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EX-31.2 - EX-31.2 - STILLWATER MINING CO /DE/ | d83749exv31w2.htm |
EX-32.2 - EX-32.2 - STILLWATER MINING CO /DE/ | d83749exv32w2.htm |
EX-32.1 - EX-32.1 - STILLWATER MINING CO /DE/ | d83749exv32w1.htm |
EX-31.1 - EX-31.1 - STILLWATER MINING CO /DE/ | d83749exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - STILLWATER MINING CO /DE/ | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2011.
OR
o | 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 1-13053
STILLWATER MINING COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 81-0480654 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1321 DISCOVERY DRIVE, BILLINGS, MONTANA 59102
(Address of principal executive offices)
(406) 373-8700
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES o
NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one).
Large Accelerated Filer þ | Accelerated Filer o | Non-Accelerated Filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) YES o NO þ
At July 25, 2011 the Company had outstanding 103,081,612 shares of common stock, par value $0.01
per share.
STILLWATER MINING COMPANY
FORM 10-Q
QUARTER ENDED JUNE 30, 2011
INDEX
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Stillwater Mining Company
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except per share data)
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except per share data)
Three Months Ended | Six Months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
||||||||||||||||
Mine production |
$ | 139,733 | $ | 92,570 | $ | 261,713 | $ | 187,769 | ||||||||
PGM recycling |
82,872 | 42,291 | 130,953 | 75,941 | ||||||||||||
Other |
| | | 4,622 | ||||||||||||
Total revenues |
222,605 | 134,861 | 392,666 | 268,332 | ||||||||||||
Costs and expenses |
||||||||||||||||
Costs of metals sold |
||||||||||||||||
Mine production |
65,094 | 54,980 | 125,344 | 112,843 | ||||||||||||
PGM recycling |
79,552 | 39,256 | 124,706 | 70,251 | ||||||||||||
Other |
| | | 4,622 | ||||||||||||
Total costs of metals sold |
144,646 | 94,236 | 250,050 | 187,716 | ||||||||||||
Depletion, depreciation and amortization |
||||||||||||||||
Mine production |
15,395 | 16,589 | 31,196 | 35,046 | ||||||||||||
PGM recycling |
265 | 39 | 527 | 83 | ||||||||||||
Total depletion, depreciation and amortization |
15,660 | 16,628 | 31,723 | 35,129 | ||||||||||||
Total costs of revenues |
160,306 | 110,864 | 281,773 | 222,845 | ||||||||||||
Marketing |
2,800 | 807 | 3,653 | 1,275 | ||||||||||||
Exploration |
75 | | 75 | | ||||||||||||
Research and development |
621 | | 1,080 | | ||||||||||||
General and administrative |
9,893 | 7,251 | 16,255 | 13,672 | ||||||||||||
(Gain)/loss on disposal of property, plant and equipment |
(207 | ) | 9 | (226 | ) | (208 | ) | |||||||||
Total costs and expenses |
173,488 | 118,931 | 302,610 | 237,584 | ||||||||||||
Operating income |
49,117 | 15,930 | 90,056 | 30,748 | ||||||||||||
Other income (expense) |
||||||||||||||||
Other |
4 | 3 | 12 | 9 | ||||||||||||
Interest income |
951 | 532 | 1,733 | 933 | ||||||||||||
Interest expense |
(1,637 | ) | (1,636 | ) | (3,272 | ) | (3,269 | ) | ||||||||
Foreign currency transaction gain |
| | 182 | | ||||||||||||
Income before income tax provision |
48,435 | 14,829 | 88,711 | 28,421 | ||||||||||||
Income tax provision |
(5,737 | ) | (239 | ) | (9,821 | ) | (472 | ) | ||||||||
Net income |
$ | 42,698 | $ | 14,590 | $ | 78,890 | $ | 27,949 | ||||||||
Other comprehensive income (loss), net of tax |
86 | 16 | (104 | ) | (178 | ) | ||||||||||
Comprehensive income |
$ | 42,784 | $ | 14,606 | $ | 78,786 | $ | 27,771 | ||||||||
Weighted average common shares outstanding |
||||||||||||||||
Basic |
103,037 | 97,735 | 102,688 | 97,390 | ||||||||||||
Diluted |
111,123 | 105,932 | 110,924 | 105,616 | ||||||||||||
Basic earnings per share |
||||||||||||||||
Net income |
$ | 0.41 | $ | 0.15 | $ | 0.77 | $ | 0.29 | ||||||||
Diluted earnings per share |
||||||||||||||||
Net income |
$ | 0.39 | $ | 0.15 | $ | 0.73 | $ | 0.28 | ||||||||
See accompanying notes to consolidated financial statements
3
Table of Contents
Stillwater Mining Company
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data)
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 105,009 | $ | 19,363 | ||||
Investments, at fair market value |
149,879 | 188,988 | ||||||
Inventories |
156,285 | 101,806 | ||||||
Trade receivables |
7,773 | 7,380 | ||||||
Deferred income taxes |
29,027 | 17,890 | ||||||
Other current assets |
11,952 | 13,940 | ||||||
Total current assets |
459,925 | 349,367 | ||||||
Property, plant and equipment, net of $408,497 and $378,390 of accumulated
depletion, depreciation and amortization |
531,854 | 509,787 | ||||||
Restricted cash |
35,070 | 38,070 | ||||||
Other noncurrent assets |
