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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 0-25090

STILLWATER MINING COMPANY

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 X NO    

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

At July 22, 2003 the company had outstanding 89,625,911 shares of common stock, par value $0.01 per share.

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STILLWATER MINING COMPANY

FORM 10-Q

QUARTER ENDED JUNE 30, 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 June 30, 2003 and the results of its operations and its cash flows for the three-month and six-month periods ended June 30, 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 and six 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.

Note 2 – MMC Norilsk Nickel transaction

     On June 23, 2003, The Company and MMC Norilsk Nickel (“Norilsk Nickel”), a Russian mining company, completed a stock purchase transaction whereby the company issued 45,463,222 shares of its common stock to Norimet Limited (Norimet), a wholly-owned subsidiary of Norilsk Nickel, representing a 50.8% of the company’s outstanding shares. The company received consideration from Norimet consisting of $100 million in cash and approximately 877,000 ounces of palladium valued at $148.2 million as of June 23, 2003 (see Note 5). The aggregate value of the consideration was approximately $248.2 million as of June 23, 2003.

     Norimet commenced a cash tender offer on July 22, 2003, to acquire up to 4,350,000 shares of Stillwater at $7.50 per share. The additional share purchase could increase Norimet’s ownership in Stillwater to approximately 56%.

Stock issuance costs attributed to the Norilsk Nickel transaction

     The company incurred approximately $10.3 million in legal, accounting and underwriting fees related to the Norilsk Nickel transaction. The amounts have been charged directly to additional paid in capital.

Norilsk Nickel transaction related expenses

     The write-off of other transaction related expenses which are not directly related to the issuance of stock and accordingly have been charged to operations consist of approximately $1.8 million of unamortized debt issuance costs related to the pay down of the Term A Loan (see Note 6), $0.6 million in compensation expense, related to officer and employee awards, and $0.6 million in compensation expense related to the acceleration of vesting of restricted stock awards.

Reduction of net operating loss deferred tax asset resulting from ownership change

     Under the United States Internal Revenue Code, if more than 50% of the stock of a company changes hands within a specified period, future utilization of existing net operating loss carry forward (NOLs) of the company may be limited. The Norilsk Nickel transaction triggered an “ownership change” which limits the future utilization of NOLs to offset income earned in tax years following the closing of the transaction. The annual limitation is generally equal to the product of (i) a statutorily prescribed interest rate (approximately 4.5%) and (ii) the company’s equity value at the time of closing. The company recorded a charge of $14.0 million for the three-month period ended June 30, 2003 to reduce previously recorded deferred tax assets related to NOLs for the effect of the NOLs limitation.

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Note 3 – 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 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 three and six-month periods ended June 30, 2002 would not be material.

Note 4 – 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 10).

     The net of tax balance in other accumulated comprehensive loss at June 30, 2003 and December 31, 2002 was $1.1 million and $1.4 million, respectively.

     The company had no commodity instruments outstanding during the second quarter of 2003. The unrealized losses of $1.7 million ($1.1 million net of tax) existing at June 30, 2003 relating to interest rate swaps are being deferred and are expected to be reclassified to interest expense over the remaining term of the swaps (8 months).

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

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Note 5 – Inventories

     Inventories consisted of the following:

     Inventories are stated at the lower of current market value or average unit cost. Production inventory costs include cost of direct labor and materials, depreciation and amortization, as well as overhead costs relating to mining and processing activities. Approximately 877,000 ounces of palladium received in connection with the Norilsk Nickel transaction (see Note 2) were valued at $169 per ounce determined based on the current market value of the palladium of $179 per ounce on June 23, 2003 less an estimated discount for disposal and marketing expenses. If the palladium price declines below $169, the company will be required to write down the unsold palladium to market and to charge such write down to earnings in future periods. Furthermore, if the price of the palladium increases following the closing, any increase in value will only be recognized when the palladium is sold.

Note 6 – Long-Term Debt

Credit Facility

     The company has a credit facility with a syndicate of financial institutions. The credit facility provided 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. Amortization of the term loan facilities commenced on March 31, 2002.

     Pursuant to the term of the credit facility the company was required to use $50 million of the $100 million cash proceeds received in the Norilsk Nickel transaction to prepay its term loans. Consequently, the Term A loan was paid in full on June 23, 2003. In addition, in accordance with the terms of the credit agreement, 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. Accordingly, $74.1 million of the long-term debt has been classified as a current liability. The Term B facility final maturity date is December 31, 2007.

     As of June 30, 2003, the company has $129.1 million outstanding under the Term B facility, bearing interest at 7.25%. The schedule of principal payments on the amounts outstanding as of June 30, 2003, without regard to the sale of the inventory received in connection with the Norilsk Nickel transaction are as follows:

     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 June 30, 2003, bearing interest at 4.0%. The revolving credit facility requires an annual commitment fee of 0.5% on the remaining unadvanced amount. Of the $25 million revolving credit facility,

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     $17.5 million remains available to the company at June 30, 2003. The final maturity of the revolving credit facility is December 30, 2005.

Note 7 – Earnings per Share

     Outstanding options to purchase 2,577,604 and 2,009,315 shares of common stock were excluded from the computation of diluted earnings per share for the three-month periods ended June 30, 2003 and 2002, respectively, because the effect would have been antidilutive using the treasury stock method. The effect of outstanding stock options on diluted weighted average shares outstanding was 161,634 shares for the three-month periods ending June 30, 2002.

     Outstanding options to purchase 2,574,704 and 1,931,002 shares of common stock were excluded from the computation of diluted earnings per share for the six-month periods ended June 30, 2003 and 2002, respectively, because the effect would have been antidilutive using the treasury stock method. The effect of outstanding stock options on diluted weighted average shares outstanding was 174,031 shares for the six-month periods ending June 30, 2002.

     The effect of outstanding restricted stock on diluted weighted average shares outstanding was 1,059 shares for the six-month period ending June 30, 2003. The 58,237 shares of restricted stock vested on June 23, 2003 when the Norilsk Nickel transaction was complete.

Note 8 – 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 (loss) and earnings (loss) 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. The market value of restricted stock award totaled approximately $2.6 million on the grant date and was recorded as a separate component of stockholders’ equity. In connection with the completion of the Norilsk Nickel transaction, the remaining 58,237 outstanding shares were vested and the $559,075 of unamortized compensation was recognized as compensation expense in the second quarter of 2003.

Note 9 – 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 10 – 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 second quarter of 2003. Hedging gains on commodity instruments of $2.0 million and $4.8 million related to financially settled forwards were recognized as an adjustment to revenue for the three-month and six-month periods ended June 30, 2002.

     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 variable rate based on London Interbank Offered Rate (LIBOR), which is adjusted on a quarterly basis. The adjusted quarterly rate at June 30, 2003 was 1.28%. 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 three months. The three-month period ending June 30, 2003 and 2002, hedging losses of $0.6 million and $0.5 million, respectively, were recognized as additional interest expense. During the six-month periods ended June 30, 2003 and 2002, hedging losses of $1.2 million and $0.6 million, respectively, were recognized as additional interest expense.

Note 11 – 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.

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     The following summary sets forth the changes of the restructuring accrual during the first six 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)