Palladium is integral to global transportation, energy shift

2019.07.17

Despite reports of its imminent demise, the internal combustion engine-powered vehicle isn’t going away any time soon. 

In the United States, electric vehicles (EVs) only make up about 1% of new vehicles, it’s a little better in Canada, at 8%. Things are moving much faster in Europe and Asia.

Norway is the world leader in terms of EV market penetration. In 2018 one out of every three cars sold was a zero-emission vehicle, states Elektrek. That’s just for electric plug-ins. If you add hybrid plug-ins, the penetration rate climbs to 50%. In other words, half of all new car buyers in 2018 in Norway bought an EV or hybrid. That’s 50 times more EV/hybrid purchases than in the US!

But the really impressive numbers come out of China, which commands half of the global marketshare of EVs. In 2018 the Asian monolith grew its EV market by 83%, selling 1.1 million EVs at 4.2% of country marketshare, twice higher than in 2017, reports InsideEVs. This is greater than the 1 million in global EVs sales in 2017. Chinese citizens are buying more EVs than the whole world combined.

The electrification of the global transportation system is one important way of reducing greenhouse gases that most scientists say is causing global warming. (We think natural climate cycles are playing a major role too)

As the numbers above show, society has made a start. But it’s nowhere close to where we should be. Whatever you believe with regard to global warming there is no arguing that a reduction in our carbon footprint – by the electrification of the global transportation – would benefit us all.

Politicians know this but the pace of change is glacial. The current US government has shown no interest in promoting electric vehicles or forms of energy not powered by fossil fuels. The White House has backed away from EV income tax incentives. Oil interests have coalesced to try and end the federal tax credit for EV purchases. The gutted Environmental Protection Agency has been directed to loosen fuel-economy and emissions requirements for new cars. In February California’s Air Resources Board agreed to pass its own zero-emission rules.

In Canada we have a duplicitous prime minister who on the one hand says he is for environmental protection and tanker bans yet on the other has approved a $4.5-billion oil pipeline paid for by taxpayers, and a $40-billion climate disaster known as LNG Canada – the first of many liquefied natural gas plants planned for “Beautiful British Columbia”, as license plates brag. 

Britain’s Conservative government declared a “climate emergency” but has taken no action to address the issue. Reacting to an “Extinction Rebellion” protest, Conservative MP David Davies said: ‘A rise of less than one degree, partly due to the end of the little ice age, doesn’t mean we should ban cars, flying and everything else which makes the 21st century so great to live in.’

Granted, some progress has been made towards what should be a no-brainer move for governments of all stripes to stamp out fossil-fueled powered vehicles and energy sources, like coal and natural gas, and replace them with EVs, hydro, nuclear, wind and solar power.   

Stuttgart, Paris, Mexico City, Athens and Madrid are all banning diesel fuel by 2030. Norway, the Netherlands, France, Germany, UK, China and India have indicated they will outlaw cars running on fossil fuels.

More could, and should, be done. But this is where we are at. At Ahead of the Herd we don’t advocate going to protests to get things moving in the right direction. We conduct deep research to create and advocate for manageable solutions to the climate crisis, a slow-moving train wreck that will force civilization to adapt to its deteriorating environment in ways never before contemplated. 

Ideally, we could move right away to electric cars, buses and trains, but that is neither practical nor realistic. In a recent article we calculated what “going electric” like Bob Dylan did would cost us in terms of raw materials. The numbers are as mind-blowing as when Dylan strummed the first note of Maggie’s Farm at the Newport Folk Festival in 1965.

At a conservative 40% market penetration of EVs to total vehicles by 2050, we found in the United Kingdom alone, providing 12,520,000 electric vehicles with 20kg of cobalt per EV, we are looking at 250,400 tonnes of cobalt, or nearly twice the world’s current production. 

Globally, 40% electric vehicles gives us 477,760,000 EVs by 2050. 20kg of cobalt per EV requires 9,555,200 tonnes of cobalt, or 68.2X current annual production. 

At 83kg of copper per EV, the electric vehicle market would need 39,654,080 tonnes of copper, or 2.2X 2018 global production. At 63kg of lithium per EV, supplying EVs worldwide in 2050 would require 30,098,880 tonnes of lithium carbonate equivalent (LCE), or 100X current annual production. And at 2kg of rare earth elements per EV, supplying all the EV permanent magnets in 2050 would require 955,520 tonnes of rare earths, or 5.6X current annual production. 

For more read It’s not easy going green

Clearly, we need something to serve as a bridge to widespread electrification, and the answer is, hybrids and palladium. 

Why hybrids? 

