With palladium continuing to outperform many other commodities and showing positive supply-demand fundamentals,
As the owner and operator of its namesake underground mine in Nye, Mont., Stillwater is North America’s only producer of primary palladium-platinum. Platinum group metals (PGMs) are used in diverse industrial applications and in the jewelry industry.
The largest and fastest-growing user of palladium is the automotive sector, which uses the metal to produce catalytic converters, which, in turn, are used to reduce emissions.
Palladium is also used extensively in the production of electronic components for personal computers, cellular telephones, fax machines and other devices, as well as dental applications.
Platinum, on the other hand, is used extensively in jewelry, while industrially, it is employed in the production of data storage disks, glass, paints, nitric acid, anti-cancer drugs, fiber-optic cables, fertilizers, unleaded and high octane gasoline, and fuel cells.
In 1998, Stillwater produced 444,000 oz. combined palladium-platinum at a cash cost of US$151 per oz., or a total cost of US$178 per oz., compared with 355,000 oz. in 1997 at US$174 per oz., or a total cost of US$207 per oz.
At the end of 1998, proven and probable reserves stood at 37.1 million tons grading 0.71 oz. palladium and platinum, equivalent to 26.3 million contained ounces. (The ore contains about 3.2 times as much palladium as platinum.) Mill recovery rates in 1998 improved to 91%, compared with 89% in 1997.
The company reported net earnings of US$13.4 million (or US43 cents per share) in 1998, versus a loss of US$5.4 million (US18 cents per share) a year earlier. Sales revenue increased to US$106.7 million in 1998, compared with US$76.9 million in 1997. Higher revenues and income for 1998 are attributed to significantly higher palladium prices, as well as to lower operating costs and increased production.
Operations generated cash flow of US$31.4 million in 1998, versus US$1.3 million used in operations in 1997.
The improvement in profitability was achieved despite the adverse effect of a hedging program, entered into in 1997, that resulted in the realization of below-market prices for palladium. Stillwater realized a price of US$202 per oz. in 1998, compared with the average market price of US$286.
The restrictive hedging position was closed out at the end of 1998, allowing the company to realize the full benefit of higher palladium prices.
In the fourth quarter of 1998, Stillwater announced it was embarking on a US$385-million expansion program designed to increase yearly PGM production to 1.2 million oz. from its then-current level of about 450,000 oz., and that this would be achieved by the end of 2001. The plan calls for: expansion of the existing Stillwater mine to 3,000 from 2,000 tons of ore per day at a cost of US$75 million; construction of a second mine at the East Boulder project, 13 miles west of Stillwater, at an estimated cost of US$270 million; and the US$40-million expansion of the existing smelter and base metals refinery in Columbus, Mont.
Capital expenditures are being spread over a four-year period that began last year. The largest portion will be spent in the year 2000.
In a February research report, Zerb recommended Stillwater as a buy at US$22.37 per share, with a 6-to-12-month target of US$33. “Stillwater’s stock price has surpassed our two previous target prices since we originally recommended [the stock] at a post split price of US$14 in February 1998.
“We are expecting a very positive Q1 based on strong palladium and platinum prices in which Stillwater will realize market prices for the first time in about two years. We expect strong production growth over the next four years, and for 2000 we are forecasting doubling of 1998 revenues that will generate strong cash flow and earnings.”
In March, the company arranged a US$125-million term loan facility and a US$50-million revolving credit facility with a syndicate of banks led by The Bank of Nova Scotia. Proceeds from the term loan will be used to fund a portion of the company’s expansion plan.
In early April, Stillwater announced it was calling for redemption all of its outstanding 7% convertible notes due in 2003. The outstanding notes totalled US$51.4 million of debt and, on conversion, increased the number of shares outstanding for Stillwater by about 2.9 million, to 37.4 million shares outstanding, or 38.5 million fully diluted.
In mid-April, prior to the release of first-quarter results, Zerb downgraded his rating for Stillwater to long-term accumulate and lowered his 6-to-12-month target to US$31.25 following a 25% appreciation in the share price to the US$28 level.
“We have readjusted our target based on changes in shares outstanding and renewed forecasts,” he wrote.
Stillwater posted a record profit of US$10.6 million (US31 cents per share) in the first quarter of 1999, compared to US$984,000 (US3 cents per share) for the same period in 1998. Sales revenue was up 77% at US$38 million, compared to US$21.5 million in the 1998 quarter. Cash flow more than doubled at US$9.6 million, compared to US$4.6 million in the first three months of 1998.
“This is the first quarter during the last two years that we have been able to realize market prices for our metals, so the true earning power of the company is becoming apparent,” stated Stillwater Chairman Bill Nettles.
Stillwater realized an average palladium and platinum price of US$365 per oz., US$142 per oz. higher than the first quarter of 1998. The average market price of the metals was US$347 per oz. for the quarter, compared to US$276 per oz. in the 1998 quarter.
The first quarter results were constrained by weaker production results at the Stillwater mine.
Palladium and platinum production totalled 108,000 oz. for the recent 3-month period, compared with 101,000 oz. in 1998. Cash costs, at US$175 per oz., were 17% higher than in the first quarter of 1998. Total costs were US$210 per oz., compared with US$196 per oz. for the same period in 1998.
Production was affected by a lower mill head grade averaging 0.65 oz. PGM per ton, which was 5% lower than the head grade reported for the 1998 first quarter. Ore is mined from the J-M Reef, an extensive mineralized zone containing PGMs and which has been traced over a strike length of 28 miles. The J-M Reef is variable in both width and grade. It can be narrower than 1 ft. in places, and as wide as 70 ft., whereas the grade can fluctuate as much as 10% from the average of 0.71 oz. per ton. The company expects the average grade for the year to be about 0.7 oz.
“Variations within the ore body will, on occasion, create below-average mill feed. However, we view these periods as short-term, and the history of mining at Stillwater backs this conclusion,” states Zerb.
Higher cash costs were the results of the lower grade, as well as the costs associated with the projected ramp-up in production. Stillwater says it remains on track to produce between 525,000 and 575,000 oz. PGMs at a cash production cost of US$140-160 per oz. Zerb expects ongoing cash costs will be at the higher end of this range.
Capital expenditures associated with the company’s expansion program totalled US$40.2 million during the quarter. Working capital at the end of the first three months was US$35.4 million, down from US$58.8 million at the end of 1998.
Zerb says Stillwater’s first-quarter results were exceptional despite weak production results. “PGM prices, particularly palladium, continue to be strong. Although no formal contracts have been finalized it is believed that Russian palladium is reaching the market, and despite this, high demand for the metal continues. Should palladium prices remain at the current level for the rest of 1999, Stillwater could earn over US$60 million (US$1.55-1.65 per share).”
At presstime, Stillwater was trading at the US$32 level.
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