In the first nine months of 2011, Stillwater produced a total of 403,800 ounces of PGMs. That level of output was an increase of nearly 11 percent from the same period in 2010, with production exceeding forecasts in each quarter of the year. All told, the firm is likely to produce around 515,000 ounces in 2011, with more than three-quarters of that output in the form of palladium.

In the coming years, Stillwater’s series of new mine projects and expansions should spur production. The firm is opening two new areas for mining adjacent to its existing operations: the Graham Creek project near the East Boulder Mine and Blitz near the Stillwater mining operation. The first of these projects is expected to cost just $8 million to develop and add an additional 6 million tons of resource potential at an ore grade of around 0.40 ounces per ton. The Blitz project is more expensive, with an estimated cost of $180 million over a six-year period. But it could yield another 9 tons of resources at an ore quality of 0.7 ounces per ton. These are relatively attractive low-cost extension projects.

The firm’s most exciting near-term expansion is the Marathon PGM-Platinum project located in northwestern Ontario. The project could cost as much as $650 million to bring into production, but early estimates are that it could yield 200,000 ounces of PGMs per year along with 37 million tons of associated copper. That would represent a nearly 40 percent increase to Stillwater’s current production rate that could be onstream as early as 2014.

In a move that surprised many investors, Stillwater acquired junior Canadian miner Peregrine Metals on Oct. 4, 2011, for $165.7 million in cash and 12 million shares of stock. Peregrine was an unusual acquisition for Stillwater because its main project is the Altar copper and gold mine in Argentina; this represents a departure from Stillwater’s past as a PGM pure-play. The company will likely announce the results of its preliminary economic analysis of the mine early this year and, if that analysis looks solid, this could easily be a $2 billion to $3 billion project, a big deal for a small firm like Stillwater.

It’s tough to know how to value Altar until we receive more detailed information about the quality of the resource. However, the ease in credit conditions over the past few months should enable Stillwater to issue bonds to finance the project; the company was forced to pull a bond offering last year due to weakening credit conditions.

But our main thesis for buying the stock remains its exposure to palladium, not the Altar development deal. Despite a sharp fourth-quarter rally, Stillwater’s shares were still down 50 percent for the year. The stock suffered a decline of such magnitude due to concern about the state of the global economy and its impact on automobile sales–nearly 60 percent of palladium is used as an autocatalyst in car and truck engines. That connection to one of the world’s most cyclical industries makes palladium-focused miners a cyclical group.

But concerns about demand are already abating. Stronger-than-expected economic data out of the US suggest the economy picked up nicely in the final quarter of the year. That lowers the odds of recession. Meanwhile, the average age of a car in the US is nearly 11 years, an all-time record; America’s aging passenger car fleet will need to be replaced in the coming years.

In China, growth will continue to slow, but several indicators point to stabilization; meanwhile, falling inflation has allowed Chinese authorities to begin easing monetary policy to spur growth. In short: 2012 is expected to be the third year in a row of record global automobile sales, a big positive for palladium prices.

Meanwhile, supplies of the metal are expected to drop in 2012 for the first time in four years. Russia is the world’s largest producer of palladium and built up an enormous state stockpile during a production glut in the 1970s and 1980s. Over the past 10 years, the nation has sold around 1 million ounces per year from this stockpile. While it’s difficult to assess the exact size of the remaining stockpile, reports are that it’s rapidly depleting, and Russia appears to have been gradually reducing its sales over the past few years. Current consensus projections show Russian sales of 150,000 ounces in 2012 and 2013 followed by no new sales thereafter.

Mine supply also appears to face challenges. South Africa and Russia account for 88 percent of global mine supply, and producers have to dig deeper shafts to access resources, inflating mining costs. Additionally, wages, energy and raw materials costs are on the rise; at its recent lows, the cost of palladium wasn’t high enough to make mining economic.

The bottom line: Over the next two to three years, the palladium market should see demand outpace supply, which will push prices higher. That bodes well for Stillwater Mining Co and the stock remains a buy under 24.50.