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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission File Number 0-25090
STILLWATER MINING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 81-0480654
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1200 SEVENTEENTH STREET, SUITE 900, DENVER, CO 80202
(Address of principal executive offices and zip code)
(303) 352-2060
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
NAME OF WHICH EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common stock, $.01 par value The American Stock Exchange
Preferred Stock Purchase Rights The American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 1999, assuming a price of $23.25 per share, the closing sale
price on the American Stock Exchange, the aggregate market value of shares of
voting and non-voting common equity held by non-affiliates was approximately
$804,395,409.
As of March 1, 1999, the company had outstanding 34,597,652 shares of common
stock, $.01 par value.
Documents Incorporated by Reference: Part III, Items 10, 11, 12 and 13
incorporate by reference portions of Stillwater Mining Company's Proxy Statement
for the registrant's 1999 Annual Meeting of Stockholders.
TABLE OF CONTENTS
PART I
ITEMS 1 AND 2 BUSINESS AND PROPERTIES................................... 3
ITEM 3 LEGAL PROCEEDINGS......................................... 24
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 24
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS........................... 25
ITEM 6 SELECTED FINANCIAL AND OPERATING DATA..................... 26
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 28
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 36
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 57
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................................ 57
ITEM 11 EXECUTIVE COMPENSATION.................................... 57
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 57
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 57
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K....................................... 58
2
PART I
ITEMS 1 AND 2
BUSINESS AND PROPERTIES
INTRODUCTION AND 1998 HIGHLIGHTS
Stillwater Mining Company mines, processes and refines palladium, platinum
and associated metals ("PGMs") from a geological formation in southern Montana
known as the J-M Reef. The J-M Reef is the only significant source of platinum
group metals, or PGMs, outside South Africa and Russia. Associated by-product
metals of PGMs include rhodium, gold, silver, nickel and copper. The J-M Reef
is an extensive mineralized zone containing PGMs which have been traced over a
strike length of approximately 28 miles. All of the company's current mining
operations are conducted at the Stillwater Mine in Nye, Montana. Expansion is
under way at the Stillwater Mine and at the East Boulder project approximately
13 miles away toward the western end of the J-M Reef.
PGMs are rare precious metals with unique physical properties that are used
in diverse industrial applications and in the jewelry industry. The largest and
fastest growing use for PGMs is in the automotive industry for the production of
catalysts that reduce harmful automobile emissions. Palladium is also used
extensively in the production of electronic components for personal computers,
cellular telephones, facsimile machines and other devices, as well as dental
applications. Platinum's largest use is for jewelry. Industrial uses for
platinum include the production of data storage disks, glass, paints, nitric
acid, anti-cancer drugs, fiber optic cables, fertilizers, unleaded and high-
octane gasolines and fuel cells.
At December 31, 1998, the company had proven and probable reserves of
approximately 37.1 million tons of ore containing approximately 26.3 million
ounces of palladium and platinum in a ratio of approximately 3.3 parts palladium
to one part platinum.
Highlights of the 1998 year included:
. Production increased to 444,000 ounces of palladium and platinum in 1998
from 355,000 ounces in 1997.
. Cash production costs per ounce decreased to $151 in 1998 from $174 in
1997, and total production costs per ounce decreased to $178 in 1998 from
$207 in 1997.
. Mill recovery rates improved to 91% in 1998 from 89% in 1997.
. Mechanized mining increased to 85% in 1998 from 80% in 1997, and tons
mined increased to 720,000 in 1998 from 580,000 in 1997.
. Revenues increased to $106.7 million in 1998 compared to $76.9 million in
1997, and the company reported net income of $13.4 million in 1998 compared
to a net loss of $5.4 million in 1997. The improvement in profitability was
achieved despite the adverse effect of hedging positions that resulted in
realization of below market prices for palladium. The company's average
realized price was $202 per ounce in 1998 compared to the average market
price of $286 per ounce.
. In the fourth quarter, the company announced a plan (the "1998 Expansion
Plan") designed to increase annual PGM production from its current level of
approximately 450,000 ounces to an annualized rate of 1.2 million ounces by
the end of 2001. The plan consists of an expansion of the existing
Stillwater Mine from the current level of 2,000 tons of ore per day to
3,000 tons of ore per day, the construction of a second mine approximately
13 miles to the west of Nye, capable of processing at the rate of 2,000
tons of ore per day, and the expansion of the existing smelter and base
metals refinery. The total capital cost of the expansion program is
estimated to be $385 million.
3
. In order to minimize the downside price risk inherent in the palladium and
platinum markets while retaining most of the potential to obtain higher
prices, the company entered into long-term sales contracts with General
Motors Corporation, Ford Motor Company, Mitsubishi Corporation and KEMET
Corp. The contracts cover the company's production over the five-year
period from January 1999 through December 2003. Under the contracts, the
company has committed between 90% to 100% of its actual palladium
production. Palladium sales are priced at a slight discount to market, with
a floor price averaging approximately $225 per ounce. The company has
agreed to an average maximum palladium price of approximately $400 per
ounce on approximately 30% of its production. The remaining 70% of the
company's palladium production is not subject to any price cap. In
addition, the company has committed approximately 20% of its planned annual
platinum production over the next five years. Platinum sales are priced at
a slight discount to market, subject to an average minimum price of $350
per ounce with an average maximum price of $425 per ounce. The remaining
80% of the company's planned annual platinum production is not committed
under these contracts. Such platinum production remains available for sale
at prevailing market prices or under forward sales contracts.
.
The company developed a financing plan to provide the necessary capital for
the 1998 Expansion Plan. On October 19, 1998, the company completed an
offering of 2,000,000 common shares at a price of $30.75 per share (prior
to the three for two stock split effected on December 31, 1998). In
November 1998, the underwriters exercised an over allotment option for an
additional 300,000 shares (pre-split). The company realized net proceeds of
approximately $67 million from the offering. In addition, the company
obtained a seven-year $175 million senior secured credit facility with a
syndicate of banks led by The Bank of Nova Scotia (the "Scotiabank Credit
Facility"). This credit facility provides for a $125 million term loan
facility and a $50 million revolving credit facility. Proceeds of the term
loan facility will be used to finance a portion of the 1998 Expansion Plan
while proceeds of the revolving credit facility will be used for general
corporate and working capital needs. The balance of the the expansion
plan's capital cost is expected to be funded by operating cash flow.
. On December 8, 1998, the company declared a three-for-two stock split on
the company's common stock effected in the form of a stock dividend paid on
December 31, 1998 to shareholders of record on December 21, 1998.
For a discussion of risks associated with the company's business,
please read "Business and Properties--Current Operations", "--Future Expansion",
and "--Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
HISTORY OF THE COMPANY
Palladium and platinum were discovered in the J-M Reef by Johns
Manville Corporation geologists in the early 1970s. In 1979, a Manville
subsidiary entered into a partnership agreement with Chevron U.S.A. Inc. to
develop PGMs discovered in the J-M Reef. Manville and Chevron explored and
developed the Stillwater property and commenced underground mining in 1986.
In 1992, the company was incorporated and on October 1, 1993, Chevron
and Manville transferred substantially all assets, liabilities and operations at
Stillwater to the company, with Chevron and Manville each receiving a 50%
ownership interest in the company's stock. In September 1994, the company
redeemed Chevron's entire 50% ownership. The company completed its initial
public offering in December 1994, and Manville sold a portion of its shares
through the offering reducing its ownership percentage to approximately 27%. In
August 1995, Manville sold its remaining ownership interest in the company to
institutional investors. The company's common stock is publicly traded on the
American Stock Exchange under the symbol "SWC."
4
GEOLOGY OF THE J-M REEF
The J-M Reef is located in the Beartooth Mountains in southern Montana. It
is situated along the northern edge of the Beartooth Plateau, which rises to
elevations of over 10,000 feet. This plateau is deeply dissected by several
rivers and their tributaries including the Stillwater River, towards the eastern
end of the reef and the Boulder River, near the western end of the reef. Both
of these rivers have eroded their valley floors resulting in deep valleys cut
into the gently undulating elevated plateau.
Geologically, the J-M Reef is composed of an assemblage of basic and
ultrabasic rocks derived from a single, large, buried magma body emplaced an
estimated 2.7 billion years ago. The molten rock was sufficiently fluid at the
time of emplacement to allow individual minerals to crystallize sequentially,
with the heavier, more basic, darker minerals crystallizing first, and sinking
towards the bottom, leaving the lighter, more siliceous light-colored minerals
to crystallize out later to produce bands of norite, gabbro and anorthosite
which can be traced across most of the strike length of the complex. Over time
the original horizontal orientation of the reef was changed as the reef was
tilted at an angle of 50 to 90 degrees to the north. The upper portion of the
reef was eroded away to produce the essentially lenticular-shaped exposure of
the reef evident today. The reef has been identified for 28 miles in an east-
southeasterly direction.
The PGMs, which consist of palladium, platinum and a minor amount of
rhodium, are concentrated in one principal layer along with small amounts of
nickel, copper, silver and gold. The J-M Reef appears to form a continuous
layer which is exposed from the highest ridges over 9,500 feet above sea level
to the deepest valleys almost a mile below the surface of the plateau. The
mineralized horizon has been demonstrated to have a vertical continuity
exceeding 6,000 feet. Additionally, one exploration hole in the Stillwater
Valley, drilled in 1998, has confirmed the continuity of the reef to the 1,400
foot elevation can be reasonably inferred. Geological and geophysical evidence
suggests that the J-M Reef extends downward beyond the limits of currently
available mining practice. Geological mapping and gravity surveys also suggest
that the dip of the J-M Reef flattens gently and may extend 30 miles or more to
the north.
The J-M Reef is similar to South Africa's Bushveld Complex which contains
the well-known platiniferous Merensky Reef which is currently mined in many
localities. The in situ PGM grade of the J-M Reef is significantly higher than
that of the Merensky Reef and its economically recoverable portion is
significantly thicker, making the J-M Reef generally amenable to a wider variety
of gravity assisted, mechanized mining methods. The Merensky Reef, however, has
a substantially longer known surface strike length compared to the strike length
of the J-M Reef.
PGM ORE RESERVES
The following table sets forth the company's proven and probable palladium
and platinum ore reserves as of December 31, 1998 and 1997. The reserves
reflected below are based on a cut-off grade in 1998 of 0.3 ounce and in 1997 of
0.4 ounce of palladium plus platinum per ton, and assume the following prices
for palladium and platinum of: $225 and $350 per ounce, respectively in 1998
and $155 and $375, respectively in 1997. Proven and probable reserves give
effect to an average mining dilution of 10% at zero grade based on actual mining
experience.
The December 31, 1998 and 1997 ore reserves were reviewed by Behre Dolbear
& Company, Inc. ("Behre Dolbear"), independent consultants, who are experts in
mining, geology and ore reserve determination. The company has utilized Behre
Dolbear to carry out independent reviews and inventories of the company's ore
reserves since 1990. The ore reserves have been affirmed and verified by Behre
Dolbear in alternating years prior to 1997. See "Risk Factors - Reserve
Estimates."
5
ORE RESERVES (1)
December 31, 1998 DECEMBER 31, 1997
-------------------------------------------------------------------------
AVERAGE CONTAINED (2) AVERAGE CONTAINED
TONS (1) GRADE (3) OUNCES TONS (1) GRADE (3) OUNCES
(000'S) (OUNCE/TON) (000'S) (000'S) (OUNCE/TON) (000'S)
--------------------------------------------------------------------------
Proven Mining Reserves 1,884 0.74 1,399 1,379 0.86 1,184
Probable Mining Reserves (2) 35,174 0.71 24,871 28,130 0.79 22,183
------ ---- ------ ------ ---- ------
Total Proven and Probable
Reserves 37,058 0.71 26,270 29,509 0.79 23,367
------ ---- ------ ------ ---- ------
(1) Reserves are defined as that part of a mineral deposit that can be
economically and legally extracted or produced at the time of
determination and is customarily stated in terms of "ore" when dealing
with metals. The probable reserves are computed from information similar
to that used for proven reserves, but the sites for inspection, sampling
and measurement are between 50 and 1,000 feet apart. The degree of
assurance, although lower than that for proven reserves, is sufficient to
predict the geological regularity of the reef between points of
observation. See "-- Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That
May Affect Future Results and Financial Condition."
(2) Total probable reserves include 13.3 million tons and 11.5 million tons at
December 31, 1998 and 1997, respectively in the area of East Boulder.
Significant capital investments will be required to access the East
Boulder reserves. See "Current Operations -- East Boulder Project."
(3) Expressed as palladium plus platinum ounces per ton at a ratio of 3.3
parts palladium to one part platinum, before processing losses of
approximately ten percent (10%).
Reserves are consumed during mining operations and the company generally
replaces reserves by drilling on a close-spaced pattern mineralized material
which has been identified geologically but not yet established as proven and
probable reserves. Because of the expense of the close-spaced drilling
necessary to generate proven mining reserve estimates, the company generally
attempts to establish sufficient reserves to support its mine development
objective of approximately 18 months of production.
CURRENT OPERATIONS
STILLWATER MINE
The company's current mining operations take place at the Stillwater
Mine, an underground mine accessing the J-M Reef in Nye, Montana. In
addition, the company owns and maintains 110,000 square feet of buildings
which contain the concentrator, shop and warehouse, changing facilities,
headframe, hoist house, paste plant, storage facilities and office. All
structures are located within its 1,340 acre operating permit area at the
Stillwater Mine. The Stillwater Mine is wholly owned and operated by the
company. The mine is located approximately 85 miles southwest of Billings,
Montana and is accessed by a paved road. The mine has adequate water and power
from established sources.
MINING
The Stillwater Mine accesses a five-mile segment of the J-M Reef, between
the elevations of 6,700 and 3,100 feet above sea level. Deep exploration
drill holes have confirmed the structure and mineralization of the J-M Reef
down to an elevation of 1,400 feet. The deposit appears to be open at depth
and will be further verified by additional drilling. Access to the ore at
the Stillwater Mine is by means of a 1,950-foot vertical shaft and by
horizontal adits and drifts driven parallel to the strike of the J-M Reef at
vertical intervals of between 200 feet and 300 feet. Adits have been driven
from the surface in the Stillwater Valley at elevations of 5,000 feet above
sea level or more. Five drifts have been developed below the valley floor by
ramping down from the 5,000-foot level to extract ore from the reef down to
the 4,000-foot elevation. Four major levels below the 5,000-foot level are
now being developed from the shaft and shaft ramp system.
6
The 1,950-foot vertical shaft, which was commenced in 1994 and
commissioned in 1997 as part of the company's 1994 Expansion Plan to double
output from 1,000 to 2,000 tons of ore per day, was sunk adjacent to the
concentrator to increase efficiency of the operation. All ore and waste are
crushed before being hoisted up the shaft. The production shaft and
underground crushing station have reduced haulage times and costs, improved
the material handling of ore and waste and improved the grinding capabilities
of the concentrator. For the foreseeable future, ore from those areas above
the 5,000-foot west elevation will continue to be hauled to the surface by
train. Ore from those areas below the 5,000-foot level and those that are not
currently connected to the shaft are transported to the surface by 15-ton
underground trucks. The portion of waste that cannot be used for backfill in
underground excavations is hauled to the surface or hoisted up the shaft,
depending on its location, and used in the rock embankment of the tailings dam
or is placed in the permitted waste disposal site.
Prior to 1994, almost all of the company's mining activities utilized
"cut-and-fill" stoping methods. This method extracts the ore body in ten-foot
high horizontal cuts. The open space created by the extraction of each cut is
filled with waste rock and coarse concentrator tailings and becomes the floor
for the next level of mining as the process moves upward. Since 1994, the
company has introduced two mechanized mining methods: "ramp-and-fill" and
"sub-level stoping." Ramp-and-fill is a mining method in which a succession
of horizontal cuts are extracted from the ore body using mobile equipment.
Access to the ore body is from ramps driven in or adjacent to the ore body
allowing the use of hydraulic drills and load haul dump equipment. Sub-level
stoping is a mining method in which blocks of the reef approximately 50 feet
high and up to 75 feet along strike are extracted in 30-foot intervals
utilizing mobile electric hydraulic long-hole drills and remote control rubber
tired load haul dump equipment. The reef is mined in a retreat sequence along
strike and mined out areas are filled with development waste. The company
believes that mechanized mining methods are safer, less expensive and more
productive than traditional "cut-and-fill" stoping. Mechanized mining
increased from approximately 60% of tons mined in 1996 to approximately 80% in
1997 and to approximately 85% in 1998. Currently, direct costs per ton mined
for mechanized stoping are approximately 39% less than cut-and-fill stoping
and is nearly 100% more productive in terms of tons per man-hour. However, not
all areas of the reef are amenable to mechanized methods, and the company will
continue to select the appropriate mining method on a stope-by-stope basis.
PRODUCTION
During 1998, the company produced 444,000 ounces of palladium and
platinum, up from 355,000 ounces in 1997 and 255,000 ounces in 1996. See
"Selected Financial and Operating Data." In the fourth quarter of 1997, the
company attained the 1994 Expansion Plan production goal by increasing
production by 46% from approximately 1,370 tons of ore per day in the fourth
quarter of 1996 to approximately 2,000 tons of ore per day during the fourth
quarter of 1997. In conjunction with the 1994 Expansion Plan, the company
invested in new mobile mining equipment and developed a computerized scheduled
maintenance system. In addition, the rate of underground development
increased on both existing levels as well as new levels accessed from the
shaft. Additional surface facilities were also constructed, including a new
maintenance shop and warehouse and an extension of the site offices and change
house. Site services were expanded and upgraded and appropriate investment in
infrastructure was made to accommodate future plans. The company reduced its
cash production costs from $184 per ounce in 1996 to $174 per ounce in 1997,
and to $151 per ounce in 1998.
During 1994 through 1997, the company's total capital expenditures for
the expansion of the Stillwater Mine and facilities were approximately $70
million, excluding capital costs for sustaining and rehabilitating the existing
mine.
During 1998, the company announced the 1998 Expansion Plan designed to,
among other things, increase the Stillwater Mine production rate to 3,000 tons
of ore per day and begin mining at East Boulder. The capital expenditure
budget for the 1998 Expansion Plan relating to the Stillwater Mine is
approximately $75 million. See "--Future Expansion".
7
CONCENTRATION
The company maintains a concentrator plant adjacent to the Stillwater
Mine. Ore is defined as material with a metals content of 0.3 ounce per ton
or more. Ore is fed into the concentrator, mixed with water and ground to a
slurry in a mill circuit to liberate the PGM-bearing sulfide minerals from the
rock matrix. Various reagents are added to the slurry to separate the valuable
sulfides from the waste rock in a flotation circuit. In this circuit, the
sulfide minerals are floated, recycled, reground and refloated to produce a
concentrate suitable for further processing. The flotation concentrate, which
represents approximately 1% of the original ore weight, is filtered, dried and
transported in trailers approximately 46 miles to the company's metallurgical
complex in Columbus, Montana. Approximately 60% of the material discarded
from this process is used for backfill in the mine, with the balance stored in
an onsite tailings containment area.
