Mining analysts are keeping a close watch on
Roger Chaplin of Canaccord Capital recently visited the platinum-palladium operation — as well as the nearby East Boulder project, scheduled to be commissioned early next year — and saw a turnaround story in the making.
Upon his return, he recommended the stock — now trading at US$28 — as a “buy” and set a target price of just under US$40 per share. The company has 38.5 million shares outstanding and long-term debt of about US$116 million.
The problems began several years ago, when the company launched an ambitious expansion program aimed at doubling and tripling production, which, at the time, was about 1,000 tonnes per day. The program quickly fell behind schedule and other problems surfaced, making it difficult for the company to benefit from strong prices for platinum group metals (PGMs).
Although a daily mining rate of 2,000 tonnes was achieved, this could not be sustained, owing to a lack of developed stopes. And that made the goal of achieving an eventual rate of 3,000 tonnes seem elusive indeed.
“The underlying problem appears to have been a major lack of planning,” Chaplin notes in a research report. “Only 45% of ore currently being milled comes from fully delineated/planned stopes. The hand-to-mouth nature of the mining in the past couple of years has led to problems with ore/waste clearing, roadway maintenance, lack of backfill, poor equipment utilization and general inefficiency.”
The lackluster operating performance necessitated a change in mine management, and Chaplin says the new team has a more cautious and reasoned approach, which is reflected in more conservative plans to boost production to 2,800 tonnes by 2003. By 2004, Stillwater may even achieve its original target of 3,000 tonnes per day.
Chaplin also expects that the new East Boulder operation, which is separate from the Stillwater mine, will be up and running next year. It is ultimately expected to be operate at the rate of 1,900 tonnes per day, though more work remains to be done before this can be achieved.
“Altogether,” Chaplin adds, “we look for Stillwater’s production of platinum and palladium to increase to over 1.1 million oz. per annum, almost three times the 409,000 ounces produced in 1999. This is marginally below the original target of 1.2 million ounces per year — but it looks to be achievable and highly profitable.”
The Stillwater mine extracts ore from the J-M Reef, a 28-mile-long structure that pinches and swells in a random manner. The grade is also variable, Chaplin states: “The variability of the reef means that at the Stillwater mine, only around 35% of the reef, measured along strike, is minable.”
About 30-35% of production comes from “ballrooms,” which vary in size, with the largest being as much as 100 by 100 ft. on the horizontal plane. As Chaplin points out, mining must be well-planned when exploiting a deposit with such variation. This did not happen, which is why less than half the ore came from fully delineated reserves. The ad hoc approach to mining led to bottlenecks, poor equipment utilization and other problems, resulting in production setbacks and higher-than-expected costs.
The new team is pushing ahead with development, which will allow reserve definition and proper planning of the operations. By 2002, about 60% of production is expected to come from planned stopes. This is expected to increase to 85% by 2003.
The concentrator, smelter and refinery are reported to be operating well, and Chaplin notes that the company is well on top of its environmental requirements. “[This is] an essential point, considering that it is working in an area of outstanding natural beauty, just north-east of the Yellowstone National Park.”
On the financial front, Stillwater remains firmly in the black. Net earnings last year totalled US$37 million, compared with US$13 million in 1998. Earnings this year are forecast to reach US$78 million. The task ahead is to ensure that production remains profitable even if prices weaken.
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