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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Commission file number 0-25090

STILLWATER MINING COMPANY
(Exact name of registrant as specified in its charter)

(406) 322-8700

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: YES NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): YES NO o

At April 21, 2003 the company had outstanding 43,836,807 shares of common stock, par value $0.01 per share.

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STILLWATER MINING COMPANY

FORM 10-Q

QUARTER ENDED MARCH 31, 2003

INDEX

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PART I — FINANCIAL INFORMATION

     Item 1. Financial Statements

Stillwater Mining Company
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share amounts)

See notes to consolidated financial statements.

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Stillwater Mining Company
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except per share amounts)

See notes to consolidated financial statements.

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Stillwater Mining Company
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

See notes to consolidated financial statements.

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Stillwater Mining Company
Notes to Consolidated Financial Statements
(Unaudited)

Note 1 — General

     In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the company’s financial position as of March 31, 2003 and the results of its operations and its cash flows for the three-month periods ended March 31, 2003 and 2002. Certain prior period amounts have been reclassified to conform with the current year presentation. The results of operations for the three-month periods are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s 2002 Annual Report on Form 10-K.

     On November 20, 2002, the company and MMC Norilsk Nickel (“Norilsk Nickel”), a Russian mining company, entered into an agreement whereby Norimet, a wholly-owned subsidiary of Norilsk Nickel, will acquire a 51% majority ownership in the company through the issuance of 45.5 million newly issued shares of the company’s common stock in exchange for $100 million cash and approximately 877,000 ounces of palladium, which palladium was valued at $241 million based on the November 19, 2002, London PM fix of $275 per ounce and $132 million based on the April 17, 2003, London PM fix of $151 per ounce. Under the agreement Norilsk Nickel will also commence a cash tender offer within 30 days of the closing to acquire additionally up to 10% of the currently outstanding shares of the company at a price of $7.50 per share if the company share price is below $7.50 per share during the 15 trading days after closing. The tender offer could increase Norilsk Nickel’s ownership in the company to approximately 56%. The total investment by Norilsk Nickel will be approximately $341 million as of November 19, 2002, which represents a value of $7.50 for each company share and $232 million as of April 17, 2003, which represents a value of $5.11 for each company share.

     The transaction is subject to a number of conditions, including approval of the company’s stockholders, the completion of the Hart-Scott-Rodino antitrust review and other customary approvals. On March 20, 2003, the company received the necessary amendment under its credit agreement in connection with the transaction. The company is required to use 50% of the net cash proceeds and 50% of the net proceeds from the sale of the palladium received from the transaction to prepay the term loans. The remaining proceeds will be used, among other things, for general corporate purposes. The transaction is anticipated to close in 2003.

     If the company is unable to consummate this transaction by January 2, 2004, or an alternate transaction which provides adequate levels of funding to the company through the issuance of equity or subordinated debt, it will be in default on the credit facility and the loan would become due immediately.

Note 2 — New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset.

     SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be reflected in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is increased at the end of each

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period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the company will recognize a gain or loss on settlement.

     SFAS No. 143 was adopted on January 1, 2003. Upon adoption, the company increased its post-closure reclamation liability by approximately $1.9 million, increased the carrying value of its assets by approximately $1.2 million and recorded a cumulative effect adjustment to decrease income by $0.7 million ($0.4 million net of tax). If this new accounting method was applied retroactively, the impact on the consolidated statements of operations for the first quarter of 2002 would not be material

Note 3 — Comprehensive Income

     Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under generally accepted accounting principles, are excluded from net income. For the company, such items consist of unrealized gains and losses on derivative financial instruments related to commodity instruments and interest rate swaps (see note 9).

     The net of tax balance in other accumulated comprehensive loss at March 31, 2003 was $1.4 million and at December 31, 2002 was $1.4 million.

     The company had no commodity instruments outstanding during the first quarter of 2003. The unrealized losses of $2.3 million ($1.4 million net of tax) existing at March 31, 2003 on the interest rate swaps are being deferred and are expected to be reclassified to interest expense over the remaining term of the swaps (12 months).

     The following summary sets forth the changes of other comprehensive loss accumulated in stockholders’ equity:

Note 4 — Inventories

     Inventories consisted of the following:

Note 5 — Long-Term Debt

Credit Facility

     In February 2001, the company entered into a $250 million credit facility with a syndicate of financial institutions which replaced a previous $175 million bank facility. The credit facility has been amended or waivers have been obtained seven times with the most recent amendment effective

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March 20, 2003. The credit facility provides for a $65 million five-year term loan facility (Term A), a $135 million seven-year term loan facility (Term B) and a $25 million revolving credit facility (reduced from $50 million at the company’s request as of March 20, 2003). Amortization of the term loan facilities commenced on March 31, 2002. The final maturity of the Term A facility and revolving credit facility is December 30, 2005. The Term B facility final maturity date is December 31, 2007.