As part of the 1994 Expansion Plan, the capacity of the concentrator was
expanded with the addition of a large ball mill grinding unit, additional
flotation capacity and ancillary equipment. During 1998, the concentrator's
crushing, grinding and flotation capacity were expanded to enable the
processing of 3,000 tons of ore per day.
During 1998, the company continued to improve the recovery performance of
the flotation circuit installed in 1997. Mill recovery improved to 91% for
1998 compared to 89% for 1997 and 86% for 1996.
In 1998, the company received an amendment to its existing Operating
Permit which provides for the construction of a lined tailings impoundment
that will serve the Stillwater Mine for the next thirty years. In addition,
the amendment removed the production limitation of 2,000 tons of ore per day
at the Nye operation. An environmental group has filed a complaint challenging
the amendment to the permit. The company believes the compliant is without
merit. See "Regulatory and Environmental Matters".
METALLURGICAL COMPLEX
Smelting. The company's metallurgical complex is located in Columbus,
---------
Montana and consists of the precious metals smelter and base metals refinery.
Concentrate from the mine site is fed to a 1.5 megawatt electric furnace,
where it is melted and separated into a silica oxide rich slag and a PGM rich
matte.
The matte is tapped from the furnace and granulated. The granulated
furnace matte is remelted in one of two top blown rotary converters, which
separate iron from the converter matte. The converter matte is poured from
the top blown rotary converter, granulated and transferred to the base metals
refinery in two ton bags for further processing. The granulated converter
matte, approximately 10% of the original smelter feed weight, is primarily
copper and nickel sulfides containing about 2% PGMs.
The gasses released from the smelting operations are routed through a
gas/liquid scrubbing system, which removes approximately 99.8% of the sulfur
dioxide. Spent scrubbing solution is treated in a process that converts the
sulfur dioxide to gypsum, or calcium sulfate, and regenerates clean scrubbing
solution. The gypsum is used by local farmers as a soil amendment.
The initial expansion of the smelter was completed in 1997, increasing
the daily smelting capacity from 22 tons of ore per day to 32 tons of ore per
day. Feed and power control systems for the existing furnace were modified, a
second top blown rotary converter was added and the gas handling and solution
regeneration systems were upgraded. Additionally during 1997, the furnace was
rebricked, a 30-day process that occurs every two to three years. The furnace
modifications resulted in significant power savings due to increased
efficiency. At 2,000 tons of ore per day of mine production, the smelter
processes approximately 25-30 tons of concentrate per day.
8
As part of the 1998 Expansion Plan, the smelter is being expanded to treat
the increased concentrate from the Stillwater Mine and the East Boulder project.
The expansion consists of the addition of a second furnace capable of treating
100 tons of concentrate per day and additional top blown rotary converter and
ancillary facilities. The expansion is expected to be complete in the second
half of 1999 and is expected to cost approximately $32 million.
Base Metals Refinery. In 1996, the company constructed and commissioned the
--------------------
base metals refinery, which utilizes the patented Sherritt Process, whereby
sulfuric acid is used to dissolve the nickel, copper, cobalt and iron from the
converter matte. This process upgrades the converter matte product over 25 to 30
times (from 2% PGMs to 55-60% PGMs). The base metals refinery has a capacity
equivalent to more than 4,000 tons of ore per day of mine production. The
present plant is operated two shifts per day, five days per week. Even though
mine production ramped up during 1997 and 1998, the base metals refinery was
able to increase efficiencies and maintain a five-day schedule.
The iron is precipitated out of the solution and returned to the smelter to
be processed and removed in the slag. The dissolved nickel, copper and cobalt is
shipped via truck, as a sulfate solution, to an outside refiner located in
Canada. The company is paid for a portion of the nickel and cobalt content of
the solution. In the second half of 1998, the company began construction of the
first stage of a copper/nickel refinery. This new electrowinning circuit is
scheduled for completion in the first quarter of 1999. During 1999, the second
stage of the copper/nickel circuit will be constructed as part of the expansion
of the base metals refinery. The total cost of the nickel/copper refinery is
expected to be approximately $8.5 million.
The resulting PGM rich filter cake is shipped via air freight to three
different refineries and is returned to the account of the company as 99.95% PGM
sponge after approximately 22-35 days. The company pays its refiners a refining
charge in United States dollars per ounce for the toll processing of the base
metals refinery filter cake.
The 1998 Expansion for the base metals refinery contemplates an additional
autoclave and an upgrade to the piping and ventricular systems required to
handle the additional material anticipated as a result of the Nye and East
Boulder expansions. The base metals refiner expansion is expected to be
completed in the second half of 1999.
SECONDARY MATERIALS PROCESSING
A sampling facility for secondary materials was completed in late 1997. The
facility was designed to accept spent catalysts that can be crushed and added to
the electric furnace. Several test lots were processed during 1997, and it was
determined that the spent auto catalysts are suitable for processing at the
company's facilities. During 1998, the company began processing small shipments
of spent auto catalysts and in 1998 processed approximately 139 tons of spent
catalysts.
EXPLORATION ACTIVITIES
Major portions of the J-M Reef have yet to be exposed to drilling and
development sufficient to allow for the delineation of additional reserves.
However, given the magnitude of its current proven and probable reserves, the
company's exploration activities are limited. The company's current plans are to
continue to focus on its current PGM reserves and mineralization of the J-M Reef
rather than exploring for or attempting to acquire additional developed or
undeveloped ore reserves. Consequently, exploration does not represent a
significant expenditure for the company.
EAST BOULDER PROJECT
The East Boulder project will provide western access to the J-M Reef, Sweet
Grass County, Montana. The East Boulder property is wholly-owned by the company.
Development will consist of construction of mine and support facilities,
including an underground crusher, a surface concentrator and
9
ancillary surface facilities. These facilities have been designed to allow
expansion beyond 2,000 tons of ore per day should this be economically justified
and if existing operating permits are amended. In 1996, the company began work
on the development phase of the East Boulder project, but suspended all work
other than permitting late in 1996.
In November 1997, with the completion of the 1994 Expansion Plan and higher
prices for palladium and platinum, the company announced plans to restart the
East Boulder project. During the second quarter of 1998, the company accepted
delivery of a tunnel boring machine and commenced to drive the 18,500-foot long,
15-foot diameter tunnel. This is expected to take approximately 12 to 18 months
and cost approximately $14 million. During 1998, the company acquired and
refurbished a second tunnel boring machine which is expected to commence
drilling a second tunnel in the first quarter of 1999. Additional activities
commenced during the year consisted of conceptual engineering, sitework and
construction of support facilities.
During 1999, the company expects to continue underground development,
detailed engineering and construction of the concentrator and ancillary
facilities at East Boulder. The East Boulder mine is expected to begin
commercial production in the second half of 2001. The estimated total cost of
the project is $270 million.
OTHER PROPERTIES
In Columbus, Montana, the company owns and maintains a 23,200 square foot
smelter plant and a 17,000 square foot base metals refinery. Neither of these
properties is currently subject to any mortgage or other encumbrance. The
company also leases a 10,100 square foot office building in Columbus. The
company believes that its existing facilities are adequate to service current
production levels. The company also owns additional parcels of land totaling
approximately 2,890 acres in Stillwater County, Montana and additional property
in Big Timber, Montana which will be used to provide employee housing. Certain
of these parcels are leased to ranch operators, and one has been subdivided for
the lease or sale of residential lots. About 60 acres of one property is within
the company's operating permit boundaries. Some of these properties also include
residential rental units. Non-mining properties are subject to a mortgage in
favor of Chevron and Manville to support the company's indemnification
obligations to such parties.
SALES AND HEDGING ACTIVITIES
Palladium, platinum, rhodium and gold are sold to a number of consumers and
dealers with whom the company has established trading relationships. Refined
PGMs of 99.95% purity in sponge form are transferred upon sale from the
company's account at third party refineries to the account of the purchaser. By-
product metals are purchased at market price by customers, brokers or outside
refiners.
During 1998, the company implemented a marketing strategy designed to
minimize the downside price risk inherent in the palladium and platinum markets
while retaining most of the potential to obtain higher prices. The company
entered into long-term sales contracts with General Motors Corporation, Ford
Motor Company, Mitsubishi Corporation and KEMET Corp. The contracts cover the
company's production over the five-year period from January 1999 through
December 2003. Under the contracts, the company has committed between 90% to
100% of its actual palladium production. Palladium sales are priced at a slight
discount to market, with a floor price averaging approximately $225 per ounce.
The company has agreed to an average maximum palladium price of approximately
$400 per ounce on approximately 30% of its production. The remaining 70% of the
company's palladium production is not subject to any price cap. In addition, the
company has committed approximately 20% of its planned annual platinum
production over the next five years. Platinum sales are priced at a slight
discount to market, subject to an average minimum price of $350 per ounce with
an average maximum price of $425 per ounce. The remaining 80% of the company's
planned annual platinum production is not committed under these contracts. Such
platinum production remains available for sale at prevailing market prices or
under future contracts. The marketing contracts contain termination provisions
that allow the purchasers to terminate in the event the company breaches and the
breach is not cured within periods ranging from ten to thirty days of notice by
the purchaser. In addition, the contracts contain force majeure provisions that
allow for the suspension and, in one instance, the termination of the
10
contract upon the occurrence of an event of force majeure. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The company has historically entered into hedging instruments from time to
time to manage the effect of price changes in palladium and platinum on the
company's cash flow. Prior to 1998, hedging activities typically consisted of
"spot deferred contracts" for future deliveries of specific quantities of PGMs
at specific prices, the sale of call options and the purchase of put options.
During the first quarter of 1997, the company entered into significant hedging
positions, particularly in palladium, for both 1997 and 1998 sales. Following a
sharp rise in palladium spot prices, the company's deliveries against these
hedge contracts throughout 1997 and 1998 resulted in substantial hedging losses.
These losses totaled approximately $10.2 million in 1997 and $26.8 million in
1998. At December 31, 1998, the company had fulfilled all of its below market
hedge contracts.
From time to time, the company may enter into short-term delivery
contracts. At December 31, 1998, the company had 9,550 ounces of December
palladium production committed for delivery in January 1999 at an average price
of $284 per ounce, 13,100 ounces of platinum sold forward for delivery in 1999
at an average price of $375 per ounce. The company has credit agreements with
its major trading partners that provide for margin deposits in the event that
forward prices for palladium and platinum exceed the company's hedge contract
prices and their credit lines.
TITLE AND ROYALTIES
The company holds 995 patented and unpatented lode or millsite claims
covering approximately 16,000 acres of the J-M Reef. The company believes that
approximately 130 of these claims cover 100% of the known apex of the J-M Reef.
Applications for patents covering 172 of the unpatented claims, for a total area
of 2,876.9 acres, have been submitted. Patents to 34 claims covering an area of
574.8 acres have been granted; 138 claims covering 2,302.1 acres have had first
half final certificates issued. The company is currently working with the USFS
to ensure the proper allocation of personnel and other resources required for
the USFS to complete the mineral examination process (the process by which a
determination is made as to whether a discovery of valuable minerals exists) on
the 138 claims which have first half final certificates issued. The company
expects that this process will take another year or more to complete. The patent
applications and the 138 claims covered thereby will then undergo several levels
of review within the U.S. Department of the Interior before submission to the
Secretary for signature. There can be no guarantee as to whether packets will
ever be issued for the 138 claims currently being processed. Another company
claim leased from the Mouat family and acquired through the agreement with
Anaconda Minerals Inc. was patented many years ago. The remaining claims either
adjoin the apex of the J-M Reef or provide sites for surface operations.
Unpatented mining claims may be located on U.S. federal public lands open
to appropriation, and are generally considered to be subject to greater title
risk than other real property interests because the validity of unpatented
mining claims is often uncertain and is always subject to challenges of third
parties or contests by the federal government. The validity of an unpatented
mining claim or millsite, in terms of location and maintenance, depends on
strict compliance with a complex body of federal and state statutory and
decisional law and (as to unpatented mining claims) the existence of a discovery
of valuable minerals. In addition, there are few public records that
definitively control the issues of validity and ownership of unpatented mining
claims and millsites.
Of the company's 995 controlled claims, 869 are subject to royalties,
including 711 subject to a 5% net smelter royalty payable to Franco Nevada
Mining Corporation, Limited, 56 subject to a 0.35% net smelter royalty payable
to the Mouat family, and 102 subject to both royalties. During 1998, the company
paid royalties of approximately $3.3 million.
11
SAFETY
Current mine operations extend over five miles horizontally along the
Stillwater Complex and involve the use of heavy machinery and drilling and
blasting in confined spaces. The company's safety performance has shown
continued improvement in terms of its Lost Time Accident Rate ("LTA rate"). The
company's LTA rate in 1992 was 12.9 and has decreased steadily to a low of 2.3
in 1998. In order to continue this favorable trend, management has implemented
additional safety training programs and has vigorously applied the "Neil George
Five-Point Safety System," which is well known to the underground hard rock
mining industry. This program encourages daily interaction between employees and
supervisors with a specific focus on safety and requires subsequent
documentation of that interaction. Management believes that continued reductions
in accident frequency are achievable.
Safety is a primary concern of the company, and the company believes that
training is a key element in accident prevention. Eighty hours of safety
training are required before inexperienced employees may start working
underground, and yearly retraining in first aid, accident prevention techniques
and equipment handling are mandatory for each mining employee.
The metallurgical complex in Columbus, Montana maintained an exemplary
safety record in 1998 with zero lost time accidents and once again was the
recipient of the Governor's Safety and Health Achievement Award. The complex is
the first ever two-time recipient of this Award. The smelter (for the sixth
consecutive year) and the base metals refinery (for the second consecutive year)
were granted the Sharp's Award, which exempts these facilities from routine
Occupational Safety and Health Administration inspections.
EMPLOYEES
As of December 31, 1998, the company had 899 employees in the following
areas:
NUMBER OF
AREA EMPLOYEES
------------------------- --------------------
Mining 555
Processing 101
Maintenance 107
Technical Services 51
Safety and Environmental 16
Administration 57
Miscellaneous 12
-----
Total 899
=====
Prior to 1995, the company's employees were non-union. In an election held
in July 1995, 50.6% of those voting favored the appointment of the Oil, Chemical
and Atomic Workers Union ("OCAW") as exclusive bargaining representative for
substantially all hourly workers. The union was certified by the National Labor
Relations Board in January 1996. On June 30, 1996, members of Local 2-1 of the
OCAW ratified their first contract agreement with the company, which became
effective on July 1, 1996. The contract has a term of three years and provides
for a cumulative increase in wages and benefits of 5.86% over the contract term.
This contract was negotiated using an interest-based bargaining approach that
has resulted in cooperative and stable labor relations. Management believes its
employee relations are good and believes its wages, benefits and working
conditions are competitive with other mining operations. The OCAW contract
expires in June 1999 and the company expects to begin negotiation of a new
contract during 1999.
The company competes for individuals skilled in underground hard rock
mining techniques. Although the company has historically experienced a shortage
of qualified miners, the economic downturn affecting gold and base metal mining
has recently made available a significant number of skilled underground miners.
In addition, the company has instituted a training program to bring new
employees up to the status of
12
qualified, experienced underground miners bringing the total number of miners at
the end of 1998 to 303. During 1998, the company hired 128 experienced
underground miners. The company will continue to recruit miners to meet the
demands of the company's increased production goals.
REGULATORY AND ENVIRONMENTAL MATTERS
General. The company's business is subject to extensive federal, state and
-------
local government controls and regulations, including regulation of mining and
exploration which could involve the discharge of materials and contaminants into
the environment, disturbance of land, reclamation of disturbed lands, associated
potential impacts to threatened or endangered species and other environmental
concerns. In particular, statutes including, but not limited to, the Clean Air
Act, the Clean Water Act, the Solid Waste Disposal Act, the Emergency Planning
and Community Right-to-Know Act, the Endangered Species Act and the National
Environmental Policy Act, impose permit requirements, effluent standards, air
emission standards, waste handling and disposal restrictions and other design
and operational requirements, as well as recordkeeping and reporting
requirements, upon various aspects of mineral exploration, extraction and
processing. In addition, the company's existing mining operations may become
subject to additional environmental control and mitigation requirements if
applicable federal, state and local laws and regulations governing environmental
protection, land use and species protection are amended or become more stringent
in the future. For example, effective July 1, 1998 for the 1998 calendar year,
the company was required for the first time to annually report the volume of its
release of certain materials into the environment, including such constituents
that are placed within engineered tailings impoundments. Such reporting is
required by the Emergency Planning and Community Right-to-Know Act, noted above.
Additionally, the company is aware that federal regulation under the Solid Waste
Disposal Act governing the manner in which secondary materials and by-products
of mineral extraction and benefication are handled, stored and reclaimed or
reused are pending final revision which could affect the company's facility
design, operations, and permitting requirements.
The company's past and future activities may also cause it to be subject to
liabilities under provisions of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), and analogous
state law. Such laws impose strict liability on certain categories of
potentially responsible parties including current property owners for releases
or threatened releases of hazardous substances into the environment which cause
the incurrence of cleanup costs.
Generally, compliance with the above statutes requires the company to
obtain permits issued by federal, state and local regulatory agencies and to
file various reports and keep records of its operations affecting the
environment. Certain permits require periodic renewal or review of their
conditions. The company cannot predict whether it will be able to renew such
permits or whether material changes in permit conditions will be imposed. Non-
renewal of permits or the imposition of additional conditions could have a
material adverse effect on the company's financial condition and results of
operations.
The company believes that its operations and facilities comply in all
material respects with current federal, state and local permits and regulations.
However, compliance with existing and future laws and regulations may require
additional control measures and expenditures which cannot be estimated at this
time. Compliance requirements for new mines and mills may require substantial
additional control measures that could materially affect permitting and proposed
construction schedules for such facilities. Under certain circumstances,
facility construction may be delayed pending regulatory approval. The cost of
complying with future laws and regulations may render currently operating or
future properties less profitable and could adversely affect the level of the
company's reserves and, in the worst case, render its mining operations
uneconomic.
The company has agreed to indemnify each of Chevron and Manville for all
claims related to environmental damage or hazards.
Permitting and Reclamation. Operating Permit 00118 issued by the Montana
--------------------------
Department of State Lands encompasses approximately 2,450 acres at the company's
Stillwater Mine located in Stillwater County,
13
Montana. The permit delineates lands that may be subject to surface disturbance.
At present, approximately 150 acres have been disturbed, 69 of which are
occupied by the tailings impoundment. The remaining acreage consists of
buildings, roads and portal sites. The company employs concurrent reclamation
wherever feasible.
Reclamation regulations affecting the company's operations are promulgated
and enforced by the Hard Rock Bureau of the Montana Department of Environmental
Quality. Additional reclamation requirements may be imposed by the USFS during
the permitting process. For regulatory purposes, reclamation does not mean
restoring the land to its pre-mining state. Rather, it is returning the post-
mining land to a state which has stability and utility comparable to pre-mining
conditions. Reclamation concerns include stabilization and vegetation of
disturbed lands, controlling drainage from portals and waste rock dumps, removal
of roads and structures, neutralization or removal of process solutions and
visual aesthetics. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Environmental Obligations."
Permits governing air and water quality are issued to the company by the
Montana DEQ, which has been delegated such authority by the federal government.
