Operational setbacks and a precipitous drop in palladium prices have prompted cash-strapped
Stillwater, the only primary producer of platinum group metals (PGMs) in the U.S., has offered the Russian behemoth 45.5 million treasury shares at US$7.50 apiece. Noril’sk also must make a cash-tender offer for another 4.35 million shares at the same price if Stillwater trades below that level for 15 days after the deal closes.
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.
Noril’sk wants to keep Stillwater’s listing, though it could take the company private. A creeping takeover would require the approval of two of the three independent public directors who are slated for the proposed nine-member board of directors.
“First and foremost, this deal will provide us with a solid distribution platform for our PGMs in the United States,” says Noril’sk Deputy Chairman Leonid Rozheckin. “Second, this transaction allows Noril’sk Nickel to substantially remove the overhang in palladium that the company has accumulated [during the year].”
Rozheckin went on to count stability and reliability in the U.S. palladium market as other favourable factors. By Noril’sk’s estimates, the country accounts for about 47% of world demand for autocatalysts alone.
“As a consequence, the marketing arrangement we are putting in place with Stillwater will be exceptionally valuable to us as a company and to our and Stillwater’s customers,” he notes. “Finally, this deal will, to some extent, diversify the mineral-resource base of Noril’sk Nickel.”
Noril’sk operates solely in Russia and is now the second domestic company to propose a venture outside the country’s borders. It trades on the Russian Stock Exchange and over the counter on the New York, London and Berlin bourses.
To be sure, Noril’sk makes a formidable partner, being the world’s largest producer not only of palladium but also of nickel. In 2001, the miner generated US$4.4 billion in revenue from production of 223,000 tonnes nickel, 474,000 tonnes copper, 4.6 tonnes cobalt and an unspecified but considerable volume of precious metals.
As part of the deal, Noril’sk will deliver to Stillwater 876,000 oz. palladium, worth about US$241 million or an equivalent amount in credit. The metal must be placed in a London warehouse before any proxy statements can be mailed and may be followed by as much as 1 million oz. more each year for resale in the Western Hemisphere. Stillwater will literally become the North American trading house of Noril’sk.
Reaction here at home has been swift and clear: by presstime, Stillwater shares had plummeted US$1.49, or 20%, to settle at US$5.99. The loss came on heavy volumes and puts the company’s year-to-date market devaluation at US$13.21 per share.
During a conference call, analysts expressed their dismay by questioning the deal’s value to existing shareholders. One even suggested the terms make Stillwater look as if it was facing bankruptcy.
“That’s the only reason I could consider selling at so much majority at under-book,” says Douglas Donald of State Street Research.
Premium
On Sept. 30, Stillwater had a book value of US$560 million, so Noril’sk is paying a premium of US$55 million for its 51% interest. The premium is halved if the remaining shares are acquired.
Chief Financial Officer James Sabala denied the company was facing an impairment charge, noting that it exceeded the minimum palladium price required for the third quarter. Stillwater has to predict realized prices every quarter for the next 25 years, using a trailing 12-quarter statistical analysis and the impact of marketing contracts.
Chairman Frank McAllister echoed those sentiments: “We were not in peril, but at the same time, you have to look forward . . . and with prices where they are, our cost structure where it is, and our financial covenants where they are, you have to understand what can happen to you in the future if you don’t act in some proactive way to take shareholders out of harm’s way.”
Still, Stillwater recently renegotiated its US$250-million credit facility for the second time in a year. The revision knocked 10,000 oz. off its required production quota for the third, current and following two quarters, but at the price of a cash penalty and higher interest payments.
Looming over Stillwater’s head has been the downturn in spot palladium from more than US$1,000 per oz. in early 2001 to US$266 on the morning of Nov. 27. Equally taxing has been a slew of operational problems at the Stillwater mine and its smaller twin, East Boulder, which began commercial production earlier this year.
‘Cost-efficient’
“With the overhang of our financial structure, we’ve sometimes made bad decisions and chased ounces at the expense of getting a hold of our cost-structure and mining the orebody in a cost-efficient way,” says director Stephen Kearney. “I think that’s what this opportunity really gives us at the end of the day.”
Kearney was hired to advise management because of his former experience running
However, Kearney’s task has proved more formidable than expected, given the mines’ production of 470,000 combined ounces palladium and platinum in the first nine months of this year. Stillwater had expected 740,000 oz. in all of 2002, and McAllister said production in October came in below plan.
The shortfall combined with lower prices to halve net earnings in the first nine months of 2002, compared with the corresponding period last year, despite the sale of 27% more ounces. Lower-than-expected head grades are partly to blame.
On the question of timing, McAllister says the company notified shareholders a year ago of its intent to seek strategic alternatives as a means to produce at promised levels. Hence, the Noril’sk deal does not reflect a “rush to judgment.”
“Will we be able ever to produce at those [levels]?” asks McAllister. “We are not certain, but obviously East Boulder was brought to a production level at which, from the standpoint of the long-term nature of the company, it should be producing at one-hundred percent of what we had planned.”
He adds: “These opportunities to have strategic liaisons with other companies don’t necessarily come at your own beck-and-call. Quite frankly, yes, [Noril’sk] will own fifty-one per cent of the company, but, indeed, they are putting in valuable assets and strengths that will allow us to move forward both to reduce costs and increase production, as well as add in the profitability of the marketing contracts.”
Current management will remain in place, and the mines will continue to operate independently of Noril’sk. A portion of the proceeds may be used to complete construction at East Boulder, that is, double its capacity to the originally planned rate of 2,000 tons per day.
Stillwater expects the deal to close in mid-2003, assuming it passes the customary hurdles. If recent market activity is any indication, the highest hurdle may be its own shareholders.
Stillwater can entertain alternative offers from third parties but must provide Noril’sk with written notice of the bid’s terms before making any public recommendations. Otherwise, its support of Noril’sk remains firm.
A US$12.5-million breakup fee is payable.
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