Stillwater keeps its PGM costs down

Stillwater Mining (TSX: SWC.U; NYSE: SWC) has gone back to the basics and is refocused on its platinum group metals (PGM) assets in Montana, under the direction of its relatively new board, with noticeably good results.

“We had a little bit of a year of change last year, so this year going forward we are focused on profitable PGM businesses in a low political risk environment, which brings us back to our Montana assets,” Mick McMullen, the company’s president and CEO, said in an Aug. 13 interview in downtown Toronto.

McMullen and three other members, including current chair Brian Schweitzer, joined Stillwater’s seven-member board in May 2013, after a proxy contest by Clinton Group. The activist investor argued Stillwater had made two expensive and “ill-conceived” acquisitions to diversify, which hurt its share price.

In 2010, the firm took over Marathon PGM for US$118 million to get its hands on the junior’s feasibility stage platinum–palladium–copper project in northern Ontario. A year later, it paid US$487 million, or a 290% premium, to acquire Peregrine Metals for its large undeveloped copper–gold project in Argentina.

“The company had lost its way a little bit, and its focus on its core assets. Shareholders buy Stillwater Mining for low-risk PGM exposure, and that is what we are getting the business back to be. We are now looking at some of these M&A transactions that did destroy shareholder value,” McMullen says.

The company has cut expenditures on those ventures and has been  adamant on improving its core assets and maximizing free cash flow, with much success. 

In the second quarter ended in June, Stillwater reported a net income of US$17.9 million, or US14¢ per diluted share, versus last year’s net loss of US$5.3 million, or US4¢ per share. The profit includes a US$5.6 million pre-tax reorganization charge related to the dismissal of 48 employees. McMullen, who took the helm of the company in December, explains that over the last three years the company’s staff had grown while its production stayed flat, prompting the staff reduction. At the end of June, Stillwater had 1,663 employees, down 110 from Dec. 31, 2013.

During the quarter, it produced 126,000 oz. palladium and platinum from its two underground PGM mines: Stillwater and East Boulder. The mines are located on the J-M Reef, the world’s highest-grade PGM trend, in south central Montana.

Stillwater crushes the extracted ore at its two mills on-site to produce concentrates that it trucks to its smelting and refining complex in Columbus, Mont., for further processing. It also uses that complex to recycle spent catalytic material containing PGMs that it receives from third parties.

Stillwater processed recycling material containing 134,300 oz. palladium, platinum and rhodium in the second quarter. 

While both the mined and recycled ounces were below last year’s numbers, the company generated better returns by mining only high-margin ounces. 

As a result, Stillwater has lowered its full-year production guidance for palladium and platinum by 10,000 oz. to 510,000 to 525,000 oz. 

A reason why it removed ounces from its current mine plans is because they were in underground areas that need to be fully developed before they could be profitably extracted, McMullen says.

On the plus side, the deferral of those lower-margin ounces has led the miner to improve its 2014 all-in sustaining cost guidance by US$20 per oz. to US$780 to US$830.

 All-in sustaining costs during the quarter were US$792 per mined oz., down US$55, or 6.5% from the year-ago period. This puts Stillwater halfway to achieving its goal of bringing its all-in costs to the low US$700s, reflecting a US$100 per oz. drop over its 2013 levels.

“But let’s make it clear here, that it’s a goal and not a formal guidance,” McMullen notes. He says Stillwater could generate the US$100 per oz. savings in the next year or two.

Among its new changes, the company has signed a five-year PGM refining and sales agreement with Johnson Matthey. Since July, the London-based chemicals and precious metals firm has been refining all of the company’s metals, instead of half, as was the case previously. Under the new agreement, Johnson Matthey will buy all of the company’s mined palladium and part of its mined platinum at competitive market prices. In addition, it will help Stillwater grow its recycling business and provide research and marketing insights.

“The big thing in it for us is they will provide recycling volume, and that is really what we were looking for out of this agreement. They have the ability to send a lot of recycling-type material: auto catalysts and other products that we don’t currently see. So it’s a way of broadening our business,” McMullen adds. 

At its current mines, Stillwater recently brought online the Graham Creek asset at its East Boulder mine. It is now providing 10% of the ore feed at the East Boulder mill.

Moreover, the miner has introduced a third shift at the East Boulder mill, which previously operated for four days a week. This change will add 2,000 oz. of production a month.

At the Stillwater mine, the firm is working on its large Blitz project, which should come on stream in late 2017, or early 2018. It has yet to release a yearly production guidance for Blitz. 

Asked how the recent labour strikes at PGM mines in South Africa have affected the firm, McMullen said the effect was rather positive. It has taken a lot of metal out of the system and has highlighted the geopolitical concerns around palladium and platinum supply, he says, adding the current sanctions on Russia, a major PGM producer, could spark more supply concerns.

Johnson Matthey has forecasted a 1.6 million oz. deficit in palladium and a 1 million oz. deficit in platinum this year, McMullen says, adding he believes the demand for both metals, particularly palladium, will remain strong in the near-term.

Stillwater boosted its second-quarter cash position by US$28 million to US$502 million. It also redeemed a US$30-million debt facility. The company intends to use the healthy cash position to lower its long-term debt and possibly start paying a dividend.

While McMullen didn’t say when shareholders might expect a dividend, he did mention the restructured company would examine ways to increase profits.

“We have a strong board that is working well together, so we are ready to weather any challenges that come along, and we think we are in a great position actually, so our focus is very much on maximizing free cash flow.”

Stillwater closed Aug. 15 at $18.98, within a 52-week window of $10.54 to $19.50. The stock is up 49% since the start of the year. 

J.P. Morgan recently increased its price target on the stock by a dollar to US$20, largely to reflect Stillwater’s “greater financial strength” and “lower costs going forward.”