Operating permits issued to the company by the Montana DEQ and the USFS do not
have an expiration date but are subject to periodic reviews. The reviews
evaluate bonding levels, monitor reclamation progress, and assess compliance
with all permit requirements and mitigation measures.
In April 1996, the company submitted a permit amendment application for the
expansion of the Stillwater Mine. This expansion proposal includes selection and
construction of a new tailings impoundment and removal of the arbitrary 2,000
tons of ore per day production cap. During 1997, as a result of this
application, the Montana DEQ began preparation of an Environmental Impact
Statement in order to assess the environmental impacts of the amendment. The
Montana DEQ issued the final Environmental Impact Statement in 1998, subsequent
to review of draft issuances and a public hearing. In November 1998, the Record
of Decision was issued by the Montana DEQ and the USFS. There were no material
changes from the original application.
In the first quarter of 1999, an environmental group filed a complaint
against the Montana DEQ challenging the adequacy of the Environmental Impact
Statement and reclamation provisions developed in connection with the amendment
to the permit. The company is not named in the complaint. The complaint has not
been served and it is difficult to predict whether or how it may by pursued. The
company believes the suit is without merit.
Capital outlay for the proposed long term tailings site is estimated to be
approximately $22 million. The current tailings facility, located adjacent to
the Stillwater Mine, has an expected life through the year 2003, assuming 2,000
tons of ore per day of mine production. A pipeline will connect the current and
proposed tailings impoundments.
The East Boulder project is permitted with all necessary environmental
permits, including an operating permit to produce 2,000 tons of ore per day. The
water quality discharge permit for the East Boulder mine is in the renewal
process, during which time the formerly-issued permit remains in effect.
1998 EXPANSION PLAN
During the third quarter of 1998, the company announced a new expansion
plan with a long-term goal of reaching an annualized rate of PGM production of
approximately 1.2 million ounces before year end 2001 (the "1998 Expansion
Plan"). The key components of the 1998 Expansion Plan include increasing mine
production at the Stillwater Mine from 2,000 to 3,000 tons of ore per day,
construction of a tailings facility, developing a new mine at East Boulder with
a permitted capacity of 2,000 tons of ore per day, and expansion of the smelter
and base metals refinery to accommodate the increased throughput.
14
The company has completed a preliminary study setting forth the expected
costs and timetable for the 1998 Expansion Plan. Based upon studies by
independent mining engineers and our internal analyses, it is currently
estimated that the 1998 Expansion Plan will require capital investment of
approximately $385 million, as set forth below.
ESTIMATED CAPITAL INVESTMENT FOR THE 1998 EXPANSION PLAN
--------------------------------------------------------
Expansion of Stillwater Mine from 2,000 to 3,000 tons of ore per day and
construction of a new tailings facility $ 75 million
Development and construction of East Boulder mine and ancillary facilities 270 million
Expansion of existing smelter and base metals refinery 40 million
---------------
Total estimated capital investment $ 385 million
The key risks associated with the 1998 Expansion Plan are discussed
under the headings "Risk Factors--Expansion Plan Risks" and "--Government
Regulations and Permitting."
Expansion at the Stillwater Mine. In the second quarter of 1998, H.A.
--------------------------------
Simons Ltd., independent mining engineers, completed an engineering study on the
expansion of the Stillwater Mine. Based upon the engineering study and the
company's internal analyses, the expansion is estimated to cost approximately
$75 million and consists of modifications to the existing concentrator,
additional underground development and completion of a new tailings disposal
facility. During 1998, the concentrator expansion was completed and the
remaining expansion is expected to be completed by the end of 2001. When this
expansion is complete, it is expected that the Stillwater Mine will produce
approximately 725,000 to 750,000 ounces of PGMs annually.
Development of East Boulder. The East Boulder site will provide western
---------------------------
access to the J-M Reef. The company has received all major permits necessary to
construct and operate a mining facility at East Boulder at a capacity of 2,000
tons of ore per day. Development at East Boulder will consist of construction of
mine and support facilities, including an underground crusher, a surface
concentrator and ancillary surface facilities. These facilities have been
designed, however, to allow expansion beyond 2,000 tons of ore per day should
this be economically justified and if existing operating permits are amended.
In 1996, the company began work on the initial development phase of East
Boulder and invested $7.8 million, primarily for construction of a tunnel boring
machine and for electrical power supply to the mine portal site. The project was
suspended in October 1996, primarily due to a downturn in palladium and platinum
prices. However, the company continued to conduct permitting and environmental
activities at East Boulder, spending $1.1 million during 1997. In November 1997,
with the completion of the 1994 Expansion Plan and higher prices for palladium
and platinum, the company restarted the East Boulder project.
During 1998, the company completed the tunnel boring machine and began
development work. Independent contractors have commenced work with the company
to drive a 18,500-foot long, 15-foot diameter tunnel to reach the J-M Reef. The
tunnel boring is expected to take between 12 and 18 months and as of February
28, 1999, the company has drilled approximately 8,200 feet. Based upon an
independent engineering study by Kilborn International Inc. (which covered
primarily the underground mine and mine-related infrastructure) and internal
analyses, the company estimates the development of East Boulder should cost
approximately $270 million. The company believes that the operating costs at
East Boulder should be substantially similar to the costs at the existing
operations at the Stillwater Mine. When completed, annual PGM production from
East Boulder is expected to be approximately 450,000 to 500,000 ounces. The key
risks associated with the development of the East Boulder mine are discussed
under the headings "Risk Factors--Expansion Plan Risks" and "--Government
Regulations and Permitting."
Expansion of the Smelter and Base Metals Refinery. The company processes
-------------------------------------------------
concentrate produced from the Stillwater Mine at a smelter and a base metals
refinery located in Columbus, Montana. The company must expand these facilities
in order to accommodate the increased production expected from the Stillwater
Mine and the development of East Boulder. Based upon independent engineering
estimates and the company's internal analyses, the estimated capital cost of
expanding the smelter and the base metals refinery is approximately $40 million.
15
COMPETITION: PALLADIUM AND PLATINUM MARKET
THE FOLLOWING DESCRIPTION OF RECENT EVENTS RELATING TO THE PALLADIUM AND
PLATINUM MARKETS IS NOT INTENDED TO BE COMPLETE, AND READERS ARE ADVISED TO
OBTAIN THEIR OWN INFORMATION AND ADVICE REGARDING THE COMMODITIES MARKETS.
GENERAL
Palladium and platinum are rare precious metals with unique physical
qualities that are used in diverse industrial applications and in the jewelry
industry. The company knows of no economically viable replacements for PGMs in a
number of key technological and industrial applications. The development of a
less expensive alternative alloy or synthetic material which has the same
characteristics as PGMs could have a material adverse effect on the company's
revenues. Although the company is unaware of any such alloy or material, there
can be no assurance that none will be developed.
The company competes with other suppliers of PGMs, some of which are
significantly larger than the company and have access to greater mineral
reserves and financial and commercial resources. See "Supply" below. In
addition, new mines may open over the next several years, increasing supply.
Furthermore, in certain industrialized countries, an industry has developed for
the recovery of PGMs from scrap sources, mostly from spent automotive and
industrial catalysts. There can be no assurance that the company will be
successful in competing with these existing and emerging PGM producers. See "--
Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEMAND
Demand for both palladium and platinum has increased since 1992, but the
increased demand for palladium has been much more dramatic. Demand for palladium
has grown from 3.9 million ounces in 1992 to 8.2 million ounces in 1998 - more
than double in six years. Platinum demand has increased from 3.8 million ounces
in 1992 to 5.1 million ounces in 1998 - a 34% increase.
PGM's unique physical qualities include: (i) a high melting point; (ii)
superior conductivity and ductility; (iii) a high level of resistance to
corrosion; (iv) strength and durability; and (v) strong catalytic properties.
Palladium, like platinum, has numerous industrial applications and when combined
with silver, provides an extremely conductive material.
The largest and fastest growing application for palladium is in the
automotive industry, which represented nearly 51% of the palladium demand for
1998. Demand for palladium in the next several years is projected to increase
significantly, driven primarily by its use in the production of automotive
catalysts which reduce harmful automobile emissions. In the U.S., the automobile
industry has made the decision to comply with standards that will decrease
automotive emissions to National Low Emission Vehicle standards beginning with
the 1999 model year vehicles. Europe and Japan have adopted more stringent
standards for the future as well. With growing concern for cleaner air, it is
expected that concern over automobile emissions will continue to spread. This
could have a marked effect on palladium usage and to an undetermined extent,
platinum.
Approximately 30% of the palladium supply is consumed in the production of
electronic components for personal computers, cellular telephones, facsimile
machines and other devices. There are also indications that demand from the
electronic and semiconductor industries will continue to be strong, although
substitution of base metals for lower end applications continue to move forward.
Dentistry has also been a major use for palladium due to the substitution of
palladium alloys for gold-based dental alloys, representing approximately 15% of
the palladium demand for 1998.
16
Approximately 60% of current world platinum production is used for
industrial and manufacturing processes, most significantly for the
manufacture of catalytic converters for the global auto industry. In
addition to catalytic converters, industrial uses of platinum include the
production of data storage disks, glass, paints, nitric acid, anti-cancer
drugs, fiber optic cables, fertilizers, unleaded and high octane gasolines
and fuel cells. The balance of current platinum demand is for the
production of jewelry, such as gem settings for rings, and for
investment/collector coins. Supply and demand for platinum are essentially
in balance.
SUPPLY
The primary production sources of palladium and platinum are mines
located in the Republic of South Africa, which industry sources believe
provided approximately 25% of the palladium and 74% of the platinum
worldwide during 1998. The principal PGM mining companies in the Republic
of South Africa are Anglo American Platinum Corporation, Ltd., Impala
Platinum Holdings, Ltd. and Western Platinum, Ltd.
The second largest source of palladium and platinum is Russia, which
industry sources believe provided approximately 64% of the palladium and
approximately 17% of the platinum worldwide in 1998. Approximately half of
this supply is believed to have come from stockpiles. Small amounts of
palladium and platinum are also produced in Canada principally as a by-
product of nickel and copper mining.
Supply of palladium is projected to be flat and may, in fact, decline
in the future. In the past, the primary producer of palladium, Russia, has
supplied over 64% of what is now a 8.2 million ounce (demand) world market.
Russia is believed to produce approximately 2.0 million ounces a year as a
by-product of nickel mining, and the remaining supply has come from
stockpiles accumulated over the years. The general consensus in the
western markets is that the Russian stockpiles of both palladium and
platinum have declined significantly and will be exhausted within the
foreseeable future. However, if it were to be determined that Russia's
stockpiles of palladium and platinum were extensive, and if they still
exist and were disposed of in the market, the increased supply could
adversely affect the market prices of palladium and platinum.
In addition to these sources it is possible to recover PGMs from
automotive catalytic converters acquired from scrap yards. A small but
growing industry has developed, predominantly in North America, in the
collection and recovery of PGMs from scrap sources, including automotive
catalytic converters and electronic and communications equipment. In 1998,
the company began processing small shipments of spent automotive catalysts.
PRICES
The company's revenue and earnings depend upon world palladium and
platinum prices. The company has no control over these prices, which tend
to fluctuate widely. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Revenue" and "--Factors That
May Affect Future Results and Financial Condition." The volatility of
palladium and platinum prices is illustrated in the following table of the
annual high, low and average prices per ounce.
PALLADIUM PLATINUM
------------------------------------ ----------------------------------------
YEAR HIGH LOW AVERAGE HIGH LOW AVERAGE
---- ---- ---- ------- ---- ---- -------
1994 $163 $123 $143 $431 $379 $405
1995 178 128 151 459 403 424
1996 144 114 128 432 367 397
1997 239 118 177 497 343 396
1998 419 201 284 429 334 372
17
All subsections under "Business and Properties" are qualified in their
entirety by reference to "--Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors That May
Affect Future Results and Financial Condition."
RISK FACTORS
Set forth below are certain risks faced by the company. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That Could Affect Future Results."
VULNERABILITY TO METALS PRICE VOLATILITY--CHANGES IN SUPPLY AND DEMAND COULD
REDUCE REVENUES.
Since the company's sole source of revenue is the sale of platinum group
metals, changes in the market price of platinum group metals significantly
impact profitability. Many factors beyond the company's control influence the
market prices of these metals. These factors include global supply and
demand, speculative activities, international political and economic
conditions and production levels and costs in other platinum group metal
producing countries, particularly Russia and South Africa.
Current economic and political events in Russia could result in declining
market prices. If Russia disposes of substantial amounts of platinum group
metals from stockpiles or otherwise, the increased supply could reduce the
market prices of palladium and platinum. Recent political instability in
Russia and mounting economic problems make Russian stockpiles difficult to
predict and the risk of sales from stockpiles more significant. Volatility
was evident during 1997 and 1998, when apparent tightness in the market for
platinum group metals led to high prices for current delivery contracts and
"backwardation," a condition in which delivery prices for metals in the near
term are higher than delivery prices for metals to be delivered in the future.
See "--Competition: Platinum and Palladium Market" for further explanation of
these factors.
The company enters into hedging contracts from time to time to reduce the
negative effect of price changes on the company's cash flow. In the past,
these hedging activities typically consisted of contracts that required the
company to deliver specific quantities of metal in the future at specific
prices, the sale of call options and the purchase of put options. During the
first quarter of 1997, the company entered into significant hedging positions,
particularly in palladium, for sales in 1997 and 1998. Following that time,
market prices for palladium to be delivered currently rose sharply. Because
the company's contracts were entered into before the price increase,
deliveries under the hedging contracts during 1997 and 1998 were made at below
market prices and the company experienced substantial hedging losses. In
1998, the company realized $202 per ounce of palladium sold while average
current delivery prices were $286 per ounce. Thus, while hedging transactions
are intended to reduce the negative effects of price decreases, they can also
prevent the company from benefitting from price increases. The company's
below market hedge contracts were closed out during 1998 and the company has
entered into long-term sales contracts that provide a floor price for sales of
a portion of the company's production. For additional discussion of the
marketing contracts, see "Business and Properties--Current Operations--Sales
and Hedging Activities."
EXPANSION PLAN RISKS--ACHIEVEMENT OF THE COMPANY'S LONG-TERM GOALS IS SUBJECT
TO SIGNIFICANT UNCERTAINTIES.
The company's achievement of its long-term expansion goals depends upon its
ability to increase production substantially at the Stillwater Mine and
related facilities and its ability to develop the East Boulder mine. Each of
these tasks will require the company to construct mine and processing
facilities and to commence and maintain production within budgeted levels.
Although the company believes its goals and preliminary estimates are based
upon reasonable assumptions, the company may need to revise its plans and
estimates for the Stillwater Mine and East Boulder project as the projects
progress. See "--East Boulder Project" and "--Expansion Plans" for further
discussion of the company's expansion plans. Among the major risks to
successful completion of the 1998 Expansion Plan are:
18
. potential cost overruns during development of new mine operations and
construction of new facilities;
. possible delays and unanticipated costs resulting from difficulty in
obtaining the required permits; and
. the inability to recruit sufficient numbers of skilled underground
miners.
In addition, a decrease in the market price for platinum group metals would
limit the company's ability to successfully implement and finance the 1998
Expansion Plan.
Based on the complexity and uncertainty involved in development projects at
this early stage, it is extremely difficult to provide reliable time and cost
estimates. The company cannot be certain that either the Stillwater expansion or
the development of East Boulder will be completed on time or at all, that the
expanded operations will achieve the anticipated production capacity, that the
construction costs will not be higher than estimated, that the expected
operating cost levels will be achieved or that funding will be available from
internal and external sources in necessary amounts or on acceptable terms.
The company is not planning to obtain a complete feasibility study or a
final engineering study for the East Boulder project. When an 18,500-foot access
tunnel has been completed, the company will revaluate its geologic and process
analyses, estimates of capital expenditures, cash operating costs and recovery
rates to confirm the feasibility of proceeding with the East Boulder
development. The project's capital costs, operating costs and economic returns
may differ materially from the company's current analyses, which are based
largely on preliminary engineering and cost estimates. The company will proceed
with further development of East Boulder as the engineering studies are
completed and the grade and continuity of the reserves are confirmed.
East Boulder is a development project and has no operating history. Thus,
estimates of future cash operating costs at East Boulder are based largely on
the company's years of operating experience at the Stillwater Mine portion of
the J-M Reef. Actual cash operating costs and economic returns may differ
significantly from those currently estimated or those established in future
studies and estimates. Although the company anticipates that the operating
characteristics at East Boulder will be similar to the Stillwater Mine, new
mining operations often experience unexpected problems during the development
and start-up phases, which can result in substantial delays in reaching
commercial production.
DEPENDENCE ON AGREEMENTS WITH SIGNIFICANT CUSTOMERS--THE COMPANY'S PROTECTION
FROM LOW PRICES DEPENDS UPON PERFORMANCE OF ITS MARKETING CONTRACTS.
In the third quarter 1998, the company entered into sales contracts
covering the sale of palladium and platinum over the five-year period from
January 1999 through December 2003. Under these contracts, the company has
committed approximately 90% to 100% of its annual palladium production and 20%
of its platinum production. The marketing contracts contain termination
provisions that allow the purchasers to terminate in the event the company
breaches and the breach is not cured within periods ranging from ten to thirty
days of notice by the purchaser. In addition, the contracts contain force
majeure provisions that allow for the suspension and, in one instance, the
termination of the contract upon the occurrence of certain events, such as "acts
of God," that are beyond the control of a contracting party and that limit the
party's ability to perform the contract.
The company, therefore, is subject to the customers' compliance with the
terms of the contracts, their ability to terminate or suspend the contracts and
the customers' willingness and ability to pay. In the event the company becomes
involved in a disagreement with one or more of its customers, their compliance
with these contracts may be at risk. For example, the company has negotiated
floor prices that are well above historical low prices for palladium. In the
event of a substantial decline in the market price of palladium, one or more of
these customers could seek to renegotiate the prices or fail to honor the
contracts. In such an event, the company's expansion plans could be threatened.
In addition, under the Scotiabank Credit Facility, a default or modification of
the marketing contracts could prohibit additional loans or require the repayment
of outstanding loans. If the repayment of the credit facility accelerates, the
company may be required to pay the principal and interest due on
19
the 7% Convertible Subordination Notes due 2003. Although the company believes
it has adequate legal remedies if a customer fails to perform, termination or
breach could have a material adverse effect on the company's expansion plans and
results of operations. See "Business and Properties--Current Operations--Sales
and Hedging Activities" for additional information about the marketing
contracts.
LIMITED AVAILABILITY OF ADDITIONAL MINING PERSONNEL AND UNCERTAINTY OF LABOR
RELATIONS
The operations of the company depend significantly on the availability of
qualified miners. Historically, the company has experienced high turnover with
respect to its miners. In addition, the company must compete for individuals
skilled in the operation and development of mining properties. The number of
such persons is limited, and significant competition exists to obtain their
skills. The company cannot be certain that it will be able to maintain an
adequate supply of miners and other personnel or that the company's labor
expenses will not increase as a result of a shortage in supply of such workers.