We are talking here about hybrid electric vehicles (HEVs) and plug-in hybrid vehicles (PHEVs) versus battery-powered electric vehicles (BHEVs). Not to state the obvious but these terms can be slightly confusing. A BHEV, or just EV, is equipped with rechargeable batteries instead of a gasoline or diesel engine. The battery pack is used to run the electric motor and all the on-board electronics. Only a BHEV is capable of being charged at a Level 3 fast charge rate, which can recharge a battery for up to 90 miles in about 30 minutes. 

A plug-in hybrid’s battery is recharged either by being plugged into an electrical outlet, or “regenerative braking”. The latter charges the battery when the brakes are applied. PHEVs usually go 20 to 50 kilometers before their gasoline engines take over from battery power. The PHEV can be thought of as sitting between a full hybrid (an HEV) and a conventional gas vehicle. Many “EVs” on the market currently are actually PHEVs, including the Chevy Volt, the Hyundai Sonata and the Toyota Prius. 

An HEV is similar to a PHEV but it uses both the gasoline engine and the batteries at any given time while driving. However, it is different in a couple of ways. First, an HEV is not plugged in for recharging, all the power is stored in the battery. Second, an on-board computer decides which propulsion source to use and when, unlike a PHEV which does not have this capability. For example, the battery might kick in when climbing a hill or when merging. The vehicle can be run on electric power only, for short periods with the gas engine turned off, allowing for better fuel economy than a PHEV. 

Air pollution standards tightened  

The “diesel-gate” scandal at Volkswagen has put tailpipe emissions on the radar of policy-makers especially given that the rigging of diesel cars to fraudulently meet emissions came amid reports of the dangers of air pollution to human health. 

A 2017 study in the journal Nature found that emissions from diesel vehicles which exceeded certification limits were associated with about 38,000 premature deaths. The following year, a German court ruled that smog-belching vehicles will be banned from the centers of Stuttgart and Dusseldorf. 

Concerns over air pollution led the EU to set a target of cutting emissions by at least 40% by 2030, from 1990 levels. According to Euractiv, the mayors of 10 European capitals are urging a switch to zero-emissions vehicles within the next 20 years – something the British Columbia government has pledged to happen by 2040 according to a new climate plan. 

The Euro 6 standard currently in force sets a limit of 80mg of nitrogen oxide (NOX) per kilometer. 

The need to comply with stricter European standards spawned an unusual partnership earlier this year. Fresh EU regulations require that new vehicles emit no more than 95g/CO2 per kilometer. That caused a problem for Fiat Chrysler Automobiles (FCA), which doesn’t yet produce any hybrid or electric vehicles. To comply with the rules, and avoid millions of dollars in fines, FCA agreed to pay Tesla, the luxury EV maker, up to $2 billion to pool its fleet sales with Tesla’s, to avoid over two billion euros (US$2.3 billion) in fines, according to Oilprice.com.

The United States under President Obama embarked on a path of restricting auto emissions significantly, but the plans have skidded to a halt under the Trump administration. In February, Global News reported, the administration ended talks with California over its plans to roll back fuel economy rules considered to be too strict. But 17 automakers recently called on Trump officials to compromise on a proposal somewhere in between the Obama-era standards requiring a 5% annual decrease in emissions, and the Trump administration’s proposal to freeze emissions requirements at 2020 level through 2026. 

China, whose major cities are often cloaked in a thick fog of air pollution, has also begun to implement tougher vehicle emissions standards. Xinhua, the state news agency, reported earlier this month that several regions will start rolling out “China VI” standards, after official data showed emissions from 6.2 million vehicles were responsible for 45% of Beijing’s particulate matter in the air. 

The country is targeting a reduction of between 26 and 28% of emissions from 2005 levels by 2030. 

The new rules demand that vehicles emit fewer pollutants such as nitrogen oxides, particular matter and ammonia. They were initially supposed to take effect in July 2020 but have been pushed ahead due to heavy pollution in the Pearl River Delta region, Sichuan province and the city of Chongqing, Xinhua stated.

Survival of the cleanest 

The tighter emissions standards that are being rolled out worldwide in response to worsening air quality, have affected automakers’ selection of vehicles and the components of their engines. 

A recent Reuters article reports that “The auto industry has all but stopped developing next-generation combustion engines as limited resources are directed towards building electric and self-driving cars.” 

However, the news agency quotes analysts saying it won’t be until the middle of the next decade before electric vehicle overtake their gas and diesel-powered predecessors, noting that EVs only accounted for around 1.5% of the 86 million cars sold last year. 

