering a world supply shortage of 530,000 oz.

South Africa and Russia dominate world mined production of PGM. In 1999, South Africa supplied approximately 75% of the world mined production of platinum and 25% of the world mined production of palladium. Russia, conversely, was responsible for 16% of mined platinum and 65% of mined palladium. North American production of the two metals was slight by comparison, just 5% and 8%, respectively.

Bernie Schnieders, regional resident geologist for Ontario's Ministry of Northern Development and Mines in the Thunder Bay (Ontario) South region, said there has been a definite increase in the number of junior companies and prospectors looking for PGM.

"I had some venture-capital types, guys that do financing, call me up a couple of months ago asking for the names of junior mining companies," he said. "They see a long-term play in platinum and palladium."

Schnieders said one reason for the heightened interest is the success of North American Palladium Ltd.'s exploration of its Lac des Iles open pit palladium mine, located approximately 55 miles north of Thunder Bay, Ontario. The company announced Jan. 6 a $126.5-million expansion of the mine. With the announcement, N.A. Palladium reported results of a study showing a new mineable proven and probable reserve of 74.2 million tons of ore with an average grade of 1.64 grams per ton of palladium and 0.18 grams per ton of platinum, as well as gold, copper and nickel resources.

The Lac des Iles mine is Canada's only primary producer of PGM. For the third quarter ended Sept. 30, 1999, N.A. Palladium reported a net of loss of C$3,159,000, or C$0.36 per share, on revenue of C$11,961,000. That compares with net income of C$706,000, or a loss of C$0.05 per share, on revenue of $6,808,000, in the third quarter of 1998.

Schnieders listed a number of junior micro cap companies engaged in PGM exploration. They include Avalon Ventures Ltd., Starcore Resources Ltd., and Freewest Canada Resources Inc.

Bond said he'd heard of interest by companies such as Mustang Minerals Corp., New Millennium Metals Corp. and Altoro Gold Corp.

As long as demand continues to outstrip supply, any companies involved in the exploration and/or production of platinum and palladium will be worth watching.

-- Ted Walker (walker2ted@yahoo.com), January 27, 2000