Failure to maintain an adequate supply of miners could adversely effect the
company's expansion plans and results of operations. The company currently has
approximately 916 employees, about 669 of whom are covered by a collective
bargaining agreement with the Oil, Chemical and Atomic Workers Union, expiring
June 30, 1999. The company's inability to negotiate an acceptable contract with
this union or with a new union could result in work stoppages by the affected
employees and increased operating costs as a result of higher wages or benefits
paid. In the event the company's employees were to engage in a strike or other
work stoppage, the company could experience a significant disruption of its
operations and higher ongoing labor costs, which could have a material adverse
effect on the company's business, financial condition and results of operations.
MINING RISKS AND POTENTIAL INADEQUACY OF INSURANCE COVERAGE
Underground mining and the company's milling, smelting and refining
operations involve a number of risks and hazards, including environmental
hazards, industrial accidents, labor disputes, metallurgical and other
processing, smelting or refining problems, unusual and unexpected rock
formations, ground or slope failures, cave-ins, flooding and periodic
interruptions due to inclement or hazardous weather conditions or other acts of
God, mechanical equipment and facility performance problems and the availability
of materials and equipment. Such risks could result in damage to, or destruction
of, mineral properties or production facilities, personal injury or death,
environmental damage, delays in mining, monetary losses and possible legal
liability. Fatalities have occurred at the company's mine since operations began
in 1986. Industrial accidents could have a material adverse effect on the
company's business and operations. Although the company believes that it
maintains insurance within ranges of coverage consistent with industry practice,
it cannot be certain that this insurance will cover the risks associated with
mining or that the company will be able to maintain insurance to cover these
risks at economically feasible premiums. The company might also become subject
to liability for pollution or other hazards which it cannot insure against or
which it may elect not to insure against because of premium costs or other
reasons. Losses from such events could have a material adverse effect on the
company.
ADVERSE EFFECT OF GOVERNMENTAL REGULATIONS--CHANGES TO REGULATIONS AND
COMPLIANCE WITH EXISTING REGULATIONS COULD INCREASE COSTS AND CAUSE DELAYS.
The company's business is subject to extensive Federal, state and local
environmental controls and regulations, including the regulation of discharge of
materials into the environment, disturbance of lands, threatened or endangered
species and other environmental matters. These laws are continually changing
and, as a general matter, are becoming more restrictive. Generally, compliance
with these regulations requires the company to obtain permits issued by Federal,
state and local regulatory agencies. Certain permits require periodic renewal or
review of their conditions. The company cannot predict whether it will be able
to renew such permits or whether material changes in permit conditions will be
imposed. Nonrenewal of permits or the imposition of additional conditions could
have a material adverse effect on the company's financial condition or results
of operations.
Compliance with existing and future environmental laws and regulations may
require additional control measures and expenditures which the company cannot
predict. Environmental compliance requirements for new
20
mines may require substantial additional control measures that could materially
affect permitting and proposed construction schedules for such facilities. Under
certain circumstances, facility construction may be delayed pending regulatory
approval. Expansion will require new environmental permitting at the Stillwater
Mine and mining and processing facilities at the East Boulder project.
For example, in April 1996, the company submitted a permit amendment
application for the expansion of the Stillwater Mine. This expansion proposal
includes selection and construction of a new tailings impoundment and removal of
the 2,000 tons of ore per day production cap. During 1997, as a result of this
application, the Montana DEQ began preparation of an Environmental Impact
Statement in order to assess the environmental impacts of the amendment. The
Montana DEQ issued the final Environmental Impact Statement in 1998, subsequent
to review of draft issuances and a public hearing. In November 1998, the Record
of Decision was issued by the Montana DEQ and the USFS. There were no material
changes from the original application. An environmental group filed a comlaint
to challenge the adequacy of the Environmental Impact Statement and reclamation
provisions developed in connection with the amendment to the permit. The
complaint has not been served and it is difficult to predict whether or how it
may by pursued.
The company's activities are also subject to extensive Federal, state and
local laws and regulations governing matters relating to mine safety,
occupational health, labor standards, prospecting, exploration, production,
exports and taxes. Compliance with these and other laws and regulations could
require significant capital outlays. The company has not experienced any
material difficulty emanating from these extensive laws and regulations in the
past, nor does it have any basis to expect any material difficulty in the
future. The company believes that it has successfully complied in all material
respects with all Federal, state and local requirements for the current
operations and planned expansion of its mining activities at the Stillwater
Mine.
POTENTIAL NEGATIVE IMPACT OF NEW MINING LEGISLATION
New laws and regulations, amendments to existing laws and regulations, or
more stringent enforcement of existing laws and regulations could have a
material adverse impact on the company's results of operations and financial
condition. In the worst case, such amendments could render the company's mining
operations uneconomic. During the 1998 legislative session, legislation was
introduced into the United States Congress that proposed a number of
modifications to the General Mining Law, which governs the location and
maintenance of unpatented mining claims and related activities on federal lands.
Among those modifications were proposals which would have:
. imposed a royalty on production from unpatented mining claims;
. imposed a fee on production from patented mining claims;
. increased the cost of holding mining claims; and
. imposed more specific federal reclamation requirements on operations on
mining claims.
None of those proposed modifications were enacted into law; however,
similar legislative proposals have been introduced in 1999. The potential impact
on the company as a result of congressional action is difficult to predict, but
legislation amending the General Mining Law could adversely affect the company's
ability to economically develop the J-M Reef, virtually all of which is
comprised of unpatented mining claims on federal lands.
DEPENDENCE ON A SINGLE MINE--THE STILLWATER MINE IS THE COMPANY'S SOLE SOURCE OF
REVENUES.
All of the company's revenues are currently derived from its mining
operations at the Stillwater Mine. Although the company has not experienced any
serious production interruption since production began in 1987, an interruption
in operations at the Stillwater Mine or at any of the company's processing
facilities would have a material adverse effect on the company's ability to
generate revenues and profits in the future.
21
UNCERTAINTY OF TITLE TO PROPERTIES
The validity of unpatented mining claims on public lands, which
constitute most of the property holdings of the company, is often uncertain
and may be contested and subject to title defects. Unpatented mining claims
may be located on U.S. federal public lands open to appropriation, and are
generally considered to be subject to greater title risk than other real
property interests because the validity of unpatented mining claims is often
uncertain and is always subject to challenges of third parties or contests by
the federal government. The validity of an unpatented mining claim or
millsite, in terms of its location and its maintenance, depends on strict
compliance with a complex body of federal and state statutory and decisional
law and, for unpatented mining claims, the existence of a discovery of
valuable minerals. In addition, few public records exist to definitively
control the issues of validity and ownership of unpatented mining claims or
millsites. While the company has obtained various reports, opinions and
certificates of title for some of the unpatented mining claims or millsites it
owns or to which it has the rights in accordance with what the company
believes is industry practice, the company cannot be certain that the title to
any of its claims may not be defective.
DIFFICULTY OF ESTIMATING RESERVES ACCURATELY
While the company's 1998 ore reserves have been affirmed and verified by
independent consultants, the ore reserve estimates are necessarily imprecise
and depend to some extent on statistical inferences drawn from limited
drilling, which may prove unreliable. Reserve estimates are expressions of
judgment based on knowledge, experience and industry practice. Although the
company believes its estimated ore reserves are well established, it cannot be
certain that its estimated ore reserves are accurate, and future production
experience could differ materially from such estimates. Should the company
encounter mineralization or formations at any of its mines or projects
different from those predicted by drilling, sampling and similar examinations,
reserve estimates may have to be adjusted and mining plans may have to be
altered in a way that might adversely affect the company's operations.
Declines in the market prices of platinum group metals may render the mining
of some or all of the company's ore reserves uneconomic. The grade of ore may
vary significantly from time to time and the company cannot give any
assurances that any particular level of metal may be recovered from the ore
reserves. Moreover, short-term factors relating to the ore reserves, such as
the need for additional development of the ore body or the processing of new
or different grades, may impair the profitability of the company in any
particular accounting period.
COMPLEXITY OF PROCESSING PLATINUM GROUP METALS
Producers of platinum group metals are required to conduct additional
processing procedures and construct and operate additional facilities compared
to gold and silver producers. In addition to concentration facilities at the
mine site, the company operates its own smelting and base metals refining
facilities in Columbus, Montana to produce a filter cake that is shipped for
final refining by a third party refiner. The operations of a smelter and
refinery by the company require environmental steps and operational expertise
not required of most other precious metals producers. Though the company has
not experienced any material adverse effects to date, this additional
complexity of operations poses additional operational and environmental risks.
22
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information concerning the individuals who are
executive officers of the company.
Name Age Position
-------------------------------------------------------------------------------
William E. Nettles 55 Chairman of the Board and Chief Executive Officer
John E. Andrews 52 President and Chief Operating Officer
James A. Sabala 44 Vice President and Chief Financial Officer
Gilmour Clausen 42 Vice President, Nye Operations
The following are brief biographies of the company's executive officers:
WILLIAM E. NETTLES is currently Chairman of the Board and Chief Executive
Officer of the company. He joined the company in August 1997 after fifteen
years with Engelhard Corporation. Most recently, Mr. Nettles served as Chief
Financial Officer for Engelhard. He had previously served as Engelhard's Vice
President and General Manager for the Chemical Catalyst Group and the
Specialty Minerals & Colors Group and Vice President and Business Director for
the Performance Minerals Group. Prior to Engelhard, Mr. Nettles was with The
Dow Chemical Company from 1965 to 1982 serving in various position of
increasing responsibility. Mr. Nettles has a Bachelor of Science in
Industrial Management from the Georgia Institute of Technology and a Master of
Business Administration from the University of Michigan.
JOHN E. ANDREWS is currently President and Chief Operating Officer of the
company and was appointed to the company's Board of Directors on January 1,
1999. He joined the company in 1993 after serving four years as the Director
of International Mining Operations of Phelps Dodge Corporation. From 1979 to
1989, Mr. Andrews held various positions with Exxon Corporation and its
affiliates, including Operations Support Division Manager of Exxon Coal and
Minerals Company and Plans Coordination and Evaluation Manager of Exxon
Minerals Company. Prior to joining Exxon, Mr. Andrews was a Consulting Mining
Engineer with David S. Robertson & Associates from 1977 to 1979. From 1969 to
1977 he served in a variety of mining capacities with Union Corporation, Ltd.
in the Republic of South Africa. He received a Bachelor of Science with
honors from the Royal School of Mines, Imperial College, England in 1969.
JAMES A. SABALA was appointed Vice President and Chief Financial Officer
of the company effective April 1, 1998. Prior to joining the company, Mr.
Sabala was with Coeur d'Alene Mines Corporation from 1981 to 1998, most
recently as Senior Vice President and Chief Financial Officer. Prior to
joining Coeur d'Alene Mines, Mr. Sabala was with Price Waterhouse & Co. as a
Certified Public Accountant. He received a Bachelor of Science in Business,
summa cum laude, with a major in Accounting from the University of Idaho.
GILMOUR CLAUSEN is currently Vice President, Nye Operations. Mr. Clausen
joined the company in 1995 after six years with Placer Dome Inc. in a number
of positions, including General Manager of the Detour Lake Mine and the Endako
Mines Division. Prior to that he was employed by Cleveland-Cliffs, Fording
Coal and Noranda Mines Limited. Clausen received his Bachelor of Science and
Master of Science degrees from Queen's University in Kingston, Canada. He also
holds a Diploma in Civil Engineering from Ryerson Polytechnical University.
Set forth below is certain information concerning other officers of the
Company:
CHRIS ALLEN is currently Vice President, Safety and Government Affairs.
He joined the company in 1993. Prior to joining the company, he was Manager
of Health and Safety for P.T. Freeport Indonesia Incorporated from 1991 to
1993, and prior to that he was with FMC Gold Corporation and FMC Corporation
from 1986 to 1991 in a number of roles with increasing responsibility in the
areas of safety and environmental affairs. He received a Bachelor of Science
in Public Health from Utah State University.
23
GINA WILSON is currently Vice President, Investor Relations and Corporate
Communications. She joined the company in 1996 after serving three years with
Santa Fe Pacific Gold Corporation as Director of Investor Relations and
Corporate Communications. Prior to that she was employed by Amax Gold Inc. as
Manager, Investor and Public Relations from 1988 to 1993. She received her
Bachelor of Science degree, summa cum laude, from Regis University and her
Master of Business Administration from the University of Colorado.
ROBERT LAPPLE is currently Vice President, Metals Marketing. Mr. Lapple
joined the company in 1998. Prior to joining the company, he was Vice
President of Precious Metals with Gerald Metals, Inc./PGP Industries Inc. from
1996 to 1998. From 1995 to 1996 he was a vice president with the Moccatta
Group of Standard Chartered Bank and served as a vice president with Engelhard
Corporation from 1989 to 1995. From 1983 to 1989 he served in a number of
roles of increasing responsibility with Gerald Metals, Inc. He received his
Bachelor of Arts in economics from Davidson College.
CRAIG PATRICK is currently Vice President, Human Resources. He joined
the company in 1998 after serving twelve years with Cyprus Amax Minerals
Company, most recently as Regional Director, Organizational Services. From
1969 to 1986 he was with Duval Corporation. He has a Bachelor of Science in
Business Administration from the University of Arizona and a Masters in
Business Administration from the University of Phoenix.
ITEM 3
LEGAL PROCEEDINGS
Not applicable.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
24
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The company's common shares were traded on the NASDAQ National Market
under the symbol "PGMS" from December 16, 1994 to June 4, 1997. Effective
June 5, 1997, the company began trading on the American Stock Exchange,
Inc. ("AMEX") under the trading symbol "SWC". For the period from January
1, 1996 through December 31, 1998 the high and low sales prices for the
company's common stock for each quarter as reported by NASDAQ or AMEX, as
applicable, were:
1998 HIGH LOW
----------------------- -------- --------
First Quarter $16.88 $10.58
Second Quarter 19.30 14.92
Third Quarter 21.30 11.58
Fourth Quarter 27.33 19.42
1997 HIGH LOW
---------------------- -------- --------
First Quarter $15.83 $11.17
Second Quarter 16.67 13.17
Third Quarter 15.00 12.67
Fourth Quarter 15.33 10.17
The prices for the company's common stock have been retroactively
adjusted to reflect a three-for-two stock split effective December 31,
1998.
STOCKHOLDERS. As of March 1, 1999, the company had 396 stockholders of
record.
DIVIDENDS. The company has never paid any dividends on its common
stock and expects for the foreseeable future to retain all of its earnings
from operations for use in expanding and developing its business. Any
future decision as to the payment of dividends will be at the discretion of
the company's Board of Directors and will depend upon the company's
earnings, financial position, capital requirements, plans for expansion,
loan covenants and such other factors as the Board of Directors deems
relevant. Covenants in the Scotiabank Credit Facility significantly
restrict the payment of dividends on common stock.
25
ITEM 6
SELECTED FINANCIAL AND OPERATING DATA
(in thousands, except per share amounts) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Revenues (1) $106,723 $ 76,877 $ 56,214 $ 51,335 $ 54,934
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of metals sold (1) 66,793 67,948 50,175 45,864 46,041
Depreciation and amortization 11,642 11,658 8,699 5,749 5,232
- -----------------------------------------------------------------------------------------------------------------------------------
Total cost of sales 78,435 79,606 58,874 51,613 51,273
General and administrative expenses and other 5,102 3,479 2,532 1,974 768
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 83,537 83,085 61,406 53,587 52,041
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 23,186 (6,208) (5,192) (2,252) 2,893
Interest income 1,354 1,073 2,138 2,795 221
Interest expense, net of capitalized interest (2) (2,774) (3,608) (1,461) (431) (320)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary loss and
cumulative effect of accounting change 21,776 (8,743) (4,515) 112 2,794
Income tax (provision) benefit (8,380) 3,366 1,736 (44) (243)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss and cumulative effect
of accounting change 13,386 (5,377) (2,779) 68 2,551
Extraordinary loss on early extinguishment of debt, net of tax - - - -
benefit of $357 (3) (568)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change 13,386 (5,377) (2,779) 68 1,983
Cumulative effect of accounting change, net of income tax - -
provision of $8,677 (4) 13,861 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 13,386 $ (5,377) $ 11,082 $ 68 $ 1,983
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE (5)
Income (loss) before extraordinary loss and cumulative
effect of accounting change $ 0.43 $ (0.18) $ (0.09) $ - $ 0.11
Extraordinary loss (3) - - - - (0.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting change $ 0.43 $ (0.18) $ (0.09) $ - $ 0.09
Cumulative effect of accounting change (4) - - 0.46 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.43 $ (0.18) $ 0.37 - $ 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE (5)
Income (loss) before extraordinary loss and cumulative
effect of accounting change $ 0.38 $ (0.18) $ (0.09) $ - $ 0.11
Extraordinary loss (3) - - - - (0.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting change $ 0.38 $ (0.18) $ (0.09) $ - $ 0.09
Cumulative effect of accounting change (4) - - 0.46 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.18) $ 0.37 $ - $ 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (5)
Basic 31,472 30,435 30,140 30,102 22,700
Diluted 35,019 30,435 30,140 30,102 22,700
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash provided by (used in) operating activities $ 31,399 $ (1,297) $ 14,464 $ 6,009 $ 9,220
Capital expenditures (6) 78,272 15,820 58,413 46,133 9,315
BALANCE SHEET DATA
Current assets $ 85,378 $ 35,303 $ 49,061 $ 44,974 $ 77,234
Total assets 335,937 229,219 239,910 162,175 153,498
Current liabilities 26,617 12,249 15,833 10,370 9,427
Long-term debt and capital lease obligations 58,992 61,513 62,563 8,713 1,715
Shareholders' equity 228,007 141,392 143,666 132,305 132,171
Working capital 58,761 23,054 33,228 34,604 67,807
- -----------------------------------------------------------------------------------------------------------------------------------
(footnotes on following page)
26
(in thousands, except per share amounts) 1998 1997 1996 1995 1994
----------------------------------------------
OPERATING DATA
Tons milled (7) 719 577 446 398 373
Mill head grade (8) 0.69 0.70 0.67 0.67 0.80
Ounces of palladium produced 340 271 196 169 207
Ounces of platinum produced 104 84 59 51 63
- -----------------------------------------------------------------------------------------------------------------
Total ounces produced (9) 444 355 255 220 270
- -----------------------------------------------------------------------------------------------------------------
Ounces of palladium sold 337 288 214 180 216
Ounces of platinum sold 103 91 62 54 63
- -----------------------------------------------------------------------------------------------------------------
Total ounces sold (9) 440 379 276 234 279
----------------------------------------------------------------------------------------------------------------
PRICE AND COST DATA (10)
Average realized price per palladium ounce $ 202 $ 144 $ 144 $ 157 $ 138
Average realized price per platinum ounce 377 388 410 425 399
Combined average realized price per ounce 243 203 204 219 197
Cash costs per ton milled $ 93 $ 107 $ 105 $ 119 $ 124
Cash costs per ounce produced 151 174 184 215 173
Total costs per ounce produced 178 207 219 240 191
- -----------------------------------------------------------------------------------------------------------------
(1) Revenues consist of the sales revenue for palladium and platinum, including
any hedging gain or loss. By-product metals revenue and secondary materials
processing revenue are included as a reduction of cost of metals sold.
