Stillwater mine runs deep — Sales contracts inspire company to accelerate expansion program

Nestled in a picturesque valley near this small western town, the Stillwater mine has long been known as North America’s only primary source of platinum and palladium, and the richest known deposit of platinum group metals (PGMs) in the world. Yet, since mining began in 1986, the operation has had to struggle to produce steady profits and realize its full potential.

Operator Stillwater Mining (SWC-A) uses the analogy of a 3-legged stool to explain the mine’s wobbly performance. It was only recently that the stool was made level as a result of three factors: higher metal prices (and the ability to benefit from them); a strong operating team; and enough reserves and capital to expand the operation to its optimal size.

With the stars now aligned in its favor, Stillwater is accelerating an expansion of its namesake mine and forging ahead with the development of the nearby East Boulder project.

The company’s current goal is to achieve an annual production rate of 1.2 million oz. of platinum and palladium in 2001. Previously, it was aiming to boost production to 1.3 million oz. by 2003.

Production will continue to come from the J-M Reef, a geological structure that has been traced over a strike length of about 28 miles (encompassing East Boulder), and which extends downdip more than 1 mile to an unknown depth. Stillwater holds rights to almost all the mineralization thus far identified in the reef.

At the end of 1997, proven and probable reserves totalled 29.5 million tons at an average grade of 0.79 oz. per ton, or 23.4 million oz. PGMs. (The ore contains, on average, three times as much palladium as platinum.)

“This translates into a mine life of at least 40 years,” Gil Clausen, vice-president of operations, told a group of analysts who, along with The Northern Miner, recently toured the mine. “That’s a lot longer than what was originally envisioned.”

In addition to these proven and probable reserves, Stillwater has a resource inventory of 33.5 million tons grading 0.8 oz. palladium and platinum, plus many other untested targets. Accordingly, the company does not feel the need to spend much on exploration.

The Stillwater mine has already undergone one expansion (in mid-1997), which doubled production to its current rate of 450,000-470,000 oz. palladium and platinum. The expansion enabled Stillwater to report consecutive quarters of profitability this year.

The latest results support Stillwater’s optimism that the trend will continue. The company reported net income of US$3.8 million (or 18 cents per share) on revenue of $28.2 million for the third quarter, compared with a loss of US$1.7 million on revenue of $17 million a year earlier.

In recent years, Stillwater’s operating results were hampered by its below-market hedge position. This millstone will be eliminated entirely by year-end, which means the company will be able to reap the full benefits of higher metal prices.

Indeed, in its latest quarter, the company realized US$53 more per ounce of metal sold than a year ago (US$244 compared with $191). This improvement was attributed to a higher average market price for palladium (US$294 per oz., compared with $197 per oz.) and an increase in the number of ounces sold at the average market price, rather than the company’s hedged price.

The buoyant outlook for PGMs, combined with operating improvements and expansion plans at Stillwater, has boosted the company’s share price. A recent offering of 2 million shares, resulting in estimated net proceeds of US$58 million, was priced at US$30.75 per share. The proceeds will be used to finance a portion of the company’s expansion plan.

Analysts were told that the next, US$385-million expansion program will have three major phases. The second expansion at Stillwater, currently under way, is aimed at increasing the milling rate to more than 3,000 tons per day from 2,000 tons. The price tag is about US$75 million, which includes $20 million for a long-term tailings facility.

Once this phase is completed, by the year 2000, the Stillwater mine should be producing 700,000-725,000 oz. PGMs annually. Cash operating costs are expected to remain in the current range of US$140-160 per oz., which represents a major improvement over cash costs in 1997 (US$174 per oz.), 1996 ($184) and 1995 ($215)

The fully permitted East Boulder project, 13 miles west of Stillwater, is expected to cost about US$270 million to place into production (T.N.M., May 25-31/98). This total includes US$35 million for future expansion beyond the current design rate of 2,000 tons per day. By 2001, East Boulder is expected to produce between 450,000 and 500,000 oz. palladium and platinum at cash costs comparable to those incurred at Stillwater.

The remaining US$40 million will be used to expand the company’s smelter and base metal refinery in nearby Columbus.

Chairman William Nettles summed it all up at the recent Mining Investment Forum in Denver: “We have a very aggressive and achievable program to triple capacity over the next three years, and we want to be the lowest-cost producer of platinum group metals in the world.”

Nettles said the expansion would be financed with operating cash flow and external financing, including a commitment for a US$175-million facility with the Bank of Nova Scotia. A subsidiary of H.A. Simons is engineering the Stillwater expansion, while Kilborn International is managing development of East Boulder.

An important catalyst for the expansion program was the recent signing of long-term sales contracts with end-users. The contracts give Stillwater an average floor price of US$225 per oz. of palladium sold for almost all of the ounces produced from 1999 though to 2003. About 20% of the platinum production for the same period will be sold at prices of between US$350 and $425 per oz., with the remaining 80% to be sold at market prices.

“These contracts were instrumental in establishing the debt-financing arrangements,” Nettles said. “We’ve removed a lot of the risks.”

A modest start

Many operating mines in the U.S. can be traced back to the gold rush of the late 1800s, and Stillwater is no exception. Prospectors panned for gold in local streams, found lode deposits in the nearby Yellowstone region, and later staked claims for copper and nickel in the Beartooth Mountains near the Stillwater mine site.

The old-timers had trouble recognizing PGMs until the 1920s, when the rare and precious metals were identified at several locations in the Stillwater complex. However, it was not until the 1970s, when Johns-Manville found what is now known as the J-M Reef, that commercial mining began to look feasible.

