New GM Shuns Stillwater Palladium

Montana-based Stillwater Mining (SWC-N), the only palladium producer in the United States, is objecting to post-bankruptcy General Motors’ decision to terminate its palladium and rhodium supply contract with the company. Instead, GM is planning to buy its platinum group metals (PGMs) from sources in South Africa and Russia.

Under the bankruptcy code, GM has sold all of its best assets to a new company in a process that allows it to drop any existing contracts. Stillwater says it’s the only major supplier whose products aren’t obsolete to the new GM that has been left out so far.

But GM spokesman Dan Flores says GM intends to become more competitive and to pay back its massive US$50-billion government bailout loan as soon as it can. Flores says the GM-Stillwater agreement had an uncompetitive cost structure and the price floors and volume requirements made it difficult to negotiate a new contract.

“Although we met and discussed with Stillwater over several months, we couldn’t come to an agreement that worked for both parties,” Flores says. “Our main focus is to repay our loans as quickly as we can to prove to the U. S. taxpayers that their investment in us is a worthwhile investment and the way to do that is to run our business as competitively as possible.”

However, John Beaudry, public affairs manager for Stillwater, says that because the new GM is 61%- owned by the U. S. government, (as well as 17.5% by the United Auto Workers union and 11.7% by the Canadian government) the company should be obligated to honour its existing contracts with American suppliers.

“Are we investing federal dollars to the tune of US$50 billion for the larger public good and economic recovery, or are we doing it for the benefit of one company? That seems to be the debate,” Beaudry says.

Stillwater’s objection, filed with the U. S. Bankruptcy Court, Southern District of New York, claims GM hasn’t shown how rejecting the Stillwater contract will save it money. On top of that, Stillwater says it was told that pricing was not the reason behind the cancelled supply contract — “the GM representative cited the reduced manufacturing capacity as a reason for the company’s decision to consolidate its suppliers of (platinum group) metals,” the objection says. Stillwater says hundreds of jobs could be at stake as a result.

Stillwater admits, though, that business is not sustainable without the pricing floors in the long-term auto sales contracts.

PGM prices have plunged significantly across the board and palladium has been no exception. Between March and December 2008, palladium dropped from US$582 per oz. to a low of US$162 per oz. before recovering to US$250 per oz. at presstime.

The price drop forced North American Palladium (PDL-T, PAL-X) to shut down its platinum and palladium mine near Thunder Bay, Ont. To be profitable, that mine requires a palladium price of at least US$300 per oz.

Stillwater says losing the GM contract will mean losing about US$5-10 million in annual revenue. The company’s only other supply contract is with Ford (F-N), which Beaudry says is much larger. In fact, the company reported 2008 mining revenue of US$356 million, while revenue for PGM recycling was about US$475 million. Overall, Stillwater reported a net loss of US$113 million.

Beaudry says Stillwater is entitled to continue its existing contract with GM or at least negotiate a new one.

“It’s not a free-market situation when you’ve got federal money going into a company to the tune of billions of dollars,” Beaudry says. “And then to take the tax dollars and turn around and buy your materials from South Africa or Russia when there is a supplier in North America . . . that’s our issue — taking tax dollars and working against a taxpayer.”

Stillwater has got its local government representatives fighting on its behalf. Montana Governor Brian Schweitzer has sent a letter to the co-chairs of the Auto Task Force, Department of Treasury, protesting GM’s move.

“Not only will the decision be harmful to a good Montana business, but it flies in the face of national efforts for economic recovery,” the letter says.

Stillwater employs about 1,300 people at its two mines, a smelter refinery and administrative offices, down from 1,700 as a result of the recession.