(2) Capitalized interest for the years ended December 31, 1998, 1997 and 1996
totaled $2.1 million, $1.5 million and $2.2 million, respectively.
(3) Upon early extinguishment of notes issued in connection with the 1994
private placement, the unamortized balance of deferred debt issue costs of
$925,000 ($568,000 net of taxes) was charged against income as an
extraordinary item.
(4) Net income for 1996 reflects a change in accounting policy which became
effective January 1, 1996. Pursuant to this policy, the company changed its
method of accounting for mine development expenditures by capitalizing
certain direct and indirect costs related to development activities, which
were previously expensed. The effect of the accounting change on 1996
results was to increase net income by approximately $5.2 million ($0.17 per
share). Assuming the accounting change had been applied retroactively, the
unaudited pro forma effect would have been an increase in net income of
$3.0 million ($0.10 per share) in 1995.
(5) In 1997, the company adopted SFAS No. 128, Earnings per Share, which
requires the presentation of basic and diluted earnings per share. All
prior period per share data presented have been restated to conform with
the provisions of this statement.
(6) Aggregate capital expenditures related to the 1994 and 1998 Expansion Plans
were $9.3 million, $39.5 million, $35.9 million, $2.9 million, and $49.9
million in 1994, 1995, 1996, 1997 and 1998.
(7) Tons milled represent the number of grade-bearing tons of ore fed to the
concentrator.
(8) Mill head grade is presented as ounces of palladium and platinum combined
per ton.
(9) Ounces produced is defined as the number of ounces produced from the
concentrator during the period reduced by losses expected to be incurred in
subsequent smelting and refining processes. Differences in ounces produced
and ounces sold are caused by the length of time required by the smelting
and refining processes.
(10) A combined average realized price of palladium and platinum is reported at
the same ratio as ounces are produced from the base metals refinery. Cash
costs include cash costs of mining, processing and administrative expenses
at the mine site (including overhead, taxes other than income taxes,
royalties and credits for metals produced other than palladium and
platinum.) Total costs of production include cash costs plus depreciation
and amortization. Income taxes, corporate general and administrative
expenses and interest income and expense are not included in either total
or cash costs.
27
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
company's Consolidated Financial Statements and Notes, included elsewhere
in this report, and the information contained in "Selected Financial and
Operating Data."
PRODUCTION
The company mines, processes and refines palladium, platinum, and
associated metals from the J-M Reef in Montana. The company conducts its
mining operations at the Stillwater Mine, and recently announced its 1998
Expansion Plan intended to reach an annualized rate of PGM production of
1.2 million ounces before year end 2001. The company plans to expand
existing operations at the Stillwater Mine and develop the East Boulder
site. See "Business and Properties--1998 Expansion Plan."
The company's production of palladium and platinum is determined by
the tons of ore mined, the mill head grade (ounces of precious metal per
ton of mined ore) and metallurgical recovery. The company defines its mine
production as those ounces contained in concentrate when it is shipped to
the company's smelter, which generally occurs within four days of the ore
being mined. The company records revenue when partially-refined ounces are
shipped from its base metals refinery to a third-party refiner for final
processing. Shipment from the base metals refinery to a third-party refiner
generally occurs within 15 to 18 days of mining. Approximately 40 days
elapse between the time ore is extracted from the Stillwater Mine and the
time ounces of precious metal contained in that ore are made available to
the company by a third-party refiner. Because of the length of the
processing cycle and the different cutoff points for identifying production
and sales, production may not always correspond to sales in a particular
accounting period. However, any production not shipped from the base metals
refinery at the end of an accounting period is generally shipped during the
first two weeks of the subsequent period.
In 1994, the company commenced a major expansion project designed to
double ore throughput at its Nye, Montana operation to 2,000 tons of ore
per day. This expansion effort was completed in mid-1997, and during the
fourth quarter of that year, the company successfully attained its 2,000
tons of ore per day goal. Increases in ore tonnage in 1997 and 1998 were
achieved by the company as a result of the operation of the new 1950-foot
shaft and the underground crusher and conveyor system. Also, the company
added manpower, increased the number of active stopes and improved
productivity, principally through the increase of mechanized mining
methods.
The ore grade of the company's reserves is generally consistent, but,
as is common in an underground mine, the grade mined and the recovery rate
achieved will vary from period to period. In particular, mill head grade
can be expected to vary by up to 10% from quarter to quarter. During 1998,
the average mill head grade of ore processed was 0.69 ounce of PGMs per ton
of ore. During 1997, the average mill head grade of ore processed was 0.70
ounce of PGMs per ton of ore, compared to the 1996 average mill head grade
of 0.67 ounce of PGMs per ton of ore.
REVENUE
The company's revenue and earnings are significantly influenced by
worldwide prices of palladium and platinum, which can be volatile and over
which the company has no control. Sales to significant customers
represented approximately 60%, 90% and 98% of total revenues for the years
ended December 31, 1998, 1997 and 1996, respectively. The company sells its
metals to a small number of customers and brokers; however, the company
may, if the need were to arise, readily sell its metal in markets
throughout the world.
28
Until the second quarter of 1997, the company used basic hedging
techniques involving spot deferred forward contract commitments and put and
call options to attempt to lock in prices for its production, benefit from
price increases and protect against price decreases. During the first quarter
of 1997 the company entered into significant hedge positions, particularly for
palladium, for 1997 and 1998. These hedging contracts, which expired in 1998
precluded the company from obtaining the benefit of increased market palladium
prices in 1997 and 1998. As a result, the company's revenues were unfavorably
impacted, in 1998 with the company's combined average 1998 realized price for
palladium falling about 29% below the combined average 1998 market price.
These below market hedge contracts matured and the metal was delivered by the
close of 1998. The objective of the company's hedging policy in the future
will be to benefit from upward price movements while providing floor prices to
reduce the company's exposure to downside price movements. Pursuant to this
policy, the company entered into sales contracts to sell approximately 90% to
100% of its palladium production and 20% of its platinum production from 1999
through 2003. Palladium sales under these contracts will be at a slight
discount to market prices. These contracts provide for an average floor price
of approximately $225 per ounce on substantially all of the company's annual
production and an average maximum price of $400 per ounce on approximately 30%
of production. The 20% of the company's platinum production covered by these
contracts will be sold at a slight discount to market prices, subject to floor
of $350 per ounce and a cap of $425 per ounce. See "Risk Factors--Dependence
on Agreements with Significant Customers."
COST STRUCTURE
The company's current operating costs per ounce have improved
significantly as a result of increased production at the Stillwater Mine.
Cash costs of production include cash costs of mining, processing, general and
administrative expenses at the minesite, royalties and taxes other than income
taxes and are net of byproduct metals revenue. Mine site general and
administrative expenses include overhead, taxes other than income, and
royalties. Operating efficiencies were achieved through economies of scale as
production increased. In addition, material handling and material processing
efficiencies were realized once the underground shaft was commissioned in June
1997, as the shaft provided a more automated method for transporting ore and
waste underground. Finally, the successful implementation of controls to
minimize mine dilution also had a favorable impact on the company's cost
structure. Management expects these operating efficiencies will continue to
be realized in the future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
PGM Production. Total ore tons mined in the year ended December 31,
--------------
1998 increased 24% to 720,000 tons, from 580,000 tons for the year ended
December 31, 1997. Tons milled in 1998 averaged about 2,000 tons of ore
per day compared with an average of 1,600 tons of ore per day milled in
1997. Increases in ore tonnage were achieved as a result of the mine
expansion, primarily through operating efficiencies gained by commencing
underground ore crushing, adding mine manpower and improving stoping
productivity. Enhanced stoping productivity was driven by an increase in
mechanized mining to almost 85% of 1998 tons mined, up from 80% in 1997.
The average head grade of ore delivered to the mill was 0.69 ounces
per ton in 1998, compared to 0.70 ounce per ton achieved in 1997.
Metallurgical recovery was 91% in 1998, compared to 89% in 1997 and is the
result of the use of additional flotation cells installed to increase
retention time in flotation.
Palladium and platinum production increased 25% to 444,000 ounces for
the year ended December 31, 1998 from 355,000 ounces in 1997. Once again,
this substantial improvement in production was primarily the result of the
mine expansion and, more specifically, was driven by the increase in tons
milled during 1998, coupled with an improvement in the recovery rate
resulting from the installation of three additional flotation cells earlier
in the year.
29
Revenues. Revenues were $106.7 million for the year ended December
--------
31, 1998 compared with $76.9 million in 1997, an increase of 39% and were
the result of higher production levels and higher realized PGM prices.
Palladium sales increased to 337,000 ounces in 1998 from 288,000
ounces in 1997. Platinum sales increased to 103,000 ounces in 1998 from
91,000 ounces in 1997. Total sales of metal increased 16% to 440,000
ounces in 1998 from 379,000 ounces in 1997, primarily due to significantly
higher production levels achieved in 1998.
The combined average realized price per ounce of palladium and
platinum sold in 1998 was $243 per ounce, compared to $203 per ounce in
1997, while the combined average market price rose about 32% to $304 per
ounce in 1998, compared with $230 per ounce in 1997. The company was unable
to realize the average market price for palladium in 1998 because of its
inability to defer delivery upon favorable terms on its market deferred
palladium forward contracts due to continued severe backwardation in the
palladium markets during 1997 and 1998. The average realized price per
ounce of platinum sold was $377 per ounce in 1998, a decline of 3% compared
with $388 per ounce in 1997. The platinum market price was $372 per ounce
in 1998 compared to $395 per ounce in 1997. The average realized price per
ounce of palladium was $202 per ounce in 1998 compared to $144 per ounce
for 1997, while the average market price increased 61% to $286 per ounce in
1998 from $178 per ounce in 1997.
Costs and Expenses. Cash production costs per ounce in the year ended
------------------
December 31, 1998 decreased $23, or 13%, to $151 per ounce from $174 per
ounce in the year ended December 31, 1997, primarily the result of a 25%
increase in metal production. Total production costs per ounce in the year
ended December 31, 1998 decreased $29, or 14% to $178 per ounce from $207
per ounce in the year ended December 31, 1997. This decrease is also
primarily due to increased metal production.
Operating Income (Loss). The company reported operating income of
-----------------------
$23.2 million for the year ended December 31, 1998, compared with an
operating loss of $6.2 million for 1997. The higher operating income was
mainly the result of increased metal production and higher realized prices.
For 1998, general and administrative costs were $5.1 million compared with
$3.5 million in 1997.
Net Income (Loss). Primarily as a result of increased operating
-----------------
income, the company has provided for income taxes of $8.4 million compared
to a reported benefit of $3.4 million for the year ended December 31, 1997.
As a result the company reports net income of $13.4 million for the year
ended December 31, 1998 compared with net loss of $5.4 million in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
PGM Production. Total ore tons mined in the year ended December 31,
--------------
1997 increased 37% to 580,000 tons from 424,000 tons for the year ended
December 31, 1996. Tons milled in 1997 averaged about 1,600 tons of ore
per day compared with an average of 1,200 tons of ore per day milled in
1996. Increases in ore tonnage were achieved as a result of the mine
expansion, primarily through operating efficiencies gained by commencing
underground ore crushing, adding mine manpower and improving stoping
productivity. Enhanced stoping productivity was driven by an increase in
mechanized mining to almost 80% of 1997 tons mined, up from 60% in 1996.
The average head grade of ore delivered to the mill was 0.70 ounce per
ton in 1997, an increase over the 0.67 ounce per ton achieved in 1996. The
mill head grade increased primarily due to successful implementation of
controls to minimize mining dilution. Additionally, commissioning of the
production shaft in June 1997 produced greater efficiencies in material
handling and subsequent material processing through the mill.
Palladium and platinum production increased 39% to 355,000 ounces for
the year ended December 31, 1997 from 255,000 ounces in 1996. Once again,
this substantial improvement in production was primarily
30
the result of the mine expansion and, more specifically, was driven by the
increase in tons milled during 1997 and a higher average mill head grade,
coupled with an improvement in the recovery rate resulting from the
installation of three additional flotation cells earlier in the year .
Revenues. Revenues were $76.9 million for the year ended December 31,
--------
1997 compared with $56.2 million in 1996, an increase of 37%.
Palladium sales increased to 288,000 ounces in 1997 from 214,000
ounces in 1996. Platinum sales increased to 91,000 ounces in 1997 from
62,000 ounces in 1996. Total sales of metal increased 37% to 379,000 ounces
in 1997 from 276,000 ounces in 1996, primarily due to significantly higher
production levels achieved in 1997 as a result of the 1994 mine expansion.
Effective January 1, 1997, the company changed its method of revenue
recognition whereby revenue is recognized when product is shipped from the
company's base metals refinery to an external refiner. This change made
the company's revenue recognition policy more comparable with other
precious metals producers. The cumulative effect of this change as of
January 1, 1997 was to increase revenue by approximately $2.7 million in
the first quarter of 1997; the effect on net income was not material.
The combined average realized price per ounce of palladium and
platinum sold in 1997 was $203 per ounce, roughly the same as 1996, while
the combined average spot price rose about 20% to $230 per ounce in 1997,
compared with $191 per ounce in 1996. The average realized price per ounce
of palladium remained constant at $144 per ounce for both 1997 and 1996,
while the average spot price increased 39% to $178 per ounce in 1997 from
$128 per ounce in 1996. The average realized price per ounce of platinum
sold was $388 per ounce in 1997, a decline of 5% compared with $410 per
ounce in 1996. The platinum spot price remained about the same in both
years at $395 per ounce. The company was unable to realize the average spot
price for palladium in 1997 because of its inability to defer delivery upon
favorable terms on its spot deferred palladium forward contracts due to
continued severe backwardation in the palladium markets during 1997.
Costs and Expenses. Cash costs per ounce of metal produced in the
------------------
year ended December 31, 1997 decreased $10 to $174 per ounce from $184 per
ounce in the year ended December 31, 1996, primarily the result of a 39%
increase in metal production. Total costs per ounce of metal produced in
the year ended December 31, 1997 decreased $12 to $207 per ounce from $219
per ounce in the year ended December 31, 1996. This decrease is also
primarily due to increased metal production.
Operating Income (Loss). The company incurred an operating loss of
-----------------------
$6.2 million for the year ended December 31, 1997, compared with an
operating loss of $5.2 million for 1996. The higher operating loss was
mainly the result of a $1.1 million increase in general and administrative
costs. For 1997, general and administrative costs were $2.9 million
compared with $1.8 million in 1996. The $2.9 million of expenses for 1997
included approximately $1.6 million of non-recurring severance costs and
professional fees related to changes in the company's business processes
and management structure and the reorganization of the company's Board of
Directors. The decrease in costs per ounce for the current year was driven
by significantly higher production in 1997, about 39% more than in 1996.
Operating efficiencies also contributed to the lower cost per ounce.
Net Income (Loss). The company realized a net loss of $5.4 million for
-----------------
the year compared with net income of $11.1 million in 1996, when results
included the cumulative effect of an accounting change. Absent this
accounting change, the net loss for 1996 was $2.8 million. The larger net
loss in 1997 was driven by lower realized platinum prices, reduced interest
income on lower cash balances and increased net interest expense.
31
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital at December 31, 1998 was $58.8
million compared to $23.1 million at December 31, 1997. The ratio of
current assets to current liabilities was 3.2 at December 31, 1998,
compared to 2.9 at December 31, 1997.
Net cash provided by operations for the year ended December 31, 1998
was $31.4 million compared with cash used in operations of $1.3 million in
1997, an increase of $32.7 million. The increase is a result of increased
net income of $18.8 million and an increase in the provision for deferred
income taxes of $11.7 million in 1998 as compared to 1997.
A total of $54.8 million of cash was used in investing activities in
1998 compared to $12.1 million in 1997. The increased usage was primarily
due to an increase in capital expenditures as a result of the development
of the East Boulder project and the Stillwater Mine expansion.
For the year ended December 31, 1998, cash flow from financing
activities was $69.0 million compared to $1.2 million for the year ended
December 31, 1997. The increase is primarily due to the completion in the
fourth quarter of 1998 of 2.3 million common share offering which provided
approximately $67 million.
As a result of the above, cash and cash equivalents increased by $45.6
million for the year ended December 31, 1998, compared with a decrease of
$12.2 million in the comparable period of 1997.
In September 1998, the company completed the sale leaseback of a
tunnel boring machine and miscellaneous other mining equipment. The leases
are classified as operating leases for financial reporting purposes and are
non-cancellable with terms of seven years. The annual rental payments
during the term of the leases are approximately $1.6 million.
In 1998, the company announced plans to expand the Stillwater Mine and
to develop East Boulder. Total capital to fund the expansion is expected to
approximate $385 million. Of this, the Stillwater Mine expansion is
expected to cost about $75 million; East Boulder is expected to cost
approximately $270 million; and approximately $40 million is designated for
the expansion of the company's smelter and base metals refinery located in
Columbus, Montana. During 1999, the company expects to invest approximately
$200 million on capital items, including capitalized interest of $6
million.
Cash flow from operating activities is not expected to be sufficient
to cover 1999 capital expenditures. Based on cash and short-term
investments on hand and expected cash flows from operations, along with
existing credit facilities of $175 million, management believes there is
sufficient liquidity to meet 1999 operating and capital needs. The company
may, from time to time, also seek to raise additional capital from the
public or private securities markets or from other sources for general
corporate purposes and for investments beyond the scope of the current
phase of its current expansion plans.
The company has obtained a seven-year $175 million credit facility
from a syndicate of banks led by the Bank of Nova Scotia. The facility
provides for a $125 million term loan facility and a $50 million revolving
credit facility. Borrowings may be made under the term loan facility until
December 31, 2000 and amortization of the term loan facility will commence
on March 31, 2001. The final maturity of the term loan facility and
revolving credit facility will be December 31, 2005.
The loans will be required to be prepaid from excess cash flow,
proceeds from asset sales and the issuance of debt or equity securities,
subject to specified exceptions. Proceeds of the term loan facility will be
used to finance a portion of the 1998 Expansion Plan. Proceeds of the
revolving credit facility will be used for general corporate and working
capital needs. At the company's option, the Scotiabank Credit Facility will
bear
32
interest at LIBOR or an alternate base rate, in each case plus a margin.
The interest rate may be adjusted depending upon the company's ratio of
debt to operating cash flow. Substantially all the property and assets of
the company and its subsidiaries and the stock of the company's
subsidiaries have been pledged as security for the Scotiabank Credit
Facility.
Conditions precedent to both initial and subsequent borrowing under
the term loan facility and revolving credit term loan facility and
revolving credit facility include: (1) continued performance of the
marketing contracts; (2) receipt of satisfactory milestone reports
regarding the 1998 Expansion Plan; and (3) receipt of all government and
third party approvals necessary or advisable for the 1998 Expansion Plan.