12,088 | 12,246 | ||||||
Total assets |
$ | 1,038,937 | $ | 909,470 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Accounts payable |
$ | 24,049 | $ | 19,405 | ||||
Accrued compensation and benefits |
29,095 | 24,746 | ||||||
Property, production and franchise taxes payable |
12,815 | 10,999 | ||||||
Income taxes payable |
9,821 | | ||||||
Other current liabilities |
7,665 | 3,052 | ||||||
Total current liabilities |
83,445 | 58,202 | ||||||
Long-term debt |
196,027 | 196,010 | ||||||
Deferred income taxes |
64,996 | 53,859 | ||||||
Accrued workers compensation |
6,601 | 7,155 | ||||||
Asset retirement obligation |
7,033 | 6,747 | ||||||
Other noncurrent liabilities |
5,553 | 4,425 | ||||||
Total liabilities |
363,655 | 326,398 | ||||||
Stockholders equity |
||||||||
Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued |
| | ||||||
Common stock, $0.01 par value, 200,000,000 shares authorized; 103,056,185
and 101,881,816 shares issued and outstanding |
1,031 | 1,019 | ||||||
Paid-in capital |
774,887 | 761,475 | ||||||
Accumulated deficit |
(99,680 | ) | (178,570 | ) | ||||
Accumulated other comprehensive loss |
(956 | ) | (852 | ) | ||||
Total stockholders equity |
675,282 | 583,072 | ||||||
Total liabilities and stockholders equity |
$ | 1,038,937 | $ | 909,470 | ||||
See accompanying notes to consolidated financial statements
4
Table of Contents
Stillwater Mining Company
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cash flows from operating activities |
||||||||||||||||
Net income |
$ | 42,698 | $ | 14,590 | $ | 78,890 | $ | 27,949 | ||||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||||||
Depletion, depreciation and amortization |
15,660 | 16,628 | 31,723 | 35,129 | ||||||||||||
(Gain)/loss on disposal of property, plant and equipment |
(207 | ) | 9 | (226 | ) | (208 | ) | |||||||||
Accretion of asset retirement obligation |
145 | 133 | 286 | 263 | ||||||||||||
Amortization of debt issuance costs |
246 | 245 | 491 | 490 | ||||||||||||
Stock based compensation and other benefits |
2,689 | 2,523 | 5,789 | 5,489 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Inventories |
(15,505 | ) | (13,243 | ) | (55,569 | ) | (20,178 | ) | ||||||||
Trade receivables |
81 | 835 | (393 | ) | (4,222 | ) | ||||||||||
Accrued compensation and benefits |
3,051 | 202 | 4,341 | (457 | ) | |||||||||||
Accounts payable |
1,450 | 1,739 | 4,644 | 5,383 | ||||||||||||
Property, production and franchise taxes payable |
1,273 | (624 | ) | 2,944 | 641 | |||||||||||
Income taxes payable |
5,737 | 239 | 9,821 | 472 | ||||||||||||
Workers compensation |
(78 | ) | 875 | (554 | ) | 1,749 | ||||||||||
Restricted cash |
| | 3,000 | (25 | ) | |||||||||||
Other |
1,571 | (3,049 | ) | 7,496 | (1,610 | ) | ||||||||||
Net cash provided by operating activities |
58,811 | 21,102 | 92,683 | 50,865 | ||||||||||||
Cash flows from investing activities |
||||||||||||||||
Capital expenditures |
(23,110 | ) | (13,860 | ) | (46,295 | ) | (24,587 | ) | ||||||||
Purchase of long-term investment |
| | (616 | ) | | |||||||||||
Proceeds from disposal of property, plant and equipment |
207 | | 228 | 265 | ||||||||||||
Purchases of short-term investments |
(32,801 | ) | (82,586 | ) | (98,096 | ) | (126,632 | ) | ||||||||
Proceeds from maturities of short-term investments |
58,575 | | 137,017 | 12,973 | ||||||||||||
Net cash provided by (used in) investing activities |
2,871 | (96,446 | ) | (7,762 | ) | (137,981 | ) | |||||||||
Cash flows from financing activities |
||||||||||||||||
Issuance of common stock |
7 | 190 | 725 | 441 | ||||||||||||
Net cash provided by financing activities |
7 | 190 | 725 | 441 | ||||||||||||
Cash and cash equivalents |
||||||||||||||||
Net increase (decrease) |
61,689 | (75,154 | ) | 85,646 | (86,675 | ) | ||||||||||
Balance at beginning of period |
43,320 | 155,135 | 19,363 | 166,656 | ||||||||||||
Balance at end of period |
$ | 105,009 | $ | 79,981 | $ | 105,009 | $ | 79,981 | ||||||||
See accompanying notes to consolidated financial statements
5
Table of Contents
Stillwater Mining Company
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1
GENERAL
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 financial position of Stillwater Mining Company (the Company) as of June 30, 2011
and the results of its operations and its cash flows for the three- and six- month periods ended
June 30, 2011 and 2010. The results of operations for the first six months of 2011 are not
necessarily indicative of the results to be expected for the full year. The accompanying
consolidated financial statements in this quarterly report should be read in conjunction with
the consolidated financial statements and notes thereto included in the Companys March 31, 2011
Quarterly Report on Form 10-Q and in the Companys 2010 Annual Report on Form 10-K.