Moreover, car-makers that can offer vehicles that comply with tighter emissions standards will do much better financially than those struggling to do so. In fact, cleaner and greener automakers are likely to be the survivors after a round of consolidations occurs, Reuters quotes Goldman Sachs managing director Axel Hoefer: 

“The profit pool of companies with combustion engine-related technology – once the envy of the industry – is shrinking with the rise of electric vehicles and the digitization of the industry,” he said. “You would expect someone to come in and consolidate to benefit from economies of scale.”

Interestingly, in that way, environmental progress is being made not at the behest of regulation-wielding governments but the industry itself, which is demanding change from within its ranks. Volkswagen for example is one of the largest manufacturers of gas and diesel engines, but it has plans to retool its 16 factories to build 33 EV models. Its rival Ford reportedly said last month it will close two engine factories in Europe, with its final generation of combustion engines rolling off the line in 2026. 

Life still left in ICEs

These developments seem to indicate a shift in the industry that will eventually mark the end of the combustion engine, as EV adoption becomes mainstream. Before we write the epitaph of the ICE, however, we need to appreciate that it’s a long road to 40% market penetration, or even 10%. Consider this: most electric cars as noted above have a hybrid component to them. Only BEVs are pure-electric vehicles with no combustion engine. That makes hybrids a natural bridge between a conventional vehicle and an EV – not a bad thing considering that motorists still have a hard time grappling with the “range anxiety” associated with a pure EV, not to mention the logistics of finding a charging station and the high sticker prices. 

If we are stuck with conventional vehicles for several more years, we are also stuck with catalytic converters. These pollution-control devices employ both platinum and palladium, but more platinum is used in the autocatalysts of diesel engines, and more palladium is found in the catalytic converters of gas-powered vehicles. Autocatalysts are the largest markets for both precious metals.

According to Norilsk Nickel, which controls 40% of the world’s palladium production, palladium demand is intensifying. Bloomberg says a market analyst at the Russian miner is forecasting that combined palladium use in hybrids (HEVs) and plug-in hybrids (PHEVs) next year will be nearly triple that of 2016. JP Morgan & Chase is equally bullish on the precious metal. In a report, the investment bank predicts by 2025, hybrids will represent over 25 million vehicles, close to a quarter of all vehicle sales, compared to just 3% in 2016. 

These numbers appear to jibe with the sentiment in the field. The Reuters article above mentions the CEO of drivetrain supplier Dana saying he believes demand for combustion engines will persist for several years. 

“People are overbaking a little bit on how much the internal combustion engine is just going to go away,” said James Kamsickas. “If anything, I’m a very strong advocate that it’s going to be a world of hybridization for the next 15 years. Last time I checked, that still requires an ICE.”

Why palladium? 

As noted, palladium is an ingredient in catalytic converters for gasoline-powered cars, vans and trucks; platinum is in the catalytic converters of diesel vehicles.

Autocatalyst demand accounts for three-quarters of palladium demand.

Demand for the metallic element has surged since 2016 with the movement away from more polluting diesel-fueled vehicles, aided by “diesel-gate”. The price has more than doubled over the last three years (+124%) and ran up 18% in 2018. That compares to declines in spot gold, platinum and silver last year.

As drivers shift from diesel to gas-powered cars or hybrids, the market for palladium used in gasoline engines has buoyed the price. In 2017 palladium raced past $1,700 an ounce for the first time since 2001.

Despite automobile demand slumping in China last year, palladium finished 2018 at $1,262 an ounce – almost catching gold’s year-end close of $1,282/oz.  At present, the spot price of palladium is $1,566/oz, about $150/oz higher than gold.

As mentioned, the combined palladium use in hybrids (HEVs) and plug-in hybrids (PHEVs) next year will be nearly triple that of 2016.

Not only has demand bounced up, palladium is also facing constricted supply. 2018 was the seventh year in a row that palladium was in deficit because of strong vehicle sales. 

According to a report from Sprott Asset Management, “Supply shortages continue to support palladium’s performance, with strong multi-year growth in palladium demand now straining a fixed supply.” Indeed, there is limited scope for producers to increase supply, in the near term.

South African palladium is a by-product of platinum mining and palladium from Russia is a by-product of nickel. Between them, the two countries control 75% of the palladium market.

Citigroup said in December that production is expected to trail consumption by 545,000 ounces this year. 

Among the factors in favor of palladium are a 3.6% forecasted rise in auto catalyst demand, driven by tighter emissions standards, and increased market share for gasoline vehicles in Europe.

