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PALL > SEC Filings for PALL > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for ETFS PALLADIUM TRUST

Form 10-K for ETFS PALLADIUM TRUST


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the financial statements and notes to the financial statements included with this report. The discussion and analysis that follows may contain statements that relate to future events or future performance. In some cases, such forward-looking statements can be identified by terminology such as "may," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or the negative of these terms or other comparable terminology. Neither the Sponsor, nor any other person assumes responsibility for the accuracy or completeness of forward-looking statements. Neither the Trust nor the Sponsor is under a duty to update any of the forward-looking statements to conform such statements to actual results or to a change in the Sponsor's expectations or predictions.

Introduction.

The ETFS Palladium Trust (the "Trust") is a trust formed under the laws of the State of New York. The Trust does not have any officers, directors, or employees, and is administered by The Bank of New York Mellon (the "Trustee") acting as trustee pursuant to the Depositary Trust Agreement (the "Trust Agreement") between the Trustee and ETF Securities USA LLC, the sponsor of the Trust (the "Sponsor"). The Trust issues shares ("Shares") representing fractional undivided beneficial interests in its net assets. The assets of the Trust consist of palladium bullion held by a custodian as an agent of the Trust and responsible only to the Trustee.

The Trust is a passive investment vehicle and the objective of the Trust is for the value of each Share to approximately reflect, at any given time, the price of the palladium bullion owned by the Trust, less the Trust's liabilities (anticipated to be principally for accrued operating expenses), divided by the number of outstanding Shares. The Trust does not engage in any activities designed to obtain a profit from, or ameliorate losses caused by, changes in the price of palladium.

The Trust issues and redeems Shares only in exchange for palladium, only in aggregations of 50,000 or integral multiples thereof (each, a "Basket"), and only in transactions with registered broker-dealers that have previously entered into an agreement with the Trust governing the terms and conditions of such issuance (such dealers, the "Authorized Participants").

As of the date of this annual report the Authorized Participants that have signed an Authorized Participant Agreement with the Trust are Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., EWT, LLC, Goldman, Sachs & Co., Goldman Sachs Execution & Clearing, L.P., HSBC Securities (USA) Inc., J.P. Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. Incorporated, Newedge USA, LLC, Scotia Capital (USA) Inc., UBS Securities LLC and Virtu Financial BD, LLC.

Shares of the Trust trade on the NYSE Arca under the symbol "PALL."

Investing in the Shares does not insulate the investor from certain risks, including price volatility. The following table illustrates the movement in the price of the Shares and NAV of the Shares against the corresponding palladium price (per 1/10 of an oz. of palladium) since inception:

NAV per Share vs. 1/10th Palladium Fix from Inception to December 31, 2013[[Image Removed: T:\02 Finance\01 Issuers\02 US Trusts\01 Precious Metals Trusts\Accounting\Financial Filings\2013\4 Dec 10-K\4 Palladium\Drafts & Comments\Graph.PNG]]

The divergence of the NAV per Share from the palladium price over time reflects the cumulative effect of the Trust expenses that arise if an investment had been held since inception.


Critical Accounting Policy

The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements relies on estimates and assumption that impact the Trust's financial position and results of operations. These estimates and assumptions affect the Trust's application of accounting policies. Below we describe the valuation of palladium bullion, a critical accounting policy that we believe is important to the understanding of our results of operations and financial position. In addition, please refer to Note 2 to the Financial Statements for further discussion of our accounting policies.

Valuation of Palladium

Palladium is held by the Custodian on behalf of the Trust and is valued, for financial statement purposes, at the lower of cost or market. The cost of palladium is determined according to the average cost method and the market value is based on the London PM Fix used to determine the NAV of the Trust. Realized gains and losses on transfers of palladium to pay the Sponsor's Fee, or palladium distributed for the redemption of Shares, are calculated on a trade date basis using average cost.

The table below summarizes the impact of unrealized gains on the Trust's palladium at December 31, 2013, 2012 and 2011:

                                       December 31, 2013      December 31, 2012     December 31, 2011
(Amounts in 000's of US$)
Investment in palladium - average
cost                                  $          463,598     $          445,038    $          351,083
Unrealized gain on investment in
palladium                                         46,877                 52,982                23,047
Investment in palladium - market
value                                 $          510,475     $          498,020    $          374,130

Inspection of Palladium

Under the Custody Agreements, the Trustee, the Sponsor and the Sponsor's auditors and inspectors may, only up to twice a year, visit the premises of the Custodian or the Zurich Sub-Custodian for the purpose of examining the Trust's palladium and certain related records maintained by the Custodian. Visits by auditors and inspectors to the Zurich Sub-Custodian's facilities will be arranged through the Custodian. Other than with respect to the Zurich Sub-Custodian, the Trustee has no right to visit the premises of any sub-custodian for the purposes of examining the Trust's palladium or any records maintained by the sub-custodian, and no sub-custodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such sub-custodian.

The Sponsor has exercised its right to visit the Custodian, in order to examine the palladium and the records maintained by the Custodian. The inspection held as of December 31, 2013 by Inspectorate International Limited, a leading commodity inspection and testing company, confirmed that the Custodian's records of palladium held in the vault were accurate. The Sponsor has not exercised its right to visit the premises of the Zurich Sub-Custodian for the purpose of examining the Trust's palladium and related records.