The preparation of the Companys consolidated financial statements in conformity with
United States 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 managements estimates
relate to mineral reserves, reclamation and environmental obligations, valuation allowance for
deferred tax assets, useful lives utilized for depreciation, amortization and accretion
calculations, future cash flows from long-lived assets, and fair value of derivatives and other
financial instruments. Actual results could differ from these estimates.
The Company evaluates subsequent events through the date the consolidated financial
statements are issued. No subsequent events were identified that required additional disclosure
in the consolidated financial statements through the date of this filing.
NOTE 2
SALES
SALES
Mine Production
The Company mines and processes ores containing palladium, platinum, rhodium, gold, silver,
copper and nickel into intermediate and final products for sale to customers. Palladium,
platinum, rhodium, gold and silver are sent to third party refineries for final processing from
where they are sold to a number of consumers and dealers with whom the Company has established
trading relationships. Refined platinum group metals (PGMs) in sponge form are transferred upon
sale from the Companys account at third party refineries to the account of the purchaser.
By-product precious metals are normally sold at market prices to customers, brokers or outside
refiners. By-products of copper and nickel are produced by the Company at less than commercial
grade, so prices for these metals typically reflect a quality discount. By-product sales are
included in revenues from mine production. During the second quarter of 2011 and 2010, total
by-product (copper, nickel, gold, silver and mined rhodium) sales were $8.0 million for each
reporting period. During the first six months of 2011 and 2010, total by-product (copper,
nickel, gold, silver and mined rhodium) sales were $15.5 million and $16.2 million,
respectively.
The Company has a supply agreement with General Motors Corporation (GM) that provides for
fixed quantities of palladium to be delivered to GM each month. The agreement provides for
pricing at a small discount to a trailing market price. The Company also has palladium and
platinum supply agreements with Ford Motor Company and BASF and a platinum supply agreement with
Tiffany & Co. The Company is continuing to negotiate potential supply arrangements with other
large PGM consumers and in the meantime is selling its remaining mine production under
month-to-month and spot sales agreements.
6
Table of Contents
PGM Recycling
The Company purchases spent catalyst materials from third parties and processes these
materials in its facilities in Columbus, Montana to recover palladium, platinum and rhodium for
sale. It also accepts material supplied from third parties on a tolling basis, processing it
for a fee and returning the recovered metals to the supplier. The Company has entered into
sourcing arrangements for catalyst material with several suppliers. Under these sourcing
arrangements as currently structured, the Company advances cash against a shipment of material
shortly before receiving the physical shipment. These advances are included in Other current
assets on the Companys consolidated balance sheet until such time as the material has been
physically received and title has transferred to the Company. The Company holds a security
interest in materials procured by its largest recycling supplier that have not been received by
the Company. Once the material is physically received and title has transferred, the associated
advance is reclassified from Other current assets into Inventories. Finance charges collected
on advances and inventories prior to being earned are included in Other current liabilities on
the Companys consolidated balance sheet. Finance charges are reclassed from Other current
liabilities to Interest income ratably from the time the advance was made until the out-turn
date of the inventory.
At the same time the Company commits to purchase recycling material, it typically enters
into a fixed forward contract for future delivery of the PGMs contained in the recycled material
at a price consistent with the purchase cost of the recycled material. The fixed forward
contract commits the Company to deliver finished metal on a specified date that normally
corresponds to the expected out-turn date for the metal from the final refiner. The purpose of
this arrangement is to eliminate the Companys exposure to fluctuations in market prices during
processing, while at the same time creating an obligation for the Company to deliver metal at a
future point in time that could be subject to operational risks. If the Company were unable to
complete the processing of the recycled material by the contractual delivery date, it could
either cover its delivery commitments with mine production or purchase finished metal in the
open market. If open market purchases are used, the Company would bear the cost (or benefit) of
any change in the market price relative to the price stipulated in the delivery contract.
Other
The Company makes other open market purchases of PGMs from time to time for resale to third
parties. The Company recognized revenue of $4.6 million for 10,000 ounces of PGMs that were
purchased in the open market and resold for the six- month period ended June 30, 2010.
Total Sales
Total sales to significant customers as a percentage of total revenues for the three- and
six- month periods ended June 30, 2011 and 2010, were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Customer A |
24 | % | 15 | % | 24 | % | 18 | % | ||||||||
Customer B |
24 | % | 10 | % | 21 | % | * | |||||||||
Customer C |
19 | % | 47 | % | 21 | % | 51 | % | ||||||||
Customer D |
* | * | 10 | % | * | |||||||||||
67 | % | 72 | % | 76 | % | 69 | % | |||||||||
* | Represents less than 10% of total revenues |
NOTE 3
DERIVATIVE INSTRUMENTS
DERIVATIVE INSTRUMENTS
The Company uses various derivative instruments to manage its exposure to changes in PGM
market commodity prices. Some of these derivatives are designated as hedges. Because the
Company hedges only with instruments that have a high correlation with the value of the
underlying exposures, changes in the derivatives fair value are expected to be offset by
changes in the value of the hedged transaction.