Covenants in the Scotiabank Credit Facility restrict: (1) additional
indebtedness; (2) payment of dividends or redemption of capital stock; (3)
liens; (4) investment, acquisitions, dispositions or mergers; (5)
transactions with affiliates; (6) capital expenditures (other than those
associated with the 1998 Expansion Plan); (7) refinancing or prepayment of
subordinated debt (excluding an underwritten call or conversion of the
company's 7% Convertible Subordinated Notes Due 2003); (8) changes in the
nature of business conducted or ceasing operations at the principal
operating properties; and (9) commodities hedging to no more than 90% of
annual palladium production and 75% of annual platinum production
(excluding the sales covered by the company's marketing contracts and
similar agreements). The company also is subject to financial covenants
including a debt to operating cash flow ratio, is debt service coverage
ratio and a debt to equity ratio.
Events of default include: (1) a cross-default to other indebtedness
of the company or its subsidiaries; (2) any material modification to the
life-of-mine plan for the Stillwater Mine; (3) a change of control of the
company; (4) the failure to maintain annual palladium production of at
least 315,000 ounces in the year 2000 and at least 490,000 ounces each year
thereafter or (5) any breach or modification of any of the sales contracts.
Default under the Scotiabank Credit Facility may constitute a default under
the indenture associated with the Convertible Notes. The indenture for the
Convertible Notes also contains standard covenants and provisions for
events of default.
In addition, the company had an unsecured working capital line of
credit with N M Rothschild & Sons Limited, with a maximum borrowing
capacity of $15 million. As of December 31, 1998, there were no borrowings
against this credit line, and the company could borrow up to $9.3 million
based upon quarterly borrowing calculations under the terms of the
agreement. This facility was cancelled concurrent with completion of the
Scotiabank Credit Facility.
MARKET RISK
-----------
The company may from time to time utilize derivative instruments to
financial risk. The company has no material derivative position as of
December 31, 1998. During the third quarter of 1998, the company entered
into sales contracts with General Motors Corporation, Ford Motor Company,
Mitsubishi Corporation and KEMET Corp. These contracts cover the company's
PGM production over the five-year period from January 1999 through December
2003. During this period, the company has committed between 90% to 100% of
its actual palladium production and approximately 20% of its planned annual
platinum production. Palladium and platinum sales are priced at a slight
discount to market, with floor prices on substantially all of the company's
production committed under these contracts averaging $225 per ounce of
palladium and $350 per ounce of platinum. The company has also agreed to an
average maximum price of approximately $400 per ounce on approximately 30%
of its palladium production and $425 per ounce on approximately 20% of its
planned annual platinum production.
ENVIRONMENTAL OBLIGATIONS
The company focused on one significant environmental project during
1998. This project involved securing an amendment to the company's existing
permit from the Montana Department of Environmental Quality which provided
for a substantial increase in throughput at the Stillwater Mine site and
construction of
33
a tailings facility on a tract of land owned by the company in Stillwater
County, Montana. The costs associated with this permitting effort were $0.3
million in 1998 and $0.3 million in 1997. The company does not expect to incur
additional costs in connection with the project. The company does not anticipate
incurring any significant capital or unusual operating expenditures for other
environmental compliance within the next 12 months. In the first quarter of
1999, an environmental group filed a complaint against the Montana Department of
Environmental Quality challenging the adequacy of the Environmental Impact
Statement and reclamation provisions developed in connection with the permit
amendment. The company believes the complaint is without merit. In 1998, the
company's environmental expenses were $0.6 million and capital expenditures for
environmental equipment were $0.1 million. The company incurred $1.0 million in
environmental-related costs during 1997, of which half were expensed and half
were for purchases of environmental equipment. The company's ongoing operating
expenditures for environmental compliance are expected to be approximately $0.8
million per year.
The company is presently required to post surety bonds with the State of
Montana in the amount of $11.1 million, which also represents the company's best
estimate of mine closure and reclamation costs for current operations. The
company does not believe that costs will materially exceed this estimate. The
company is accruing for reclamation costs over the life of the Stillwater Mine
based on current production levels and estimated proven and probable reserves.
On December 31, 1998 and 1997, the accrued liability was $0.7 million. The
company periodically reviews the adequacy of its reclamation and mine closure
obligations in light of current laws and regulations and will adjust its
estimate as necessary.
YEAR 2000 ISSUES
Year 2000 will impact computer programs written using two digits rather
than four to define the applicable year. Any programs with time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operation, including a temporary inability to process
transactions, send invoices or engage in other ordinary activities. This problem
largely affects software programs written years ago, before the issue came to
prominence. The company primarily uses third-party software programs written and
updated by outside firms, and the company is in the process of determining
whether this software is Year 2000 compliant. In May 1996, the company began the
implementation of a new information technology infrastructure that the company
believes will be fully Year 2000 compliant. This infrastructure will be in place
by the fourth quarter of 1999. The company does not believe that the costs
associated with additional Year 2000 compliance will be material.
The company has set in motion an effort to obtain written assurances from
its material suppliers regarding their Year 2000 compliance. As a result of this
effort, the company expects to generate by the second quarter of 1999 a
validated list of suppliers that are Year 2000 compliant, and will use the
entities on this list to obtain its supplies.
The company has also begun the process of obtaining written assurances from
the company's material customers regarding their Year 2000 compliance. The
company's goal is to obtain by the second quarter of 1999 written assurances
from customers that they are Year 2000 compliant or that they are expecting to
become Year 2000 compliant before December 31, 1999. In addition, the company is
developing contingency plans to deal with potential Year 2000 risks that could
occur as a result of power failures or the failure of other critical systems.
Although the company has taken significant steps to address the Year 2000
problem, there can be no assurance that the failure of the company and/or its
material customers or suppliers to timely attain Year 2000 compliance will not
materially reduce the company's revenues or income, or that these failures
and/or the impacts of broader compliance failures by telephone, mail, data
transfer or other utility or general service providers or government or private
entities will not have a material adverse effect on the company.
34
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
Some statements contained in this report are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and, therefore,
involve uncertainties or risks that could cause actual results to differ
materially. Such statements include comments regarding expansion plans, costs,
grade, production and recovery rates, permitting, financing needs, the terms of
future credit facilities and capital expenditures, increases in processing
capacity, cost reduction measures, safety, timing for engineering studies, and
environmental permitting and the palladium and platinum market. Factors that
could cause actual results to differ materially from those anticipated include:
. worldwide economic and political events affecting the supply and demand of
palladium and platinum;
. price volatility of PGMs;
. potential cost overruns, difficulty in making reliable estimates in the
early stages of expansion, uncertainties involved in developing a new mine
and other factors associated with a major expansion;
. fluctuations in ore grade, tons mined, crushed or milled;
. variations in concentrator, smelter or refinery operations
. geological, technical, permitting, mining or processing problems;
. availability of experienced employees;
. financial market conditions;
. compliance of the company and significant customers with marketing
contracts; and
. the other factors discussed under "Risk Factors."
Investors are cautioned not to put undue reliance on forward-looking
statements. The company disclaims any obligation to update forward-looking
statements.
35
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying financial
statements and for other financial and operating information in this report.
Management believes that its accounting systems and internal accounting
controls, together with other controls, provide assurance that all accounts and
records are maintained by qualified personnel in requisite detail, and
accurately and fairly reflect transactions of Stillwater Mining Company in
accordance with established policies and procedures.
The Board of Directors has an Audit Committee, none of whose members are
officers or employees of the company or its affiliates. The Audit Committee
recommends independent accountants to act as auditors for the company; reviews
the company's financial statements; confers with the independent accountants
with respect to the scope and results of their audit of the company's financial
statements and their reports thereon; reviews the company's accounting policies,
tax matters and internal controls; and oversees compliance by the company with
the requirements of federal regulatory agencies. Access to the Audit Committee
is given to the company's financial and accounting officers and independent
accountants.
William E. Nettles
Chairman of the Board and Chief Executive Officer
James A. Sabala
Vice President and Chief Financial Officer
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Stillwater Mining Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
shareholders' equity present fairly in all material respects, the financial
position of Stillwater Mining Company and its subsidiary at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2, the company changed its method of accounting for
mine development expenditures in 1996.
PRICEWATERHOUSECOOPERS, LLP
Denver, Colorado
February 3, 1999
37
STILLWATER MINING COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 49,811 $ 4,191
Short-term investments - 13,468
Inventories 9,333 7,380
Accounts receivable 21,762 6,926
Deferred income taxes 2,980 1,989
Other current assets 1,492 1,349
- -----------------------------------------------------------------------------------------------------------
Total current assets 85,378 35,303
Property, plant and equipment, net 247,556 191,254
Other noncurrent assets 3,003 2,662
- -----------------------------------------------------------------------------------------------------------
Total assets $335,937 $229,219
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 11,980 $ 2,709
Accrued payroll and benefits 3,332 1,972
Property, production and franchise taxes payable 3,971 3,682
Current portion of long-term debt and capital lease obligations 2,425 1,982
Other current liabilities 4,909 1,904
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 26,617 12,249
LONG-TERM LIABILITIES
Long-term debt and capital lease obligations 58,992 61,513
Deferred income taxes 19,009 11,782
Other noncurrent liabilities 3,312 2,283
- -----------------------------------------------------------------------------------------------------------
Total liabilities 107,930 87,827
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued - -
Common stock, $0.01 par value, 50,000,000 shares authorized, 34,548,559
and 20,377,623 shares issued and outstanding 345 204
Paid-in capital 214,281 141,193
Accumulated earnings (deficit) 13,381 (5)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 228,007 141,392
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $335,937 $229,219
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
38
STILLWATER MINING COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
REVENUES $ 106,723 $ 76,877 $ 56,214
- --------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of metals sold 66,793 67,948 50,175
Depreciation and amortization 11,642 11,658 8,699
- --------------------------------------------------------------------------------------------------------------------
Total cost of sales 78,435 79,606 58,874
General and administrative expenses and other 5,102 3,479 2,532
- --------------------------------------------------------------------------------------------------------------------
Total costs and expenses 83,537 83,085 61,406
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 23,186 (6,208) (5,192)
OTHER INCOME (EXPENSE)
Interest income 1,354 1,073 2,138
Interest expense, net of capitalized interest
of $2,126, $1,535, and $2,218 (2,774) (3,608) (1,461)
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 21,766 (8,743) (4,515)
INCOME TAX (PROVISION) BENEFIT (8,380) 3,366 1,736
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 13,386 (5,377) (2,779)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET
OF INCOME TAX PROVISION OF $8,677 - - 13,861
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 13,386 $ (5,377) $ 11,082
====================================================================================================================
BASIC EARNINGS PER SHARE
Income (loss) before cumulative effect of accounting change $ 0.43 $ (0.18) $ (0.09)
Cumulative effect of accounting change - - 0.46
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.43 $ (0.18) $ 0.37
====================================================================================================================
DILUTED EARNINGS PER SHARE
Income (loss) before cumulative effect of accounting change $ 0.38 $ (0.18) $ (0.09)
Cumulative effect of accounting change - - 0.46
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.18) $ 0.37
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 31,472 30,435 30,140
Diluted 35,019 30,435 30,140
The accompanying notes are an integral part of these financial statements.
39
STILLWATER MINING COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 13,386 $ (5,377) $ 11,082
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 11,642 11,658 8,699
Deferred income taxes 8,380 (3,366) (1,736)
Cumulative effect of accounting change,
net of income tax provision of $8,677 - - (13,861)
Loss on disposition of fixed assets 309 592 772
Other - - (335)
Changes in operating assets and liabilities:
Inventories (1,953) 6,142 4,928
Accounts receivable (14,836) (6,855) (71)
Accounts payable 9,271 (2,330) 288
Other 5,200 (1,761) 4,698
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 31,399 (1,297) 14,464
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (78,272) (15,702) (58,295)
Purchase of short-term investments (2,277) (11,497) (48,290)
Proceeds from maturity of short-term investments 15,745 15,089 55,163
Proceeds from sale/leaseback transactions 10,019 - -
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (54,785) (12,110) (51,422)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of stock issue costs 71,084 1,740 414
Redemption of common stock - - (134)
Proceeds from capital lease and debt issue, net of debt issue costs - 855 53,206
Payments on long-term debt and capital lease obligations (2,078) (1,386) (853)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 69,006 1,209 52,633
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) 45,620 (12,198) 15,675
Balance at beginning of year 4,191 16,389 714
- --------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 49,811 $ 4,191 $ 16,389
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
STILLWATER MINING COMPANY
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Shares Common Paid-in Earnings Total
Outstanding Stock Capital (Deficit) Equity
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 20,065 $ 201 $ 137,814 $ (5,710) $ 132,305
Net income and comprehensive income - - - 11,082 11,082
Common stock redeemed (7) - (134) - (134)
Common stock issued under stock plan 78 - 455 - 455
Other - - (42) - (42)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 20,136 $ 201 $ 138,093 $ 5,372 $ 143,666
Comprehensive loss:
Net loss - - - (5,377) (5,377)
Comprehensive income for the tax benefit
from stock options exercised - - 1,363 - 1,363
- --------------------------------------------------------------------------------------------------------------------
Comprehensive loss - - 1,363 (5,377) (4,014)
- --------------------------------------------------------------------------------------------------------------------
Common stock issued under stock plan 242 3 1,772 - 1,775
Other - - (35) - (35)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 20,378 $ 204 $ 141,193 $ (5) $ 141,392
Comprehensive income:
Net income - - - 13,386 13,386
Comprehensive income for the tax benefit
from stock options exercised - - 2,145 - 2,145
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income - - 2,145 13,386 15,531
- --------------------------------------------------------------------------------------------------------------------
Common stock issued under stock plan 355 3 4,430 - 4,433
Conversion of 7% notes - - 17 - 17
Issuance of shares pursuant to public stock offering 2,300 23 66,615 - 66,638
Three-for-two stock split 11,516 115 (119) - (4)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 34,549 $ 345 $ 214,281 $ 13,381 $ 228,007
====================================================================================================================
The accompanying notes are an integral part of these financial statements.
41
NOTE 1
NATURE OF OPERATIONS
Stillwater Mining Company, a Delaware corporation, is engaged in the
exploration, development, extraction, processing and refining of palladium,
platinum and associated minerals from the J-M Reef located in Stillwater and
Sweet Grass Counties, Montana. The J-M Reef is a twenty-eight (28) mile long
geologic formation containing the highest known grade deposit of platinum group
metals in the world.
The company's operations consist of the Stillwater Mine, a fully permitted
minesite located on the J-M Reef in Nye, Montana, the East Boulder project, a
fully permitted development project located at the western end of the J-M Reef
in Sweet Grass County, Montana and a smelter and base metals refinery located in
Columbus, Montana.
During 1998, the company announced plans to accelerate the expansion of the
Stillwater Mine, development of the East Boulder project and expansion of the
smelter and base metals facilities. Key components of the expansion are
development of the Stillwater Mine and concentrator facilities to expand
production from 2,000 tons per day to 3,000 tons per day, development of the
East Boulder mine and ancillary facilities to provide for an initial production
rate of 2,000 tons per day and expansion of the smelter and base metals
refinery. The company plans to reach an annual production rate of approximately
1.2 million ounces of palladium and platinum during 2001.
The company's operations can be significantly impacted by risks and
uncertainties associated with the mining industry as well as those specifically
related to its operations. The risks and uncertainties that can impact the
company include but are not limited to the following: price volatility of
palladium and platinum, economic and political events affecting supply and
demand for these metals, reserve estimation, exploration and development,
environmental obligations, government regulations and ownership of and access to
mineral reserves.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Stillwater Mining Company and its wholly owned subsidiary (collectively referred
to as the "company"). All intercompany transactions and balances have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with current year presentation.
USE OF ESTIMATES
The preparation of the company's consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in these
consolidated financial statements and accompanying notes. The more significant
areas requiring the use of management's estimates relate to mineral reserves,
reclamation and environmental obligations, valuation
42
allowance for deferred tax assets, useful lives for depreciation and
amortization, and future cash flows from long-lived assets. Actual results could
differ from these estimates.
CASH AND CASH EQUIVALENTS
The company considers all highly-liquid investments purchased with a
maturity of three months or less to be cash equivalents. As of December 31, 1998
and 1997, cash and cash equivalents included $4.1 and $4.2 million of cash,
respectively. The balance of reported amounts consist principally of investment
grade commercial paper. Amounts reported represent cost which approximates fair
value.
SHORT-TERM INVESTMENTS
Short-term investments may consist of corporate bonds and commercial paper.
Short-term investments are carried at amortized cost, which approximates fair
value, as the company has the ability and intent to hold to maturity.
INVENTORIES
Metals inventories are carried at the lower of current market value or
cost. Production costs include the cost of direct labor and materials,
depreciation and amortization, as well as administrative expenses relating to
mining and processing activities. Materials and supplies inventories are valued
at the lower of average cost or fair market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated using
the straight-line method over estimated useful lives ranging from five to twenty
years or, for capital leases, the term of the related leases. Maintenance and
repairs are charged to operations as incurred. Mine development expenditures
incurred to increase existing production, develop new ore bodies or develop
mineral property substantially in advance of production are capitalized and
amortized using a units-of-production method over the proven and probable
reserves. Interest is capitalized on expenditures related to construction or
development projects and amortized using the same basis of depreciation as the
related asset. Capitalization is discontinued when the asset is placed into
operation or development ceases. Exploration costs are expensed as incurred.
Effective January 1, 1996, the company changed its method of accounting for
mine development expenditures whereby certain direct and indirect costs related
to development activities, which were previously expensed as incurred, are now
capitalized. This change is believed to better present current income from
mining activities because it results in a better matching of expenses with the
revenue generated as a result of those expenses. The effect of the accounting
change on 1996 results was to increase net income by approximately $5.2 million
($0.17 per share).
The company follows SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121
prescribes that an impairment loss is recognized in the event that
43
facts and circumstances indicate that the estimated carrying amount of an asset
may not be recoverable and an estimate of future undiscounted cash flows is less
than the carrying amount of the asset. Impairment is recorded based on an
estimate of future discounted cash flows. As of December 31, 1998, the company
does not believe that any impairments have occurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The company's non-derivative financial instruments consist primarily of
cash and short-term investments, accounts receivable and debt. The carrying
amounts of cash, short-term investments and accounts receivable approximate fair
value due to their short maturities. At December 31, 1998 and 1997, based on
rates available for similar types of obligations, the fair values of long-term
debt and capital lease obligations were not materially different from their
carrying amounts.
REVENUE RECOGNITION
Revenues consist of the sales of palladium and platinum, including any
hedging gain or loss. Byproduct metals revenue and secondary materials
processing revenue are included as a reduction to the cost of metals sold.
Effective January 1, 1997, the company changed its method of revenue recognition
whereby revenue is recognized when product is shipped from the company's base
metals refinery to an external refiner. Sales and receivables are provisionally
valued and later adjusted when sales prices are finalized and weight and assay
calculations are completed. The cumulative effect of this change as of January
1, 1997 was to increase revenue by approximately $2.7 million in the first
quarter of 1997; the effect on net income was not material. Prior to 1997, the
company recognized revenue when product was delivered and transferred to the
buyer.
HEDGING PROGRAM
The company enters into forward sales contracts and option contracts from
time to time to manage the effect of price changes in palladium and platinum on
the company's sales. The results of these transactions are included in sales
revenue at the same time as the hedged production.