     As of March 31, 2003, the company has $52.2 million and $129.5 million outstanding under the Term A and Term B facilities, respectively, bearing interest at 5.13% and 7.25%, respectively. The company has obtained a letter of credit in the amount of $7.5 million, which reduces amounts available under the revolving credit facility at March 31, 2003, bearing interest at 3.88%. The revolving credit facility requires an annual commitment fee of 0.5% on the remaining unadvanced amount. Of the $25 million revolving credit facility, $17.5 million remains available to the company.

     During the first quarter of 2003 the company began working with its lead banks to obtain waivers and amendments of various covenants under the credit facility due to: (1) the requirement to obtain lender approval of transactions which result in a change of control of the company, such as the transaction with Norilsk Nickel ; (2) implementing a new long-range operating plan in the first quarter of 2003, which focuses on reducing operating and capital costs and, therefore, requiring the company to lower its 2003 PGM production target; and (3) management’s concern that at the current low palladium prices and without access to additional capital provided by borrowings under the revolving credit facility, the company did not believe that its cash would be sufficient to maintain its projected liquidity requirements, including interest and principal payments required under the credit facility, through 2003.

     On March 20, 2003, the company obtained an amendment to the credit agreement that, among other things, modifies certain production and financial covenants for the remaining term of the agreement and allows for the Norilsk Nickel transaction. The amendment also provides the company with access to the $17.5 million of availability under the revolving credit facility. This amendment modified covenants relating to the debt to EBITDA ratio, the debt service coverage ratio, production ounces and the minimum average primary development for the Stillwater and East Boulder Mines. During the first quarter of 2003, the company’s debt to EBITDA ratio may not be greater than 3.55:1.0, annual production for the company may not be less than 565,000 ounces, its debt service coverage ratio may not be less than 2.20:1.0, its average primary development with respect to the Stillwater Mine may not be less than 5,000 feet and its average primary development with respect to the East Boulder Mine may not be less than 1,900 feet. All such covenants thereafter change quarterly as further set forth in the credit agreement as amended. The amendment did not alter the debt to equity ratio, which, during the term of the credit agreement shall not be greater than 1.0:1.0. This amendment also modified the maximum capital expenditures permitted; during the fiscal year 2003, the company is permitted to make capital expenditures up to $57 million. Additionally, the developed proven ore reserves measure based on production tons was modified to reflect, based on the current mine plans, that at December 31, 2003, 14 months of proven ore reserves be available at the East Boulder Mine. This covenant thereafter changes each year through December 31, 2005.

     Pursuant to the credit agreement and further detailed in the amendment, the company is required to use $50 million of the $100 million cash proceeds received in the Norilsk Nickel transaction to prepay its term loans. In addition, the company must use 50% of the net proceeds from the sale of palladium received in the Norilsk Nickel transaction to prepay its term loans. In connection with this amendment, the company agreed to an amendment fee of 0.5% (approximately $1.1 million), and a 0.5% increase in the interest rate payable on the loans. As a result of the amendments, the company believes it will remain in full compliance with the credit agreement throughout 2003.

     The Norilsk Nickel transaction is under review by the U.S. Federal Trade Commission and the German Federal Cartel Office; no assurances can be given that this transaction will be consummated. If the company is unable to consummate this transaction by January 2, 2004, or an alternate

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transaction which provides adequate levels of funding to the company through the issuance of equity or subordinated debt, it will be in default on the credit facility and the loan would become due immediately.

Note 6 — Earnings per Share

     The effect of outstanding stock options on diluted weighted average shares outstanding was 509 and 190,822 shares for the three-month periods ending March 31, 2003 and 2002, respectively. Outstanding options to purchase 2,577,479 and 1,905,958 shares of common stock were excluded from the computation of diluted earnings per share for the three-month periods ended March 31, 2003 and 2002, respectively, because the effect would have been antidilutive using the treasury stock method.

     The effect of outstanding restricted stock on diluted weighted average shares outstanding was 2,130 and 47,926 shares for the three-month periods ending March 31, 2003 and 2002, respectively. For the three-month period ending March 31, 2003, 58,237 shares of unvested restricted stock were excluded from the computation of diluted earnings per share because the effect would have been antidilutive using the treasury stock method.

     The impact of potential common shares from exercising of stock options or vesting of restricted stock is not included in the computation of diluted earnings per share for the first quarter of 2003 because the company’s operations resulted in a net loss.