7
Table of Contents
Commodity Derivatives
The Company customarily enters into fixed forward contracts and on occasion it also enters
into financially settled forward contracts to offset the price risk in its PGM recycling
activity. From time to time, it also has entered into these types of contracts on portions of
its mine production. Under these customary fixed forward transactions, the Company agrees to
deliver a stated quantity of metal on a specific future date at a price stipulated in advance.
The Company uses fixed forward transactions primarily to price in advance the metals acquired
for processing in its recycling segment. Under the occasional financially settled forward
transactions, at each settlement date the Company receives the net difference between the
forward price and the market price if the market price is below the forward price and the
Company pays the net difference between the forward price and the market price if the market
price is above the forward price. These financially settled forward contracts are settled in
cash at maturity and do not require physical delivery of metal at settlement. The Company
typically has used financially settled forward contracts with third parties to reduce its
exposure to price risk on metal it is obligated to deliver under long-term sales agreements.
Mine Production
At present the Company has no outstanding derivative contracts pertaining to its mined
production.
PGM Recycling
The Company regularly enters into fixed forward sales relating to its recycling of PGM
catalyst materials. The metals from PGM recycled materials are typically sold forward at the
time the Company commits to purchase the materials and delivered against the fixed forward
contracts when the ounces are recovered. All of these fixed forward sales contracts open at
June 30, 2011, will settle at various periods through November 2011. The Company has credit
agreements with its major trading partners that provide for margin deposits in the event that
forward prices for metals exceed the Companys hedged prices by a predetermined margin limit.
As of June 30, 2011, no such margin deposits were outstanding or due.
Occasionally, the Company also has entered into financially settled forward contracts on
its recycled materials. Such contracts are utilized when the Company wishes to establish a firm
forward price for recycled metal on a specific future date. No financially settled forward
contracts were entered into during the second quarter of 2011. The Company generally has not
designated these contracts as cash flow hedges, so they are marked to market at the end of each
accounting period. The change in the fair value of the derivatives is reflected in the
consolidated statement of operations and comprehensive income.
The following is a summary of the Companys outstanding commodity derivatives as of June
30, 2011:
PGM Recycling:
Fixed Forwards
Platinum | Palladium | Rhodium | ||||||||||||||||||||||
Settlement Period | Ounces | Avg. Price | Ounces | Avg. Price | Ounces | Avg. Price | ||||||||||||||||||
Third Quarter 2011 |
25,028 | $ | 1,794 | 37,258 | $ | 763 | 5,643 | $ | 2,211 | |||||||||||||||
Fourth Quarter 2011 |
564 | $ | 1,711 | 676 | $ | 745 | 1,258 | $ | 2,055 |
NOTE 4
SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION
Stock Plans
The Company sponsors stock option plans (the Plans) that enable the Company to grant
stock options or nonvested shares to employees and non-employee directors. Effective March 1,
2011, the Company ceased offering stock options as incentive compensation to employees and
non-employee directors and in the future expects to issue only cash awards or nonvested shares
in lieu of stock options. The Company continues to have stock options previously issued that
remain outstanding. The Compensation Committee of the Companys Board of Directors administers
the Plans and determines the exercise period, vesting period and all other terms of
8
Table of Contents
instruments
issued under the Plans. Approximately 1.1 million shares were available and reserved for grant
as of June 30, 2011.
Stock Options
The Company received $0.7 million in cash from the exercise of stock options in the six-
month period ended June 30, 2011. The Company received $0.2 million and $0.4 million in cash
from the exercise of stock options in the three- and six- month periods ended June 30, 2010,
respectively.
The Company recognizes compensation expense associated with its stock option grants based
on their fair market value on the date of grant using a Black-Scholes option pricing model. The
Company recognizes stock option expense ratably over the vesting period of the options. If
options are canceled or forfeited prior to vesting, the Company stops recognizing the related
expense effective with the date of forfeiture. The compensation expense, recorded in General
and administrative in the Consolidated Statements of Operations and Comprehensive Income,
related to stock options during the three- month periods ended June 30, 2011 and 2010, was
$61,500 and $36,000, respectively, and $131,000 and $74,000 during the six- month periods ended
June 30, 2011 and 2010, respectively.
The following table presents the total compensation expense (in thousands) not yet
recognized related to nonvested stock options to be recognized over the remaining vesting
periods:
Compensation | ||||
(in thousands) | Expense | |||
Remaining six months of 2011 |
$ | 97 | ||
2012 |
$ | 95 | ||
2013 |
$ | 32 | ||
Total |
$ | 224 | ||
Nonvested Shares
The following table summarizes the status of and changes in the Companys nonvested shares
during the first six months of 2011:
Weighted-Average | ||||||||
Six Months Ended June 30, 2011 | Nonvested Shares | Grant-Date Fair Value | ||||||
Nonvested shares at December 31, 2010 |
1,563,886 | $ | 9.37 | |||||
Granted |
310,681 | 23.02 | ||||||
Vested |
(412,211 | ) | 14.86 | |||||
Forfeited |
(714 | ) | 16.57 | |||||
Nonvested shares at March 31, 2011 |
1,461,642 | $ | 10.72 | |||||
Granted |
46,907 | 21.33 | ||||||
Vested |
| | ||||||
Forfeited |
(400 | ) | 23.06 | |||||
Nonvested shares at June 30, 2011 |
1,508,149 | $ | 11.04 | |||||
Compensation expense related to grants of nonvested shares was $1.6 million in the three-
month periods ended June 30, 2011 and 2010, respectively, and is included within General and
administrative in the Consolidated Statements of Operations and Comprehensive Income.
