Stillwater faces red ink; awaits regulatory nod

Vancouver – Timing is crucial in the metals market, a lesson not lost on Stillwater Mining (SWC-N). Less than 2 years ago with the price of palladium soaring, an aggressive expansion program at its two Montana-based mines appeared prudent. However, palladium prices soon tumbled and operating costs rose pushing the embattled company into the arms of Russia’s Norilsk Nickel.

Stillwater, which is waiting for U.S. regulatory approval of its agreement to sell a 51% stake to Norilsk, tallied a net loss of US$1.8 million, or US$0.04 per shares in the three months ended March 31, compared to a profit of US$16.6 million, or US$0.40 per share in the corresponding period last year. Revenue plunged 17.6% to $62.6 million.

In the first quarter, the company received an average of US$363 per oz for palladium, and US$580 per oz for platinum, compared to US$455 and US$493, respectively, in the first quarter of 2002. The combined average realized price per oz sold came in at US$411, a US$70 per oz premium over the combined average market price of US$341due to long-term sales contracts.

“As a company we met our overall plan for the first quarter,” says Stillwater’s Chief Executive Officer, Francis McAllister, “the Stillwater mine achieved its production target, both mines met their development targets and were better than plan on a cost per ounce basis.”

For 2002, net income rang in at US$32 million, down from about US$66 million in 2001. Although production of palladium and platinum came in at 617,000 oz, up substantially from 504,000 oz in 2001, falling palladium prices and rising operational costs hit the company. Palladium has dropped from a high of US$1,090 per oz in Jan., 2001 to below US$200 per oz since the end of March.

By the middle of 2002, Stillwater required a cash infusion. Norilsk, the World’s largest palladium producer, stepped up to the plate back in Nov. by offering to take a 51% stake in Stillwater for US$100 million in cash and 877,000 oz of palladium that at the time were worth US$241 million (TNM Dec. 2-8,2002). Since then, palladium prices have fallen substantially, cutting the value of the Russian palladium to US$189 million as of the end of March.

Among other hurdles, the Norilsk deal must win approval by two federal agencies, including U.S. antitrust regulators, as well as the shareholders. In Jan., U.S. regulators asked the company for more information on the proposed sale. Stillwater expects the deal to close by the end of the second quarter, while Norilsk is slightly less optimistic, putting the deal to bed by the third quarter. Following the deal, Stillwater will have 89 million shares outstanding, or just over twice as many as it now does. Noril’sk will own between 51% and 56% of them.

Stillwater plans to hold a special stockholders meeting about the deal on June 16, subject to completion of ths US Security and Exchange commission review of the proxy statement.

The only other offer on interest came from a major international investment bank, which proposed a US$100 million rights offering. The idea was to issue six new shares for every one in issue at a price of US$0.30 per share. The bank suggested an offer of up to 262.8 million shares for US$78.8 million, while it would buy 70.5 million shares of stock to raise an additional US$20.2 million. The bank would fund any shortfalls in order to achieve the targeted US$100 million, including potentially purchasing a new series of redeemable preferred shares in the event that the rights offering did not reach target.

In terms of Stillwater’s credit agreement, the banks would immediately be entitled to 60% of the $100 million, leaving the company short of its projected cash requirements. In terms of the Norilsk deal, Stillwater must surrender 50% of the total proceeds, which has dropped to US$231 million at present palladium prices, leaving it with some US$115 million to fund its operations. The bank’s proposal was received by Stillwater on April 8 and rejected almost immediately.

The Columbus, Montana-based company states that its funding is adequate to meet its liquidity needs through 2003, “barring unexpected or extraordinary events.”

“We are covered through 2010 for the majority of our production,” says Stillwater’s Vice President, Terry Ackerman. “Our focus now is on getting the deal approved.”

As of March 31, the company’s cash position rose US$27.3 million, up from US$25.9 million at the end of 2002.

Should the Russian deal not materialize by Jan. 2, 2004, Stillwater will be in violation of its credit agreement, leading to possible bankruptcy. The company managed to stave off creditors earlier this year after receiving an amendment, the fifth, to its credit agreement (TNM Feb. 24-March 2, 2003). During the first quarter, the company made US$5.4 million in principal debt payments and US$1.5 million in amendment fees were paid on its credit facility. Currently, some US$181.7 million is outstanding under its term loan facilities and US$7.5 million is outstanding as letters of credit under the revolving credit facility.

Stillwater operates two mines in Montana, East Boulder and Stillwater. Over the past six months its main operation has shifted from a production-driven to a cost-driven emphasis. The Stillwater mine, which sits on the eastern end of the J-M reef, contributed 492,000 oz. of combined palladium-platinum in 2002, — noticeably less than the 504,000 oz produced a year earlier, reflecting lower head grades, labour unrest and inadequate infrastructure.

Back in 2001, the Stillwater operation was expanded in order to produce 2,500 tons per day, though a further plan to expand to 3,000 had been shelved. At the time, the operation was expected to produce 525,000-575,000 oz. platinum group metals per year with total cash costs ringing in at US$230 per oz.

“The plan reflects our need to address the reality of a lower cash-flow environment while maintaining the flexibility to revisit this course if prices improve,” McAllister said. “It makes no sense for the company to increase output if the demand for our metal is down in the short term. We have a valuable resource and will not mine it unless it generates an appropriate margin.”

In the first quarter of 2003, the operation produced 84,000 oz. of palladium and 26,000 oz of platinum for 110,000 combined oz., down from the 143,000 oz recorded in the first quarter of 2002. Driving the decline was a slow down in production to 206,000 tons from 260,000 tons last year, as well as a drop in the combined mill head grade to 0.59 oz per ton, from 0.62 oz per ton.

“The Stillwater Mine mined at a rate of approximately 2,030 tons of ore per day for the first quarter,” adds McAllister. “Cash costs before royalties and taxes decreased 16% from US$271 per ounce in 2002’s fourth quarter to US$228 per ounce in this year’s first quarter.”

Lower production also took its toll of cash costs, which before royalties and taxes, hit US$228 per oz, compared to US$217 per oz in the first quarter of 2002. Total cash costs rang in at US$252, compared to US$243 last year.

Going forward, the company expects to produce 450,000 combined oz in 2003 with cash operating costs averaging US$241 per oz.

At East Boulder, which sits on the western end of the reef, some 125,000 oz of combined platinum-palladium were produced during the year. During the first quarter of 2003, the 1,190 ton per day operation produced 28,000 oz of palladium and 8,000 oz of platinum for 36,000 oz of combined palladium and platinum, compared to 23,000 oz the first quarter of 2002. The 57% increase in production is a result of the mine approaching full productive capacity of 1,250 tons per day. A total of 104,000 tons were milled with a combined average grade of 0.39 ounce per ton, up 46% from the comparable quarter last year.

Cash operating costs, before royalties and taxes came in at US$329 per oz, compared with US$382 per ounce for the same period last year. Total cash costs for the first quarter decreased 12% to US$372 per oz, compared to US$422 per oz last year. For the year, the company
expects production to hit 165,000 combined oz. with cash operating costs before royalties and taxes averaging US$300 per oz.

“Currently, East Boulder’s overall higher costs are a contributing factor to the company’s higher consolidated costs,” adds McAllister, ” we expect these costs to come down as production increases at East Boulder.”