In 1979, Manville formed a joint venture with Chevron to explore and develop PGMs found in the J-M Reef. The model was not well-known in North America, and it took years to prove the continuity, grade and extent of the mineralization. This work was followed by test-mining and permitting, which also took years to complete.

Few mines in America are situated in a more spectacular setting than Stillwater. The mine site is 35 miles from Yellowstone National Park, and only 3 miles from the Beartooth wilderness area.

“People who come here often comment on how beautiful it is,” Nettles told analysts in Denver. “That’s the reason we have to be so careful there. We pay great attention to the environment. We have a small footprint, with only 150 disturbed acres. And we like to tell people our palladium production is dedicated to cleaner air.”

Before mining could begin, the partners had to design the mine and mill to meet the highest environmental standards. Detailed studies were undertaken to evaluate the impact mining would have on water and air quality, wildlife habitat and nearby communities.

Fortunately, the waste rock at Stillwater is not acid-generating. Even so, maintaining water quality was regarded as the top priority. The operators also had to find ways to mitigate the damage done by turn-of-the-century miners, as well as by the limited mining that took place during the Second World War and the Cold War, when PGMs were of strategic importa
nce. Finally, they had to win support from local residents, who initially were ambivalent about having a mine in their beautiful backyard.

Chris Allen, the company’s vice-president of government affairs, told analysts that Stillwater is the largest single-site private employer in the state, with mine workers enjoying the highest per capita income. But all the economic benefits in the world won’t compensate for environmental mishaps, he conceded, but hastened to add that “in the past 12 years, we’ve not had a single environmental incident.”

Underground mining began in 1986 and, by 1992, Stillwater Mining was formed to hold the mine and its assets. By 1994, Stillwater had redeemed Chevron’s entire 50% ownership, and Manville had reduced its holding to about 27%. A year later, Manville sold its remaining stake in the company to institutional investors. Earlier this year, Manville sold its remaining 5% royalty on certain metals produced at Stillwater to Franco-Nevada Mining (FN-T) for US$36 million (T.N.M., April 6-12/98).

Stillwater’s past struggles to generate profits were partly due to the high cost of running a labor-intensive mine. The nearly vertical orebody is narrow, and, prior to 1994, almost all mining was carried out by means of cut-and-fill stoping, which entailed the removal of ore in 10-ft.-high horizontal cuts.

Since then, the company has introduced two mechanized stoping methods: ramp-and-fill and sub-level. Mechanized mining now accounts for at least 60% of production, and the costs incurred by this method are said to be about 40% less than cut-and-fill stoping.

Productivity was given an added boost last year when a 1,950-ft. vertical shaft was sunk adjacent to the concentrator. Prior to this, the ore was accessible by way of horizontal adits and drifts driven parallel to the strike of the J-M Reef at vertical intervals of about 200 ft. (The deposit is dissected by the Stillwater River, which allows access to portal sites.)

The commissioning of the production shaft and underground crushing station reduced haulage time and costs, and productivity stands to benefit further from a paste-fill plant, to be commissioned this year. Clausen told analysts that productivity has benefited from investments in underground development and modern mining equipment.

The J-M Reef averages 8-10 ft. in thickness, though the structure varies between 90 ft. (in so-called “ballrooms”) and 1 ft. While mechanized bulk mining has proved economic for the wider portions of the reef, dilution control is crucial in the narrower portions, where more selective methods are used. Miners use the J-M Reef’s sulphides — pyrrhotite, pentlandite and chalcopyrite — as a visual guide to the ore.

Stillwater currently has 40 active working areas (and 130 miles of underground development), and will have even more when the expansion is completed. Faced with a shortage of skilled miners, Stillwater launched a nation-wide recruiting effort. It has already added 70 miners, enough for a production rate of 2,000 tons per day. But by 2001, after Stillwater is expanded and East Boulder comes on-stream, 230 more miners will be needed. The company has an ongoing training program that is expected to produce about 15 miners a month.

In the latest quarter, Stillwater delivered a record 199,601 tons to the concentrator — 36% more than in the corresponding period in 1997. A record number of tons, 191,000, were milled during the quarter as well. Production amounted to 113,000 oz. palladium and platinum, which was 22% higher than in 1997, whereas cash costs were US$151 per oz., or 11% lower than a year ago.

In early October, the environmental impact statement for the Stillwater expansion and tailings facility was filed for public review. A decision is expected by year-end.

Meanwhile, the mill is being equipped with more flotation cells, as well as a tertiary grinding circuit, to accommodate the expansion. Some existing Outokompu cells are being replaced with Denver cells, which were found to be better-suited to the naturally frothing ore at Stillwater.

“We’ll get more surface area for the volume,” said Mill Superintendent Dan Turk. “And we’ll be able to double our concentrate grade to 8 oz. from 4 oz. in this stage.” The final concentrates shipped to Columbus for smelting and refining contain about 50 oz. PGMs per ton.

At East Boulder, a tunnel-boring machine has advanced 3,200 ft. from the access portal into the rocks of the Stillwater complex. A second portal is substantially complete, and work has begun to excavate chambers for a second tunnel-boring machine, which was purchased second-hand and is now being refurbished.

Nettles gave Kilborn Engineering full credit for its “creative approach” in helping the company find ways to accelerate progress at East Boulder. “These two tunnels add flexibility to our plan, and will help us get the project going more quickly.”

Of the US$270 million Stillwater plans to spend at East Boulder, $170 million is earmarked for underground facilities (crusher, conveyor and shops), development work, and mining and mobile equipment. The mill will cost $35 million, and $55 million has been allocated for ancillary facilities.