Compensation expense related to grants of nonvested shares was $3.1 million and $3.2 million in
the six- month periods ended June 30, 2011 and 2010, respectively.
The following table presents the compensation expense (in millions) of the nonvested shares
outstanding at June 30, 2011 to be recognized over the remaining vesting periods:
9
Table of Contents
Compensation | ||||
(in millions) | Expense | |||
Third quarter 2011 |
$ | 1.7 | ||
Fourth quarter 2011 |
1.6 | |||
2012 |
5.0 | |||
2013 |
2.9 | |||
2014 |
0.3 | |||
Total |
$ | 11.5 | ||
NOTE 5
INCOME TAXES
INCOME TAXES
The Company determines income taxes using the asset and liability approach which results in
the recognition of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax basis of those assets and
liabilities, as well as operating loss and tax credit carryforwards, using enacted tax rates in
effect in the years in which the differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets and liabilities are recorded on a
jurisdictional basis.
At June 30, 2011, the Company has net operating loss carryforwards (NOLs), which expire at
various times in years 2011 through 2030. The Company has reviewed its net deferred tax assets
and has provided a valuation allowance to reflect the estimated amount of net deferred tax
assets which management considers, more likely than not, will not be realized. As of June 30,
2011, the Company has accrued $5.7 million and $9.8 million for its estimated alternative
minimum tax (AMT) obligations associated with earnings for the three- and six- month periods
ended June 30, 2011. The Company has AMT net operating loss carry-forwards, and anticipates
that up to approximately $80.5 million of 2011 AMT income will be subject to offset by available
AMT NOLs. This reflects the provisions of Internal Revenue Code
section 382, which imposes limitations on the usage of NOL
carry-forwards following an ownership change of greater than 50%. The Company recognized an income tax provision of $0.2 million and $0.5 million for
the three- and six- month periods ended June 30, 2010, respectively. Changes in the Companys
net deferred tax assets and liabilities have been offset by a corresponding change in the
valuation allowance.
The Companys policy is to recognize interest and penalties on unrecognized tax benefits in
Income tax provision in the Consolidated Statements of Operations and Comprehensive Income.
There were no interest or penalties for the three- and six- month periods ended June 30, 2011
and 2010. Tax years still open for examination by the taxing authorities are the years ending
December 31, 2010, 2009, and 2008.
NOTE 6
COMPREHENSIVE LOSS
COMPREHENSIVE LOSS
Other comprehensive loss consists of earnings items and other gains and losses affecting
stockholders equity that are excluded from current net income. As of June 30, 2011 and 2010,
such items consisted of unrealized losses on available-for-sale marketable securities.
The following summary sets forth the changes in Accumulated other comprehensive income
(loss) in stockholders equity for the first six months of 2011 and 2010:
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(in thousands) | Accumulated Other | |||
Six Months Ended June 30, 2011 | Comprehensive Loss | |||
Balance at December 31, 2010 |
$ | (852 | ) | |
Change in value |
(190 | ) | ||
Comprehensive loss |
$ | (190 | ) | |
Balance at March 31, 2011 |
$ | (1,042 | ) | |
Change in value |
86 | |||
Comprehensive income |
$ | 86 | ||
Balance at June 30, 2011 |
$ | (956 | ) | |
(in thousands) | Accumulated Other | |||
Six Months Ended June 30, 2010 | Comprehensive Loss | |||
Balance at December 31, 2009 |
$ | (90 | ) | |
Change in value |
(194 | ) | ||
Comprehensive loss |
$ | (194 | ) | |
Balance at March 31, 2010 |
$ | (284 | ) | |
Change in value |
16 | |||
Comprehensive income |
$ | 16 | ||
Balance at June 30, 2010 |
$ | (268 | ) | |
NOTE 7
DEBT
DEBT
On March 12, 2008, the Company issued and sold $181.5 million aggregate principal amount of
senior convertible debentures due March 15, 2028 (debentures). The debentures pay interest at
1.875% per annum, payable semi-annually on March 15 and September 15 of each year, and commenced
on September 15, 2008. The debentures will mature on March 15, 2028, subject to earlier
repurchase or conversion. Each $1,000 principal amount of debentures is initially convertible,
at the option of the holders, into approximately 42.5351 shares of the Companys common stock,
at any time prior to the maturity date. The conversion rate is subject to certain adjustments,
but will not be adjusted for accrued interest or any unpaid interest. The conversion rate
initially represents a conversion price of $23.51 per share. Holders of the debentures may
require the Company to repurchase all or a portion of their debentures on March 15, 2013, March
15, 2018 and March 15, 2023, or at any time before March 15, 2028 upon the occurrence of certain
events including a change in control. The Company may redeem the debentures for cash beginning
on or after March 22, 2013.
In October 2009, the Company undertook the exchange of $15.0 million face amount of the
convertible debentures for 1.84 million shares of the Companys common stock. The debentures so
acquired were retired. There is $166.5 million face value of the debentures outstanding as of
June 30, 2011.