In the near future, palladium is likely to see a major surge in demand due to a widespread recall by Fiat Chrysler. In March FCA issued a voluntary recall of nearly 900,000 gasoline-fueled vehicles, due to defective catalytic converters. The recall is expected to create a need for another 77,000 ounces of palladium, thereby putting upward pressure on prices. 

“The demand could be impactful on this market, and if nothing else could hold these prices at these levels, which we haven’t had ever before,” according to Peter Thomas, senior vice president at Chicago-based metals broker ZanerGroup, quoted in Automotive News. 

Palladium One (TSX-V:PDM, FRA:7N11)

One company that stands to reap the benefits from the transition period, led by hybrids, between conventional and electric vehicles, is Palladium One Mining (TSX-V:PDM). The Vancouver-based junior is exploring for platinum group elements (PGEs) in north-central Finland, and for nickel, copper and PGEs near Marathon, Ontario, on the shores of Lake Superior.

The two projects have languished in recent years but Palladium One plans to raise enough capital to breathe new life into them. Three ways to do that are a board and management change, announced on March 28, through a name change, announced on May 1, and a previously announced share consolidation, whereby the number of outstanding shares were cut in half. A week later PDM completed an oversubscribed private placement, raising $1.352 million, up from the previously planned $640,000.

LK Project

Palladium One is currently focused on its LK (Lantinen Koillissmaa) Project.

The geology dates back to the early Palaeoproterozoic era, ~2.4 billion years ago, during which rift-related igneous activity produced mafic-ultramafic rocks containing palladium-rich copper-nickel-platinum group elements (Cu-Ni-PGE) sulfide minerals, chromium, as well as iron-titanium-vanadium. This rifting event produced a several mafic-ultramafic intrusions throughout central Finland and northwest Russia

Geologists think the deposit is a “basal Cu-Ni-PGE bearing sulphide accumulation within the larger Koillismaa Layered Mafic-Ultramafic Complex”.

Ninety kilometers northwest of the LK Project, another of these Paleoproterozoic intrusions hosts the Suhanko Arctic Platinum Project which has a resource of 5.4 million ounces measured and indicated palladium, plus 4.4Moz inferred with platinum, gold, copper and nickel by-products. 

Nine exploration permit applications at LK feature three prominent mineralized zones: Kaukua, Murtolampi and Haukiaho. Only about four kilometers of the 25 kilometer basal contact covered by the LK project has been drill-tested by LK’s pervious operators. A huge advantage of the LK project is that e the entire basal contact was reconnaissance drill tested by the Finish geological survey with widely spaced short (typically ~ 30 meters depth) drill holes and has demonstrated anomalous Cu-Ni-PGE mineralization along the entire contact.

A 2013 historical resource estimate (not NI 43-101-compliant) came up with 10.2 million tonnes graded 0.73 grams per tonne (g/t) palladium, 0.26 g/t platinum, 0.15% copper, 0.1% nickel and 0.08 g/t gold (cut-off grade 0.1 g/t palladium), plus an inferred resource of 13.2 million tonnes.

A 0.1 g/t Pd cut-off grade seems aggressively low. At AOTH we believe the 0.3 g/t cut-off numbers are more credible and still demonstrate the deposit ‘hangs together.’

Conclusion

The global transportation ecosystem – trains and buses, trucks and cars – will eventually go all-electric, but it probably won’t be in our lifetime. The two biggest challenges are range, and charge periods. Until EVs progress to the point where they can compete with conventional vehicles on both, we are looking at limited EV market penetration. 

We see two markets for EVs during this transition. The first is fully-electrics for urban environments, maybe plug-in hybrids for drivers with longer commutes, and the second is full hybrids for longer journeys and commutes that don’t need to depend on battery-only power or charging infrastructure. 

If the future is EVs, the near future is hybrids. Even a significant penetration of hybrid vehicles into urban markets would be a great start. As drivers get more comfortable with battery power, and technology advances, we see a gradual shift from hybrids and plug-in hybrids to battery EVs. 

With hybrids as the bridge, we also see a path forward to stopping the advance of the global warming shadow. And we see an investment in Palladium One and its flagship LK Project as an excellent way to leverage the attractive fundamentals of palladium right now, as demand for autocatalysts looks set to outstrip mined supply for the foreseeable future, insulating the precious metal’s price as it continues its march towards $1,600/oz.

Palladium One Mining

TSX-V:PDM, FRA:7N11

Cdn$0.085 July 12th

Shares Outstanding 43.7m

Market cap Cdn$3.7m

Palladium One website

*****

Richard (Rick) Mills

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified. Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as

to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Palladium One Mining (TSX.V:PDM), is an advertiser on Richard’s site aheadoftheherd.com. Richard owns shares of PDM