Note 7 — Stock-Based Compensation Costs

     The company has elected to account for stock options and other stock-based compensation awards using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, because stock options are granted at fair market value, no compensation expense has been recognized for stock options issued under the company’s stock option plans. The company records compensation expense for other stock-based compensation awards over the vesting periods. The company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the following pro forma disclosures illustrate the effect on net income and earnings per share as if the fair value based method of accounting, as set forth in SFAS No. 123, had been applied.

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Restricted Stock

     During the first quarter of 2002, the company granted 135,119 shares of restricted stock to certain of its officers and employees. During the fiscal year ended December 31, 2002, 46,344 shares had vested and the remaining shares are scheduled to vest on January 2, 2005 (unless earlier vested due to the closing of the Norilsk Nickel transaction), provided that the recipients are still employed by the company on such vesting date. The market value of restricted stock awarded totaled approximately $2.6 million on the grant date and was recorded as a separate component of shareholders’ equity. Approximately 13,000 and 1,000 shares of restricted stock were forfeited or cancelled during the three-month periods ended March 31, 2003 and 2002, respectively. The company is amortizing unearned compensation over the vesting periods. During the three-month periods ended March 31, 2003 and 2002, approximately $18,000 and $254,000, respectively, related to the restricted stock grants was recognized as compensation expense.

Note 8 — Long-Term Sales Contracts

     The company has entered into long-term sales contracts with General Motors Corporation, Ford Motor Company and Mitsubishi Corporation. The contracts provide for floor and ceiling price structures as summarized below:

Note 9 — Financial Instruments

     The company utilizes the following types of derivative financial instruments: fixed forwards, cashless put and call option collars, financially settled forwards and interest rate swaps. For derivative instruments, the company designates derivatives as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge). Changes in fair value of derivatives that are highly effective as hedges and that are designated and qualified as a cash-flow hedge are reported in other comprehensive income until the related specific firm commitments or forecasted transactions occur.

     The company had no commodity instruments outstanding during the first quarter of 2003. During the first quarter of 2002, hedging gains on commodity instruments of $2.8 million related to financially settled forwards were recognized as an adjustment to revenue.

     The company has entered into two identical interest rate swap agreements which fixed the interest rate on $100 million of the company’s debt. The interest rate swap agreements were effective March 4, 2002 and mature on March 4, 2004. The agreements require the company to pay interest at a fixed rate of 3.67% and receive interest at a rate based on London Interbank Offered Rate (LIBOR), which is adjusted on a quarterly basis. The adjusted quarterly rate at March 31, 2003 was 1.34%. The interest rate swap agreements qualify as a cash flow hedge and are considered to be highly effective since the change in the value of the interest rate swap will offset changes in the future cash flows related to interest payments on the company’s debt. During the three-month periods ended March 31, 2003 and 2002, hedging losses of $0.6 million and $0.1 million, respectively, were recognized as additional interest expense.

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Note 10 — Restructuring Costs

     In the fourth quarter of 2001, the company began implementing a revised operating plan, which included a reduction of the company’s previously planned capital expenditures and production levels. In accordance with the plan, the company terminated certain contracts related to ongoing mine development and accrued a pre-tax charge of approximately $11 million for early contract termination costs. The accrual was based on the termination provisions of the related contracts. During the first quarter of 2002, the company reduced its accrued restructuring costs resulting in a gain of $6.3 million primarily as a result of negotiations of certain termination clauses of the construction contracts. Any adjustments to the original estimate of the accrual have been included in the company’s results of operations when determined.

     In accordance with the revised operating plan, during the second quarter of 2002, the company eliminated six management positions and recorded an addition to the restructuring accrual of $1.1 million.

     The following summary sets forth the changes of the restructuring accrual during the first three months of 2003:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Stillwater Mining Company
Key Factors
(Unaudited)

(1)

Sub-grade tons milled includes reef waste material only. Total tons milled includes ore tons and sub-grade tons only. Prior period amounts have been adjusted to conform with the current year presentation.

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Stillwater Mining Company
Key Factors
(Unaudited)

(1)		Sub-grade tons milled includes reef waste material only. Total tons milled includes ore tons and sub-grade tons only. Prior period amounts have been adjusted to conform with the current year presentation.
(2)		The company’s average realized price represents revenues which include the impact of contract floor and ceiling prices and hedging gains and losses realized on commodity instruments and exclude contract discounts, divided by ounces sold. The average market price represents the average London PM Fix for the actual months of the period.
(3)		Stillwater Mining reports a combined average realized and market price of palladium and platinum at the same ratio as ounces are produced from the refinery.

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Stillwater Mining Company
Key Factors (continued)
(Unaudited)