Amortization expense related to the issuance costs of the debentures was approximately $0.2
million for each of the three- month periods ended June 30, 2011 and 2010, respectively, and
$0.5 million for each of the six- month periods ended June 30, 2011 and 2010, respectively. The
interest expense on the debentures was approximately $0.8 million, respectively, for each of the
three- month periods ended June 30, 2011 and 2010, and $1.6 million, respectively, for each of
the six-month periods ended June 30, 2011 and 2010. The Company made cash payments of $1.6
million for interest on the debentures for each of the six- month periods ended June 30, 2011
and 2010, respectively.
The Company also has outstanding a $30.0 million offering of 8.0% Exempt Facility Revenue
Bonds, Series 2000, issued through the State of Montana Board of Investments and due July 1,
2020. The balance outstanding at June 30, 2011, was $29.5 million, which is net of unamortized
discount of $0.5 million.
Subsequent to June 30, 2011, in connection with the signing of the Peregrine arrangement
agreement on July
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11, 2011, the Company received a bridge capital loan commitment of $200.0 million in order
to provide for additional working capital support if needed following the closing of the
Peregrine acquisition.
NOTE 8
SEGMENT INFORMATION
SEGMENT INFORMATION
The Company operates three reportable business segments: Mine Production, PGM Recycling and
Canadian Properties. These segments are managed separately based on fundamental differences in
their operations.
The Mine Production segment consists of two business components: the Stillwater Mine and
the East Boulder Mine. The Mine Production segment is engaged in the development, extraction,
processing and refining of PGMs. The Company sells PGMs from mine production under long-term
sales agreements, through derivative financial instruments and in open PGM markets. The
financial results of the Stillwater Mine and the East Boulder Mine have been aggregated, as both
have similar products, processes, customers, distribution methods and economic characteristics.
The PGM Recycling segment is engaged in the recycling of spent catalyst material to recover
the PGMs contained in the material. The Company allocates costs of the smelter and base metal
refinery to both the Mine Production segment and to the PGM Recycling segment for internal and
segment reporting purposes because the Companys smelting and refining facilities support the
PGM extraction of both business segments.
The Canadian Properties segment consists of the Marathon PGM assets (the majority of which
is mineral property) and the Bermuda exploration mineral property. The principal Marathon
property acquired is a large PGM and copper deposit located near the town of Marathon, Ontario,
Canada. The Marathon deposit is currently in the permitting stage and will not be in production
for several years. The Bermuda exploration mineral property is located adjacent to the Marathon
property. Financial information available for this segment of the Company consists of total
asset values, general and administrative costs, exploration costs and capital expenditures as
the properties are developed.
The All Other group primarily consists of assets, revenues, and expenses of various
corporate and support functions.
The Company evaluates performance and allocates resources based on income or loss before
income taxes. The following financial information relates to the Companys business segments:
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(in thousands) | Mine | PGM | Canadian | All | ||||||||||||||||
Three Months Ended June 30, 2011 | Production | Recycling | Properties | Other | Total | |||||||||||||||
Revenues |
$ | 139,733 | $ | 82,872 | $ | | $ | | $ | 222,605 | ||||||||||
Depreciation and amortization |
$ | 15,395 | $ | 265 | $ | | $ | | $ | 15,660 | ||||||||||
Interest income |
$ | | $ | 544 | $ | | $ | 407 | $ | 951 | ||||||||||
Interest expense |
$ | | $ | | $ | | $ | 1,637 | $ | 1,637 | ||||||||||
Income (loss) before income taxes |
$ | 59,451 | $ | 3,449 | $ | (766 | ) | $ | (13,699 | ) | $ | 48,435 | ||||||||
Capital expenditures |
$ | 21,492 | $ | 39 | $ | 1,510 | $ | 69 | $ | 23,110 | ||||||||||
Total assets |
$ | 402,990 | $ | 89,855 | $ | 192,859 | $ | 353,233 | $ | 1,038,937 |
(in thousands) | Mine | PGM | Canadian | All | ||||||||||||||||
Three Months Ended June 30, 2010 | Production | Recycling | Properties | Other | Total | |||||||||||||||
Revenues |
$ | 92,570 | $ | 42,291 | $ | | $ | | $ | 134,861 | ||||||||||
Depreciation and amortization |
$ | 16,589 | $ | 39 | $ | | $ | | $ | 16,628 | ||||||||||
Interest income |
$ | | $ | 371 | $ | | $ | 161 | $ | 532 | ||||||||||
Interest expense |
$ | | $ | | $ | | $ | 1,636 | $ | 1,636 | ||||||||||
Income (loss) before income taxes |
$ | 20,992 | $ | 3,367 | $ | | $ | (9,530 | ) | $ | 14,829 | |||||||||
Capital expenditures |
$ | 12,163 | $ | 1,684 | $ | | $ | 13 | $ | 13,860 | ||||||||||
Total assets |
$ | 396,028 | $ | 53,216 | $ | | $ | 318,679 | $ | 767,923 |
(in thousands) | Mine | PGM | Canadian | All | ||||||||||||||||
Six Months Ended June 30, 2011 | Production | Recycling | Properties | Other | Total | |||||||||||||||
