The expansion program that was supposed to boost the fortunes of
Stillwater, which owns and operates its namesake palladium-platinum mine in southwestern Montana, posted disappointing results and high costs for its latest quarter, ended June 30. This, combined with the delays to the expansion program, has made it difficult for the company to benefit from strong prices for platinum group metals (PGMs).
Roger Chaplin of Canaccord Capital speculates that strong interest in PGMs might prompt other companies to view Stillwater as a takeover target.
“This would certainly be the case if other companies believe that they could run the operation in a more efficient manner,” he notes in a research report. “Possible bidders may include the other PGM producers, Impala and Amplats — plus Gold Fields/Franco-Nevada — which have stated that each would like to get into platinum, and already have a stake in Stillwater.”
Stillwater produced 98,000 oz. combined palladium-platinum in the latest quarter, about the same as a year ago, but below the 112,000 oz. produced in the first quarter of 2000. Average cash costs climbed to US$258 per oz., up from US$197 a year ago.
“This production level is in line with the warning given by the company at the end of June, but it is still a disappointment,” Chaplin notes.
Despite the lower-than-expected production numbers, Stillwater posted positive earnings of US$12.2 million for the quarter, which brings first-half earnings to US$32.6 million. “This solid bottom line was the result of much higher prices for both palladium and platinum,” explains Chaplin.
The average price received was US$495 per oz., up 44% from a year ago, though significantly lower than the average spot price of US$583 per oz. in the past quarter. As Chaplin notes in his report, the lower received price is due to long-term supply contracts Stillwater has in place. While these give some protection on the downside, it has been at the cost of potential upside.
The contracts cover 90-100% of palladium production until 2003 and guarantee a floor price of US$225 per oz., though 30% of that has a ceiling price of US$400 per oz. For platinum, the contracts cover just 20% of production and give a minimum price of US$350 per oz., with 20% of sales limited to a maximum price of US$425 per oz.
Stillwater expects to produce 106,000 oz. platinum and 357,000 oz. palladium this year.
On the operating front, Stillwater is struggling to increase the tonnage mined and moved to the mill. While development was up 117% in the latest quarter from a year ago and the amount of broken ore was up 34%, the volume of ore mined was lower — 147,000 tons, compared with 167,000 tons a year ago.
“The lower tonnage of genuine ore was made up by milling some ‘sub-grade’ material, which ran just 0.3 oz., rather than the normal grade of around 0.7 oz.,” Chaplin writes. “This was probably economic when full-grade ore was not available, but this is not what we want to see in the long term.”
The weak performance was attributed to infrastructure issues, such as ore passes being too small (they’re now being upgraded), material-handling constraints (more equipment has been ordered and manpower hired), service interruptions and mine-dewatering. Chaplin also cites weakness in planning and project management, which he says is being addressed by management changes.
“Most of the weaknesses should have been foreseen . . . and planned for ahead of the mine expansion,” he adds. “It is to be hoped that this [new] team will now be able to come to grips with planning/development issues and get the expansion program back on track.”
On a more positive note, progress is being made at the nearby East Boulder development project, where two boring machines in use. On surface, the main buildings are nearing completion and the concentrator is almost 80% complete. Limited production should begin in mid-2001, using development ore. Stopes will be ready by the end of 2001, and production is expected to reach its target of 2,000 tons per day between 2002 and 2003.
“Despite the continued disappointments with Stillwater Mining, we look for a better performance in the second half of the year, and into 2001,” Chaplin concludes, “and we continue to recommend the shares as a buy.”
The company has 38.5 million shares outstanding and trades at about US$25.13 within a 52-week trading range of US$50.81-19.34.
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