RECLAMATION AND ENVIRONMENTAL COSTS
Post-closure reclamation and site restoration costs are estimated based on
environmental regulatory requirements and are accrued ratably over the life of
the mine using a units-of-production method. Current expenditures related to
ongoing environmental and reclamation programs are expensed as incurred,
although the ultimate amount of the obligations to be incurred is uncertain at
December 31, 1998 and 1997, the company has posted $8.9 million in reclamation
bonds for state and federal requirements. The accrued reclamation liability was
approximately $0.7 million at December 31, 1998 and 1997.
INCOME TAXES
Income taxes are determined using the asset and liability approach in
accordance with the provisions set forth in SFAS No. 109, Accounting for Income
Taxes. This method gives consideration to the future tax consequences
44
of temporary differences between the financial reporting basis and the tax basis
of assets and liabilities based on currently enacted tax rates.
STOCK-BASED COMPENSATION
The company has adopted the disclosure only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and therefore continues to account for
stock options in accordance with Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. Accordingly, because options are
granted at fair market value, no compensation expense has been recognized for
options issued under the company's stock option plans. The company has made pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting, as defined in SFAS No. 123, had been applied.
EARNINGS PER SHARE
The company follows SFAS No. 128, Earnings per Share, which requires the
presentation of basic and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing net
earnings available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
NOTE 3
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the company adopted SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for reporting and
presentation of comprehensive income and its components.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement is effective for the fiscal year beginning January 1, 2000 and
establishes accounting and reporting standards for derivative instruments and
hedging activities. The company is currently assessing the impact of this
statement.
Additionally in June 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-up Activities. SOP 98-5 is effective for fiscal year 1999 and requires
that the costs of start-up activities be expensed as incurred. The company
believes that the effect of this statement on the company's financial statements
will not be material.
45
NOTE 4
INVENTORIES
(in thousands) 1998 1997
- -----------------------------------------------------------------------
Metals inventory
Raw ore $ 267 $ 460
Concentrate and in-process 4,988 3,604
- -----------------------------------------------------------------------
5,255 4,064
Materials and supplies 4,078 3,316
- -----------------------------------------------------------------------
$ 9,333 $ 7,380
=======================================================================
NOTE 5
PROPERTY, PLANT AND EQUIPMENT
(in thousands) 1998 1997
- ---------------------------------------------------------------------------
Machinery and equipment $ 25,055 $ 23,195
Leased equipment 12,256 12,098
Buildings and structural components 69,262 67,437
Mine development 143,142 127,508
Land 2,220 2,220
Construction-in-progress:
East Boulder Project 23,582 9,319
Stillwater Mine Expansion 33,160 -
Other construction-in-progress 3,346 3,240
- ---------------------------------------------------------------------------
312,023 245,017
Less accumulated depreciation and amortization (64,467) (53,763)
- ---------------------------------------------------------------------------
$ 247,556 $ 191,254
===========================================================================
NOTE 6
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
SPECIAL INDUSTRIAL EDUCATION IMPACT REVENUE BONDS
These bonds were issued by the company in 1989 in three series to finance
impact payments to local school districts. The bonds bear interest at varying
rates between 6.5% and 7.8% and mature in increasing annual principal amounts
through 2009. The balance outstanding at December 31, 1998 and 1997 was $1.3
million and $1.6 million, respectively, of which approximately $0.1 million was
classified as current in each year. The bonds, which are collateralized by the
company's real estate, are secured by guarantees from Chevron Corporation and
Manville Corporation. Scheduled principal repayments during the years 1999
through 2003 are approximately $0.1 million in each year. Scheduled principal
repayments subsequent to 2003 total $0.9 million.
CONVERTIBLE SUBORDINATED NOTES
In April 1996, the company sold $51.5 million of 7% Convertible
Subordinated Notes (the "Convertible Notes"), maturing on May 1, 2003. The
Convertible Notes are unsecured, subordinated obligations. As of December 31,
1998 and 1997, $51.4 and $51.5 million were classified as long-term debt,
respectively.
46
The Convertible Notes are convertible into shares of common stock on or
before May 1, 1999, unless previously redeemed, at a conversion price of $17.87
per share as adjusted to reflect the three-for-two stock split ($26.80 per share
at original issuance). The company is required to make semi-annual interest
payments. The Convertible Notes are redeemable at the option of the company on
or after May 1, 1999, having no other funding requirements until maturity.
In connection with the offering of the Convertible Notes, the company filed
a shelf registration statement on Form S-3 under the Securities Act of 1933, as
amended, relating to the resale of the Convertible Notes and the common stock
issuable upon conversion. This registration statement was declared effective by
the Securities and Exchange Commission on December 19, 1996.
The company made cash payments for interest expense of $4.6, $3.3 and $0.8
million for the years ended December 31, 1998, 1997 and 1996, respectively.
EQUIPMENT LEASE AGREEMENTS
During 1997, pursuant to the terms of the 1995 Senstar Capital Corporation
Master Lease Agreement, the company entered into its fifth five-year equipment
leasing agreement for $0.8 million. This agreement was preceded by a $7.5
million leasing agreement with Senstar, signed in October 1995, and by three
additional agreements executed in 1996 totaling $3.8 million. The latest
contract brings the total capitalized lease transactions with Senstar to $12.1
million. These agreements cover new underground mining equipment and each
contains a two-year renewal option that can be exercised at the end of five
years. Based upon the provisions of the leasing agreement, all leases are
capital leases, and the renewal options qualify as extensions of the base lease
term. As a result, all leased equipment has been capitalized and is being
depreciated over seven years. Future minimum payments under the equipment
leases are as follows (in thousands):
Year ended December 31,
- ----------------------------------------------------------------------
1999 $ 3,001
2000 2,976
2001 2,115
2002 1,581
2003 482
Subsequent to 2003 59
- ----------------------------------------------------------------------
Total minimum lease payments 10,214
Less amount representing interest (1,519)
- ----------------------------------------------------------------------
Present value of net minimum lease payments 8,695
Less current portion (2,332)
- ----------------------------------------------------------------------
Total capital lease obligation $ 6,363
======================================================================
ROTHSCHILD CREDIT AGREEMENT
As of April 19, 1994, the company established an unsecured working capital
line of credit with N M Rothschild & Sons Limited, having a maximum borrowing
capacity of $15 million, subject to a borrowing base computation. The line of
credit is scheduled to expire on April 30, 1999. Interest on amounts drawn is
payable at
47
1.5% per annum over the prevailing London Interbank Offered Rate or 0.5% over
the prevailing prime rate. Fees of 1.5% per annum are levied on the aggregate
amount of any letters of credit issued under the facility and a commitment fee
of 0.5% per annum is payable on available but unused amounts. These fees were
$0.1 million in 1998, 1997 and 1996. As of December 31, 1998, the company has
approximately $9.3 million available, is in compliance with all financial
covenants and has no debt outstanding under this facility. This facility will be
cancelled concurrent with completion of the credit facility with the Bank of
Nova Scotia.
SCOTIABANK CREDIT FACILITY
The company has a commitment for a $175 million credit facility with the
Bank of Nova Scotia ("the Scotiabank Credit Facility"). The Scotiabank Credit
Facility provides for a $125 million term loan facility and a $50 million
revolving credit facility. The Scotiabank Credit Facility is expected to mature
on December 31, 2005. Proceeds of the term loan facility will be used to finance
a portion of the company's development of the East Boulder project, Stillwater
Mine expansion and processing facilities expansion (1998 Expansion Plan).
Proceeds of the revolving credit facility will be used for general corporate and
working capital needs. At the company's option, the Scotiabank Credit Facility
will bear interest at LIBOR or an alternate base rate, in each case plus a
margin of 1.00% to 1.75% which may be adjusted depending upon the company's
ratio of debt to operating cash flow. Substantially all the property and assets
of the company and its subsidiaries and the stock of the company's subsidiaries
will be pledged as security for the Scotiabank Credit Facility. The commitment
is also subject to numerous operating, financial and reporting covenants
customary for agreements of this type.
NOTE 7
EMPLOYEE BENEFIT PLANS
On June 1, 1993, the company established the Stillwater Mining Company
401(k) Plan and Trust (the "existing plan"). From June 1, 1993 through September
30, 1996, all eligible employees could participate in this plan. On October 1,
1996, the company established the Stillwater Mining Company 401(k) Plan and
Trust for Bargaining Unit Employees ("the new plan"). All bargaining unit
employees' assets were transferred to the new plan, while all non-bargaining
unit employees continue participation under the existing plan. Employees of the
company with at least six months of consecutive service are eligible to
participate in their respective plan. Other than the differentiation between
bargaining unit employees and non-bargaining unit employees, the plans are
identical. The company matches employee contributions at a 2:1 ratio up to 3% of
the employee's gross wages. Both plans have a three-year cliff vesting period.
Monthly contributions are made to separate trust funds administered by an
independent investment manager. Total plan expenses charged to operations were
$1.2 million, $1.0 million and $0.9 million in 1998, 1997 and 1996,
respectively.
48
NOTE 8
COMMON AND PREFERRED STOCK PLANS AND AGREEMENTS
STOCK PLAN
The company sponsors the stock option plans that enable the company to
grant stock options or restricted stock to employees, non-employee directors and
consultants. There are 4,050,000 shares of common stock authorized for issuance
under the plans.
Awards granted under the plans may consist of either incentive stock
options (ISO) or non-qualified stock options (NSO), stock appreciation rights
(SAR), restricted stock, or other stock-based awards, with the exception that
non-employee directors may not be granted SARs and only employees of the company
may be granted ISOs.
The plans are administered by the Compensation Committee of the company's
Board of Directors, which determines the exercise price, exercise period,
vesting period and all other terms. Unexercised options expire ten years after
the date of grant.
There are approximately 784,000 shares available for grant as of December
31, 1998. Stock option activity for the years ended December 31, 1998, 1997 and
1996 is summarized as follows:
Weighted Average
Weighted Average Fair Value of
Shares Exercise Price Options Granted
- --------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1995 845,200 $ 9.49 -
(303,688 exercisable)
1996 Activity:
Options granted 278,775 $ 21.40 $ 9.47
Options exercised (77,595) $ 5.87 -
Options canceled (40,575) $ 18.56 -
- --------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1996 1,005,805 $ 12.70 -
(674,592 exercisable)
1997 Activity:
Options granted 486,275 $ 19.90 $ 10.53
Options exercised (239,881) $ 7.59 -
Options canceled (31,650) $ 20.86 -
- --------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 1,220,549 $ 16.40 -
(940,198 exercisable)
1998 Activity:
Options granted 620,060 $ 24.36 $ 12.17
Options exercised (350,914) $ 12.40 -
Options canceled (21,400) $ 22.47 -
Three-for-two stock split 734,423 - -
- --------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 2,202,718 $ 13.74 -
(1,162,031 exercisable)
49
The following table summarizes information for outstanding and exercisable
options as of December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contract Life Exercise Price Exercisable Exercise Price
-------------- ----------- ------------- -------------- ----------- --------------
$3.91 218,540 5.79 $ 3.91 218,540 $ 3.91
$ 8.96 - $12.83 635,947 7.53 $ 12.24 395,439 $ 12.00
$13.00 - $15.91 893,511 6.21 $ 14.50 467,302 $ 14.49
$16.00 - $19.25 292,559 5.60 $ 17.65 80,750 $ 17.26
$20.25 - $24.67 162,161 4.82 $ 21.59 - -
--------- ----------
2,202,718 1,162,031
========= ==========
The company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, Accounting for Stock-Based Compensation
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, because the exercise price of
the company's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
Pro forma information regarding net earnings and earnings per share is
required by SFAS 123, and has been determined as if the company had accounted
for its stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average expected lives (years) 6.5 5.9 5.9
Interest rate 4.4 - 5.5% 5.7 - 6.7% 5.2 - 6.2%
Volatility 53% 47% 45%
Dividend yield - - -
============================================================================================================================
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The company's
pro forma information follows (in thousands, except for per share amounts):
50
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 10,560 $ (7,966) $ 9,697
Pro forma net income (loss) per share:
Basic $ 0.34 $ (0.26) $ 0.32
Diluted $ 0.30 $ (0.26) $ 0.32
====================================================================================================================================
Additionally, 9,950 shares and 30,000 shares of restricted stock were
granted in 1997 and 1994, respectively. Deferred compensation related to
restricted stock was recorded as a component of paid-in capital and is amortized
over the two-year vesting period.
Outstanding options to purchase 1,938,607, -0- and -0- shares of common
stock were included in the computation of diluted earnings per share for the
years ended December 31, 1998, 1997 and 1996, respectively. Outstanding options
to purchase 264,111, 1,220,549 and 1,005,805 shares of common stock were
excluded from the computation of diluted earnings per share for the years ended
December 31, 1998, 1997 and 1996, respectively, because the effect of inclusion
would have been antidilutive using the treasury stock method.
In addition, 2,878,656 million shares (1,919,104 million prior to stock
split) of common stock issuable under the terms of the company's Convertible
Subordinated Notes were excluded from the computation of diluted earnings per
share for the years ended December 31, 1997 and 1996, respectively, because the
effect of inclusion would have been antidilutive using the treasury stock
method.
SHAREHOLDERS' RIGHTS AGREEMENT
In October 1995, the Board of Directors of the company adopted a Rights
Agreement under which Stillwater shareholders of record as of November 15, 1995
received a dividend in the form of Preferred Stock Purchase Rights (the
"Rights"). The Rights permit the holder to purchase one one-thousandth of a
share (a unit) of Series A Preferred Stock, par value $0.01 per share (the
"Preferred Stock"), at a purchase price of $80 per unit, subject to adjustment.
All outstanding Rights may be redeemed by the company at any time until such
time the Rights become exercisable. Until a Right is exercised, the holder
thereof has no rights as a shareholder of the company, including the right to
vote or receive dividends. Subject to certain conditions, the Rights become
exercisable ten business days after a person or group acquires or commences a
tender or exchange offer to acquire a beneficial ownership of 15% or more of the
company's outstanding common stock. The Rights expire on October 26, 2005 unless
earlier redeemed or exercised.
51
NOTE 9
INCOME TAXES
The total income tax provision (benefit) has been allocated as follows (in
thousands):
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) $ 8,380 $ (3,366) $ (1,736)
Cumulative effect of accounting change - - 8,677
- -----------------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ 8,380 $ (3,366) $ 6,941
=============================================================================================================================
The components of the income tax provision (benefit) consisted of the
following (in thousands):
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Current federal $ 298 $ - $ 220
Current state - - -
- -----------------------------------------------------------------------------------------------------------------------------
Total current 298 - 220
Deferred federal 7,320 (3,060) (2,137)
Deferred state 762 (306) 181
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred 8,082 (3,366) (1,956)
Income tax provision (benefit) $ 8,380 $ (3,366) $ (1,736)
=============================================================================================================================
The deferred tax (assets) liabilities are comprised of the tax effect of
the following (in thousands):
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Property and equipment $ 8,087 $ 6,959
Mine development costs 35,146 26,551
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 43,233 33,510
- -----------------------------------------------------------------------------------------------------------------------------
Capital lease obligations (1,013) (1,024)
Noncurrent liabilities (1,347) (903)
Current liabilities (2,103) (1,188)
Inventory (117) (86)
State tax deduction (1,219) (1,219)
Net operating loss and other carryforwards (21,703) (19,297)
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets (27,502) (23,717)
- -----------------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ 15,731 $ 9,793
=============================================================================================================================
The following is a reconciliation between the tax provision determined by
applying the federal statutory income tax rate of 35% in 1998, 1997 and 1996 to
pre-tax income, and the company's tax provision (benefit) (in thousands):
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change $ 21,766 $ (8,743) $ (4,515)
=============================================================================================================================
Income taxes at statutory rate $ 7,618 $ (3,060) $ (1,580)
State income taxes, net of federal benefit 762 (306) (156)
=============================================================================================================================
Income tax provision (benefit) $ 8,380 $ (3,366) $ (1,736)
=============================================================================================================================
52
At December 31, 1998, the company had approximately $69.9 million of
regular tax net operating loss carryforwards expiring during 2009 through 2018.
The company made cash payments of $316,000, $0 and $0 for the years ended
December 31, 1998, 1997 and 1996, respectively.
NOTE 10
CAPITAL TRANSACTIONS
COMMON STOCK OFFERING
On October 20, 1998, 2,000,000 shares of the company's common stock were
sold under the company's existing $200 million universal shelf registration
statement, which was declared effective by the Securities and Exchange
Commission (SEC) on July 17, 1998. On November 4, 1998, 300,000 additional
shares were sold pursuant to the underwriter's over-allotment option. The $66.6
million of net proceeds will be used to finance a portion of the costs of the
company's expansion plan.
COMMON STOCK SPLIT
On December 8, 1998, the Board of Directors declared a three-for-two stock
split on the company's common stock effected in the form of a stock dividend to
shareholders of record on December 21, 1998. This stock split was recorded as of
the close of business on December 31, 1998 by transferring par value of $115,158
from additional paid in capital to common stock. All per share data, including
stock option information, have been restated to reflect this stock split.
NOTE 11
COMMODITY INSTRUMENTS
The company may use forward sales or other commodity instruments to manage
its exposure to market risk from changes in palladium and platinum commodity
prices. The company may also lease metal to counterparties to earn interest on
excess metal balances.
As of December 31, 1998, the company had 9,550 ounces of its December
palladium production sold forward for delivery in January 1999 at an average
price of $284 per ounce. At December 31, 1998, the company had 13,100 ounces of
platinum sold forward at an average price of $375 per ounce, with maturities in
1999.
The company has entered into long-term sales contracts with General Motors
Corporation, Ford Motor Company, Mitsubishi Corporation and KEMET Corp. The
contracts cover the company's production over the five-year period from January
1999 through December 2003. Under the contracts, the company has committed
between 90% to 100% of its palladium production. Palladium sales are priced at a
slight discount to market, with a floor price averaging approximately $225 per
ounce. The company has agreed to an average maximum palladium price of
approximately $400 per ounce on approximately 30% of its production. The
remaining 70% of the company's palladium production is not subject to any price
cap. In addition, the company has committed approximately 20% of its planned
annual platinum production over the next five years. Platinum sales are priced
53
at a slight discount to market, subject to an average minimum price of $350 per
ounce with an average maximum price of $425 per ounce. The remaining 80% of the
company's planned annual platinum production is not committed under these
contracts. Such platinum production remains available for sale at prevailing
market prices. The sales contracts contain termination provisions that allow the
purchasers to terminate in the event the company breaches and the breach is not
cured within periods ranging from ten to thirty days of notice by the purchaser.
In addition, the contracts contain force majeure provisions that allow for the
suspension and, in one instance, the termination of the contract upon the
occurrence of an event of force majeure.
NOTE 12
COMMITMENTS AND CONTINGENCIES
REFINING AGREEMENTS
The company has contracted with threefour entities to refine its filter
cake production. Even though there are limited number of PGM refiners, the
company is not economically dependent upon any one refiner.
OPERATING LEASES
In September 1998, the company completed the sale and leaseback of a tunnel
boring machine and miscellaneous other mining equipment. The leases are
classified as operating leases for financial reporting purposes and are
non-cancelable with terms of seven years. Rental/lease expense, including all
leases, amounted to approximately $0.1 million in 1998. Rental expense in prior
years was insignificant.