Revenues |
$ | 261,713 | $ | 130,953 | $ | | $ | | $ | 392,666 | ||||||||||
Depreciation and amortization |
$ | 31,196 | $ | 527 | $ | | $ | | $ | 31,723 | ||||||||||
Interest income |
$ | | $ | 919 | $ | | $ | 814 | $ | 1,733 | ||||||||||
Interest expense |
$ | | $ | | $ | | $ | 3,272 | $ | 3,272 | ||||||||||
Income (loss) before income taxes |
$ | 105,399 | $ | 6,339 | $ | (1,040 | ) | $ | (21,987 | ) | $ | 88,711 | ||||||||
Capital expenditures |
$ | 36,747 | $ | 64 | $ | 9,350 | $ | 134 | $ | 46,295 | ||||||||||
Total assets |
$ | 402,990 | $ | 89,855 | $ | 192,859 | $ | 353,233 | $ | 1,038,937 |
(in thousands) | Mine | PGM | Canadian | All | ||||||||||||||||
Six Months Ended June 30, 2010 | Production | Recycling | Properties | Other | Total | |||||||||||||||
Revenues |
$ | 187,769 | $ | 75,941 | $ | | $ | 4,622 | $ | 268,332 | ||||||||||
Depreciation and amortization |
$ | 35,046 | $ | 83 | $ | | $ | | $ | 35,129 | ||||||||||
Interest income |
$ | | $ | 659 | $ | | $ | 274 | $ | 933 | ||||||||||
Interest expense |
$ | | $ | | $ | | $ | 3,269 | $ | 3,269 | ||||||||||
Income (loss) before income taxes |
$ | 40,088 | $ | 6,266 | $ | | $ | (17,933 | ) | $ | 28,421 | |||||||||
Capital expenditures |
$ | 21,568 | $ | 2,942 | $ | | $ | 77 | $ | 24,587 | ||||||||||
Total assets |
$ | 396,028 | $ | 53,216 | $ | | $ | 318,679 | $ | 767,923 |
NOTE 9
INVENTORIES
INVENTORIES
For purposes of inventory accounting, the market value of inventory is generally deemed
equal to the Companys current cost of replacing the inventory, provided that the market value
of the inventory does not exceed the estimated selling price of such inventory in the ordinary
course of business less reasonably predictable costs of completion and disposal, and the market
value may not be less than net realizable value reduced by an allowance for a normal profit
margin.
The costs of mined PGM inventories as of any date are determined based on combined
production costs per ounce and include all inventoriable production costs, including direct
labor, direct materials, depreciation and amortization and other overhead costs relating to
mining and processing activities incurred as of such date.
The costs of recycled PGM inventories as of any date are determined based on the
acquisition cost of the recycled material and include all inventoriable processing costs,
including direct labor, direct materials and third party refining costs which relate to the
processing activities incurred as of such date.
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Inventories reflected in the accompanying balance sheets consisted of the following:
June 30, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Metals inventory |
||||||||
Raw ore |
$ | 1,313 | $ | 943 | ||||
Concentrate and in-process |
47,973 | 40,818 | ||||||
Finished goods |
87,705 | 42,236 | ||||||
136,991 | 83,997 | |||||||
Materials and supplies |
19,294 | 17,809 | ||||||
Total inventory |
$ | 156,285 | $ | 101,806 | ||||
NOTE 10
EARNINGS PER SHARE
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflect the
potential dilution that could occur if the Companys dilutive outstanding stock options or
nonvested shares were exercised or vested and the Companys convertible debt was converted.
Reported net income was adjusted for the interest expense (including amortization expense of
deferred debt fees) and the related income tax effect for the convertible debentures for the
three- and six- month periods ending June 30, 2011 and 2010. The Company currently has only one
class of equity shares outstanding.
A total of 78,418 and 48,450 options to purchase weighted shares of common stock were
included in the computation of diluted earnings per share for the three- month periods ended
June 30, 2011 and 2010, respectively. Outstanding options to purchase 96,671 and 47,935 of
weighted shares of common stock were included in the computation of diluted earnings per share
for the six- month periods ended June 30, 2011 and 2010, respectively. Outstanding options to
purchase 54,302 and 478,354 of weighted shares of common stock were excluded from the
computation of diluted earnings per share for the three- month periods ended June 30, 2011 and
2010, respectively, and outstanding options to purchase 70,745 and 488,371 of weighted shares of
common stock were excluded from the computation of diluted earnings per share for the six- month
periods ended June 30, 2011 and 2010, respectively, because the market price at the end of each
period was lower than the exercise price, and therefore the effect would have been antidilutive.
The effect of including outstanding nonvested shares was to increase diluted weighted
average shares outstanding by 925,254 and 1,065,762 shares for the three- month periods ended
June 30, 2011 and 2010, respectively. A total of 1,057,452 and 1,095,766 outstanding nonvested
shares were included in the computation of diluted earnings per share for the six- month periods
ended June 30, 2011 and 2010, respectively.
All 7.1 million shares of common stock applicable to the outstanding convertible debentures
were included in the computation of diluted weighted average shares in the three- and six- month
periods ended June 30, 2011 and 2010.