Liquidity

The Trust is not aware of any trends, demands, conditions, events or uncertainties that are reasonably likely to result in material changes to its liquidity needs. In exchange for the Sponsor's Fee, the Sponsor has agreed to assume most of the expenses incurred by the Trust. As a result, the only expense of the Trust during the period covered by this report was the Sponsor's Fee. The Trust's only source of liquidity is its transfers and sales of palladium.

The Trustee will, at the direction of the Sponsor or in its own discretion, sell the Trust's palladium as necessary to pay the Trust's expenses not otherwise assumed by the Sponsor. The Trustee will not sell palladium to pay the Sponsor's Fee but will pay the Sponsor's Fee through in-kind transfers of palladium to the Sponsor. At December 31, 2013, 2012 and 2011, the Trust did not have any cash balances.


Review of Financial Results

Financial Highlights







                                     December 31, 2013      December 31, 2012      December 31, 2011
(Amounts in 000's of US$)
Total gain on palladium              $          15,225      $             694      $          87,834
Net gain / (loss) from
operations                           $          11,928      $          (2,250)     $          83,631
Net cash provided by operating
activities                           $               -      $               -      $               -

The year ended December 31, 2013

The net asset value ("NAV") of the Trust is obtained by subtracting the Trust's expenses and liabilities on any day from the value of the palladium owned by the Trust on that day; the NAV per Share is obtained by dividing the NAV of the Trust on a given day by the number of Shares outstanding on that day.

The Trust's NAV increased from $497,765,121 at December 31, 2012 to $510,214,088 at December 31, 2013, a 2.50% increase for the year. The increase in the Trust's NAV resulted primarily from an increase in the price per ounce of palladium, which rose 1.72% from $699.00 at December 31, 2012 to $711.00 at December 31, 2013, and an increase in outstanding Shares, which rose from 7,250,000 Shares at December 31, 2012 to 7,350,000 Shares at December 31, 2013, a result of 2,000,000 Shares (40 Baskets) being created and 1,900,000 Shares (38 Baskets) being redeemed during the year.

NAV per Share increased 1.11% from $68.66 at December 31, 2012 to $69.42 at December 31, 2013. The Trust's NAV per Share rose slightly less than the price per ounce of palladium on a percentage basis due to Sponsor's Fee, which were $3,297,191 for the year, or 0.60% of the Trust's assets on an annualized basis.

The NAV per Share of $75.94 at March 11, 2013 was the highest during the year, compared with a low of $62.97 at June 28, 2013.

Net gain from operations for the year ended December 31, 2013 was $11,927,911, resulting from a net gain of $386,763 on the transfer of palladium to pay expenses and a net gain of $14,838,339 on palladium distributed for the redemption of Shares, offset by Sponsor's Fee of $3,297,191. Other than the Sponsor's Fee, the Trust had no expenses during the year ended December 31, 2013.

The year ended December 31, 2012

The Trust's NAV increased from $373,935,765 at December 31, 2011 to $497,765,121 at December 31, 2012, a 33.12% increase for the year. The increase in the Trust's NAV resulted primarily from an increase in the price per ounce of palladium, which rose 9.91% from $636.00 at December 31, 2011 to $699.00 at December 31, 2012, and an increase in outstanding Shares, which rose from 5,950,000 Shares at December 31, 2011 to 7,250,000 Shares at December 31, 2012, a result of 2,900,000 Shares (58 Baskets) being created and 1,600,000 Shares (32 Baskets) being redeemed during the year.

NAV per Share increased 9.24% from $62.85 at December 31, 2011 to $68.66 at December 31, 2012. The Trust's NAV per Share rose slightly less than the price per ounce of palladium on a percentge basis due to Sponsor's Fee, which were $2,943,626 for the year, or 0.60% of the Trust's assets on an annualized basis.

The NAV per Share of $71.27 at February 29, 2012 was the highest during the year, compared with a low of $55.64 at July 23, 2012.

Net loss from operations for the year ended December 31, 2012 was $2,249,708, resulting from a net gain of $78,123 on the transfer of palladium to pay expenses and a net gain of $615,795 on palladium distributed for the redemption of Shares, offset by Sponsor's Fee of $2,943,626. Other than the Sponsor's Fee, the Trust had no expenses during the year ended December 31, 2012.


The year ended December 31, 2011

The Trust's NAV decreased from $884,637,847 at December 31, 2010 to $373,935,765 at December 31, 2011, a 57.73% decrease for the year. The decrease in the Trust's NAV resulted primarily from a decrease in the price per ounce of palladium, which decreased 19.60% from $791 at December 31, 2010 to $636 at December 31, 2011, and a decrease in outstanding Shares, which fell from 11,250,000 Shares at December 31, 2010 to 5,950,000 Shares at December 31, 2011, a result of 2,100,000 Shares (42 Baskets) being created and 7,400,000 Shares (148 Baskets) being redeemed during the year.

NAV per Share decreased 20.07% from $78.63 at December 31, 2010 to $62.85 at December 31, 2011. The Trust's NAV per Share fell slightly more than the price per ounce of palladium on a percentage basis due to Sponsor's Fee, which were $4,203,724 for the year, or 0.60% of the Trust's assets on an annualized basis.

The NAV per Share of $84.13 at February 18, 2011 was the highest during the year, compared with a low of $54.33 at October 5, 2011.

Net gain from operations for the year ended December 31, 2011 was $83,630,685, resulting from a net gain of $1,001,078 on the transfer of palladium to pay expenses, a net gain of $86,833,331 on palladium distributed for the redemption of Shares offset by Sponsor's Fee of $4,203,724. Other than the Sponsor's Fee, the Trust had no expenses during the year ended December 31, 2011.

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