Future minimum lease payments for non-cancelable leases with terms in
excess of one year are $1.6 million in each of the years 1999 - 2003, and $2.7
million thereafter.
SIGNIFICANT CUSTOMERS
Sales to significant customers represented approximately 60%, 90% and 98%
of total revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. The company sells its metals to a small number of customers and
brokers; however, the company is not economically dependent upon these customers
since palladium and platinum can be readily sold in numerous markets throughout
the world.
ELECTRIC SERVICE AGREEMENT
During 1996, Montana Power Company (MPC) upgraded the company's transmission
line and substation facilities. The cost of this upgrade to MPC totaled
approximately $2.9 million. In a contract between MPC and the company, the
company agrees to reimburse MPC for these costs through additional electric
revenues produced from the company's increased load in excess of 8,000
kilowatts. At the completion of the five-year agreement, if the total additional
revenues, as defined in the contract between MPC and the company, has not met or
exceeded MPC's investment cost, the company will be required to pay MPC the
difference.
54
NOTE 13
QUARTERLY DATA (UNAUDITED)
Quarterly earnings data for the years ended December 31, 1998 and 1997 were
as follows (in thousands, except per share data):
First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------------
1998 QUARTERS
- ------------------------------------------------------------------------------------------------------------------------------
Revenue $21,513 $26,523 $28,198 $30,489
Operating income 2,371 5,597 6,657 8,561
Net income 982 3,061 3,790 5,553
Basic earnings per share 0.04 0.10 0.12 0.17
Diluted earnings per share 0.04 0.10 0.12 0.15
- ------------------------------------------------------------------------------------------------------------------------------
1997 QUARTERS
- ------------------------------------------------------------------------------------------------------------------------------
Revenue $16,003 $22,292 $16,998 $21,584
Operating income (loss) (3,301) 46 (1,699) (1,254)
Net loss (2,190) (679) (1,664) (844)
Basic and diluted earnings per share (0.07) (0.03) (0.05) (0.03)
==============================================================================================================================
55
NOTE 14
MINERAL RESERVES AND PRODUCTION DATA (UNAUDITED)
Proven and probable palladium and platinum reserves (1) consisted of the
following:
December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
STILLWATER MINE
Ore reserves (thousands of tons) 23,745 17,999 15,619 11,072 10,797
Grade (2) 0.71 0.79 0.80 0.82 0.82
Contained metal (thousands of ounces)
Palladium (3) 12,910 10,940 9,595 7,058 6,918
Platinum (3) 3,912 3,315 2,907 2,016 1,976
==============================================================================================================================
Total contained metal 16,822 14,255 12,502 9,074 8,894
==============================================================================================================================
EAST BOULDER
Ore reserves (thousands of tons) 13,313 11,510 11,510 11,510 11,510
Grade (2) 0.71 0.79 0.79 0.79 0.79
Contained metal (thousands of ounces)
Palladium (3) 7,251 6,992 6,992 7,087 7,087
- ------------------------------------------------------------------------------------------------------------------------------
Platinum (3) 2,197 2,120 2,120 2,025 2,025
==============================================================================================================================
Total contained metal 9,448 9,112 9,112 9,112 9,112
==============================================================================================================================
SUMMARY OPERATING INFORMATION WAS AS FOLLOWS:
Year ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Ounces produced (in thousands)
Palladium 340 271 196 169 207
Platinum 104 84 59 51 63
Average realized price per ounce
Palladium $202 $144 $144 $157 $138
Platinum $377 $388 $410 $425 $399
- ------------------------------------------------------------------------------------------------------------------------------
(1) Derived from mineral reserve estimates reviewed by independent consultants
as of December 31, 1998, 1997, December 31, 1995 and July 1, 1992 and
adjusted for production, additional drilling and development. The increases
in reserves can be attributed to additional drilling and development, the
use of a lower cut-off grade and adjustment for historical mining
experience.
(2) Expressed in contained ounces of palladium and platinum per ton.
(3) Based on the ratio of 1.0 part of platinum to 3.3 parts of palladium for
1996 through 1998 and 1.0 part of platinum to 3.5 parts of palladium for
19943 and through 1995.
56
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the company's executive officers, reference is
made to the information set forth under the caption "Executive Officers of the
Registrant" located in Item 1 of this Form 10-K. For information concerning the
company's directors and compliance by the company's directors, executive
officers and significant stockholders with the reporting requirements of Section
16 of the Securities Exchange Act of 1934, as amended, reference is made to the
information set forth under the captions "Election of Directors" and "Compliance
with Section 16(a) - Beneficial Ownership Reporting Compliance," respectively,
in the company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 27, 1999, to be filed pursuant to Regulation 14A, which information
is incorporated herein by reference.
ITEM 11
EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption "Executive
Compensation and Other Information" in the company's Proxy Statement for the
Annual Meeting of Stockholders, to be held on May 27, 1999, to be filed pursuant
to Regulation 14A, which information (except for the Report of the Compensation
Committee of the Board of Directors and the Performance Graph) is incorporated
herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Reference is made to the information set forth under the caption "Security
Ownership of Principal Stockholders and Management" in the company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 27, 1999, to
be filed pursuant to Regulation 14A, which information is incorporated herein by
reference.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption "Certain
Transactions" contained in the company's Proxy Statement for the Annual Meeting
of Stockholders to be held on May 27, 1999, to be filed pursuant to Regulation
14A, which information is incorporated herein by reference.
57
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K
1. Financial Statements Page
Report of Management 30
Report of Independent Accountants 31
Balance Sheet 32
Statement of Operations 33
Statement of Cash Flows 34
Statement of Changes in Stockholders' Equity 35
Notes to Financial Statements 36
2. Financial Statement Schedules (not applicable)
(b) Reports on Form 8-K
1 On April 22, 1998 the company filed a Form 8-K to correct executive
compensation disclosure in the company's proxy statement for its 1997
Annual Meeting of Stockholders.
2 On September 29, 1998 the company filed a Form 8-K to announce that it
had entered into long-term marketing contracts covering the sale of
palladium and platinum.
3 On October 1, 1998, the company filed a Form 8-K to announce the
acceleration of the expansion of the Stillwater Mine and the
development of the East Boulder project and to announce plans for
financing of the expansion.
4 On December 30, 1998, the company filed a Form 8-K to announce the
issuance of a 50% stock dividend.
(c) Exhibits.
EXHIBITS
Number Description
- ---------------------
2.1 Exchange Agreement for 10,000 shares of common stock dated October 1,
1993 (incorporated by reference to Exhibit 2.1 to the company's
Registration Statement on Form S-1 (File No. 33-85904) as declared
effective by the Commission on December 15, 1994 (the "1994 S-1"")).
3.1 Amended and Restated Certificate of Incorporation of the company dated
December 2, 1995 (incorporated by reference to Exhibit 3.4 to the 1994
S-1).
3.2 Amended and Restated Bylaws of the company (incorporated by
reference to Exhibit 3.2 to the 1994 S-1).
4.1 Form of Indenture, dated April 29, 1996, between the company and
Colorado National Bank with respect to the company's 7% Convertible
Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1
of the company's Form 8-K dated April 29, 1996).
4.2 Rights Agreement, dated October 26, 1995 (incorporated by reference to
Form 8-A filed on October 30, 1995).
10.1 1998 Equity Incentive Plan (incorporated by reference to Appendix A to
the Proxy statement dated April 6, 1998)
58
10.2 Employment Agreement with John E. Andrews dated as of September 19,
1994 (incorporated by reference to Exhibit 10.4 to the 1994 S-1).
10.3 Amended and Restated Employment Agreement with William E. Nettles,
dated as of August 10, 1998 (incorporated by reference to Exhibit 10.1
to the company's Form 10-Q filed on October 13, 1998).
10.4 Credit Agreement between Stillwater Mining Company as borrower and N.
M. Rothschild & Sons Limited as Lender, dated as of April 19, 1994
(incorporated by reference to Exhibit 10.7 to the 1994 S-1).
10.5 Mining and Processing Agreement dated March 16, 1984 regarding the
Mouat family; and Compromise of Issues Relating to the Mining and
Processing Agreement (incorporated by reference to Exhibit 10.8 to the
1994 S-1).
10.6 Conveyance of Royalty Interest and Agreement between the company and
Manville Mining Company, dated October 1, 1993 (incorporated by
reference to Exhibit 10.9 to the 1994 S-1).
10.7 Agreement for Electric Service between the Montana Power Company and
Stillwater Mining Company dated June 1, 1996 (incorporated by
reference to Exhibit 10.8.1 of the company's 1996 Form 10-K).
10.8 Stock Redemption Agreement by and between the company and Chevron USA
Inc. and Manville Mining Company, dated July 28, 1994 (incorporated by
reference to Exhibit 10.11 to the 1994 S-1).
10.9 Registration Rights Agreement dated August 23, 1995, amending
Shareholders Agreement (incorporated by reference to Exhibit 4.1 to
Form 8-K filed on August 28, 1995).
10.10 Amendment to William E. Nettles employment agreement dated December
15, 1998.
10.11 Residue Refining Agreement between Stillwater Mining Company and
Johnson Matthey, dated as of February 8, 1996 (incorporated by
reference to Exhibit 10.16 of the company's 1995 Form 10-K).
10.12 Equipment Lease Agreement between Stillwater Mining Company and
Senstar Capital Corporation dated October 5, 1995. (incorporated by
reference to Exhibit 10.17 of the company's 1995 Form 10-K).
10.13 Purchase Agreement between Stillwater Mining Company and Senstar
Capital Corporation dated October 5, 1995 (incorporated by reference
to Exhibit 10.17.1 of the Registrant's 1995 Form 10-K).
10.14 Purchase Agreement between Stillwater Mining Company and The Westaim
Corporation, dated October 14, 1996 (incorporated by reference to
Exhibit 10.16 of the Registrant's 1996 Form 10-K).
10.15 PGM Concentrate Refining Agreement between the company and Union
Miniere dated May 8, 1996 (incorporated by reference to Exhibit 10.15
of the company's 1998 Form 10-K).
10.16 Articles of Agreement between Stillwater Mining Company and Oil,
Chemical and Atomic Workers International Union dated July 1, 1996, as
amended by Tentative Agreement between O.C.A.W. Local Union Number 2-1
and the company, dated May 7, 1997 (incorporated by reference to
Exhibit 10.16 to the Company's 1998 Form 10-K).
10.17 Palladium Sales Agreement, made as of August 13, 1998, among
Stillwater Mining Company and Ford Motor Company (portions of the
agreement have been omitted pursuant to a confidential treatment
request) (incorporated by reference to Exhibit 10.1 to the Form 8-K
dated July 21, 1998).
10.18 Palladium Sales Agreement, made as of July 21, 1998, among Stillwater
Mining Company and KEMET Corp. (portions of the agreement have been
omitted pursuant to a confidential treatment request) (incorporated by
reference to Exhibit 10.2 to the Form 8-K dated July 21, 1998.)
10.19 Palladium and Platinum Sales Agreement, made as of August 17, 1998,
among Stillwater Mining Company and General Motors Corporation
(portions of the agreement have been omitted pursuant to a
confidential treatment request) (incorporated by reference to Exhibit
10.3 to the Form 8-K dated July 21, 1998).
10.20 Palladium and Platinum Sales Agreement, made as of August 27, 1998,
among Stillwater Mining Company and Mitsubishi Corporation (portions
of the agreement have been omitted pursuant to a confidential
treatment request) (incorporated by reference to Exhibit 10.4 to the
Form 8-K dated July 21, 1998).
59
10.21 Credit Agreement, dated March 4, 1999 between Stillwater Mining
Company and the Bank of Nova Scotia.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Behre Dolbear & Company, Inc.
27 Financial Data Schedule
60
SIGNATURES
----------
Pursuant to the requirements of Section 13 OR 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STILLWATER MINING COMPANY
("Registrant")
Dated: March 30, 1999 By: /s/ William E. Nettles
------------------------------------
William E. Nettles
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant, in
the capacities, and on the dates, indicated.
Signature and Title Date
- ------------------- ----
/s/ William E. Nettles March 30, 1999
- ------------------------------------
William E. Nettles
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ James A. Sabala March 30, 1999
- ------------------------------------
James A. Sabala
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ John E. Andrews March 30, 1999
- ------------------------------------
John E. Andrews
President, Chief Operating Officer and Director
/s/ Douglas Donald March 30, 1999
- ------------------------------------
Douglas Donald, Director
/s/ Richard Gilbert March 30, 1999
- ------------------------------------
Richard Gilbert, Director
/s/ Lawrence Glaser March 30, 1999
- ------------------------------------
Lawrence Glaser, Director
/s/ Apolinar Guzman March 30, 1999
- ------------------------------------
Apolinar Guzman, Director
/s/ Ted Schwinden March 30, 1999
- ------------------------------------
Ted Schwinden, Director
/s/ Peter Steen March 30, 1999
- ------------------------------------
Peter Steen, Director
61
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K
1. Financial Statements Page
Report of Management 30
Report of Independent Accountants 31
Balance Sheet 32
Statement of Operations 33
Statement of Cash Flows 34
Statement of Changes in Stockholders' Equity 35
Notes to Financial Statements 36
2. Financial Statement Schedules (not applicable)
(b) Reports on Form 8-K
1 On April 22, 1998 the company filed a Form 8-K to correct executive
compensation disclosure in the company's proxy statement for its 1997
Annual Meeting of Stockholders.
2 On September 29, 1998 the company filed a Form 8-K to announce that it
had entered into long-term marketing contracts covering the sale of
palladium and platinum.
3 On October 1, 1998, the company filed a Form 8-K to announce the
acceleration of the expansion of the Stillwater Mine and the
development of the East Boulder project and to announce plans for
financing of the expansion.
4 On December 30, 1998, the company filed a Form 8-K to announce the
issuance of a 50% stock dividend.
(c) Exhibits.
EXHIBITS
Number Description
- ---------------------
2.1 Exchange Agreement for 10,000 shares of common stock dated October 1,
1993 (incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (File No. 33-85904) as declared
effective by the Commission on December 15, 1994 (the "1994 S-1"")).
3.1 Amended and Restated Certificate of Incorporation of the company dated
December 2, 1995 (incorporated by reference to Exhibit 3.4 to the 1994
S-1).
3.2 Amended and Restated Bylaws of the company (incorporated by
reference to Exhibit 3.2 to the 1994 S-1).
4.1 Form of Indenture, dated April 29, 1996, between the company and
Colorado National Bank with respect to the company's 7% Convertible
Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1
of the company's Form 8-K dated April 29, 1996).
4.2 Rights Agreement, dated October 26, 1995 (incorporated by reference to
Form 8-A filed on October 30, 1995).
10.1 1998 Equity Incentive Plan (incorporated by reference to Appendix A to
the Proxy statement dated April 6, 1998)
10.2 Employment Agreement with John E. Andrews dated as of September 19,
1994 (incorporated by reference to Exhibit 10.4 to the 1994 S-1).
10.3 Amended and Restated Employment Agreement with William E. Nettles,
dated as of August 10, 1998 (incorporated by reference to Exhibit 10.1
to the company's Form 10-Q filed on October 13, 1998).
10.4 Credit Agreement between Stillwater Mining Company as borrower and N.
M. Rothschild & Sons Limited as Lender, dated as of April 19, 1994
(incorporated by reference to Exhibit 10.7 to the 1994 S-1).
10.5 Mining and Processing Agreement dated March 16, 1984 regarding the
Mouat family; and Compromise of Issues Relating to the Mining and
Processing Agreement (incorporated by reference to Exhibit 10.8 to the
1994 S-1).
10.6 Conveyance of Royalty Interest and Agreement between the company and
Manville Mining Company, dated October 1, 1993 (incorporated by
reference to Exhibit 10.9 to the 1994 S-1).
10.7 Agreement for Electric Service between the Montana Power Company and
Stillwater Mining Company dated June 1, 1996 (incorporated by
reference to Exhibit 10.8.1 of the company's 1996 Form 10-K).
10.8 Stock Redemption Agreement by and between the company and Chevron USA
Inc. and Manville Mining Company, dated July 28, 1994 (incorporated by
reference to Exhibit 10.11 to the 1994 S-1).
10.9 Registration Rights Agreement dated August 23, 1995, amending
Shareholders Agreement (incorporated by reference to Exhibit 4.1 to
Form 8-K filed on August 28, 1995).
10.10 Amendment to William E. Nettles employment agreement dated December
15, 1998.
10.11 Residue Refining Agreement between Stillwater Mining Company and
Johnson Matthey, dated as of February 8, 1996 (incorporated by
reference to Exhibit 10.16 of the company's 1995 Form 10-K).
10.12 Equipment Lease Agreement between Stillwater Mining Company and
Senstar Capital Corporation dated October 5, 1995. (incorporated by
reference to Exhibit 10.17 of the company's 1995 Form 10-K).
10.13 Purchase Agreement between Stillwater Mining Company and Senstar
Capital Corporation dated October 5, 1995 (incorporated by reference
to Exhibit 10.17.1 of the Registrant's 1995 Form 10-K).
10.14 Purchase Agreement between Stillwater Mining Company and The Westaim
Corporation, dated October 14, 1996 (incorporated by reference to
Exhibit 10.16 of the Registrant's 1996 Form 10-K).
10.15 PGM Concentrate Refining Agreement between the company and Union
Miniere dated May 8, 1996 (incorporated by reference to Exhibit 10.15
of the company's 1998 Form 10-K).
10.16 Articles of Agreement between Stillwater Mining Company and Oil,
Chemical and Atomic Workers International Union dated July 1, 1996, as
amended by Tentative Agreement between O.C.A.W. Local Union Number 2-1
and the company, dated May 7, 1997 (incorporated by reference to
Exhibit 10.16 to the Company's 1998 Form 10-K).
10.17 Palladium Sales Agreement, made as of August 13, 1998, among
Stillwater Mining Company and Ford Motor Company (portions of the
agreement have been omitted pursuant to a confidential treatment
request) (incorporated by reference to Exhibit 10.1 to the Form 8-K
dated July 21, 1998).
10.18 Palladium Sales Agreement, made as of July 21, 1998, among Stillwater
Mining Company and KEMET Corp. (portions of the agreement have been
omitted pursuant to a confidential treatment request) (incorporated by
reference to Exhibit 10.2 to the Form 8-K dated July 21, 1998.)
10.19 Palladium and Platinum Sales Agreement, made as of August 17, 1998,
among Stillwater Mining Company and General Motors Corporation
(portions of the agreement have been omitted pursuant to a
confidential treatment request) (incorporated by reference to Exhibit
10.3 to the Form 8-K dated July 21, 1998).
10.20 Palladium and Platinum Sales Agreement, made as of August 27, 1998,
among Stillwater Mining Company and Mitsubishi Corporation (portions
of the agreement have been omitted pursuant to a confidential
treatment request) (incorporated by reference to Exhibit 10.4 to the
Form 8-K dated July 21, 1998).
10.21 Credit Agreement, dated March 4, 1999 between Stillwater Mining
Company and the Bank of Nova Scotia.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Behre Dolbear & Company, Inc.
27 Financial Data Schedule