Reconciliations showing the computation of basic and diluted shares and the related impact
on income for the three- month and six- month periods ended June 30, 2011 and 2010 are shown in
the following table:
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Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, 2011 | June 30, 2011 | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||||||||||
(in thousands, except per share amounts) | (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | ||||||||||||||||||
Net income |
$ | 42,698 | $ | 78,890 | ||||||||||||||||||||
Basic EPS |
||||||||||||||||||||||||
Income available to |
||||||||||||||||||||||||
common stockholders |
42,698 | 103,037 | $ | 0.41 | 78,890 | 102,688 | $ | 0.77 | ||||||||||||||||
Effect of Dilutive Securities |
||||||||||||||||||||||||
Stock options |
| 79 | | 97 | ||||||||||||||||||||
Nonvested shares |
| 925 | | 1,057 | ||||||||||||||||||||
1.875% Convertible debentures |
994 | 7,082 | 1,987 | 7,082 | ||||||||||||||||||||
Diluted EPS |
||||||||||||||||||||||||
Income available to common
stockholders + assumed conversions |
$ | 43,692 | 111,123 | $ | 0.39 | $ | 80,877 | 110,924 | $ | 0.73 | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, 2010 | June 30, 2010 | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||||||||||
(in thousands, except per share amounts) | (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | ||||||||||||||||||
Net income |
$ | 14,590 | $ | 27,949 | ||||||||||||||||||||
Basic EPS |
||||||||||||||||||||||||
Income available to |
||||||||||||||||||||||||
common stockholders |
14,590 | 97,735 | $ | 0.15 | 27,949 | 97,390 | $ | 0.29 | ||||||||||||||||
Effect of Dilutive Securities |
||||||||||||||||||||||||
Stock options |
| 49 | | 48 | ||||||||||||||||||||
Nonvested shares |
| 1,066 | | 1,096 | ||||||||||||||||||||
1.875% Convertible debentures |
994 | 7,082 | 1,987 | 7,082 | ||||||||||||||||||||
Diluted EPS |
||||||||||||||||||||||||
Income available to common
stockholders + assumed conversions |
$ | 15,584 | 105,932 | $ | 0.15 | $ | 29,936 | 105,616 | $ | 0.28 | ||||||||||||||
NOTE 11
REGULATIONS AND COMPLIANCE
REGULATIONS AND COMPLIANCE
As of June 30, 2011, the Company believes all underground operations are in compliance with
Mine Safety and Health Administration (MSHA) limits on diesel particulate matter (DPM) exposure
for underground miners through the use of blended bio-diesel fuels, post exhaust treatments,
power train advances and high secondary ventilation standards. No assurance can be given that
any lack of compliance will not impact the Company in the future.
Nitrogen concentrates in groundwater have been elevated above background levels at both the
Stillwater Mine and the East Boulder Mine as a result of operational activities and discharges
currently authorized under permit. Noncompliance with standards has occurred in some instances
and is being addressed by the Company through action plans approved by the appropriate federal
and state regulatory agencies. Additionally, an Administrative Order on Consent (AOC) has been
approved in response to exceedances at the East Boulder Mine which modifies enforcement limits
and provides for Agency approval of remedial actions under the compliance plan. In view of its
efforts to comply and progress to date in implementing remedial and advanced treatment
technologies, the Company does not believe that failure to be in strict compliance will have a
material adverse effect on the Companys financial position, results of operations, cash flows
or its ability to operate permitted facilities.
NOTE 12
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in an orderly transaction between market participants and
also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
15
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measuring fair value. The
fair value hierarchy distinguishes three levels of inputs that may be utilized when measuring
fair value: Level 1 inputs (using quoted prices in active markets for identical assets or
liabilities), Level 2 inputs (using external inputs other than Level 1 prices, such as quoted
prices for similar assets and liabilities in active markets or inputs that are observable for
the asset or liability) and Level 3 inputs (unobservable inputs supported by little or no market
activity based on internal assumptions used to measure assets and liabilities). The
classification of each financial asset or liability within the above hierarchy is determined
based on the lowest level input that is significant to the fair value measurement.
Financial assets and liabilities measured at fair value on a recurring basis at June 30,
2011 and December 31, 2010, consisted of the following:
(in thousands) | Fair Value Measurements | |||||||||||||||
At June 30, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Mutual funds |
$ | 1,269 | $ | 1,269 | $ | | $ | | ||||||||
Investments |
$ | 149,879 | $ | 149,879 | $ | | $ | |
(in thousands) | Fair Value Measurements | |||||||||||||||
At December 31, 2010 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Mutual funds |
$ | 1,092 | $ | 1,092 | $ | | $ | | ||||||||
Investments |
$ | 188,988 | $ | 188,988 | $ | | $ | |
The fair value of mutual funds and investments is based on market prices which are readily
available. Unrealized gains or losses on mutual funds and investments are recorded in
Accumulated other comprehensive income (loss).
Financial assets and liabilities measured at fair value on a nonrecurring basis at June 30,
2011, and December 31, 2010, consisted of the following:
(in thousands) | Fair Value Measurements | |||||||||||||||
At June 30, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Convertible debentures |
$ | 196,470 | $ | | $ | 196,470 | $ | | ||||||||
Exempt facility revenue bonds |
$ | 40,547 | $ | | $ | | $ | 40,547 |
(in thousands) | Fair Value Measurements | |||||||||||||||
At December 31, 2010 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Convertible debentures |
$ | 193,973 | $ | | $ | 193,973 | $ | | ||||||||
Exempt facility revenue bonds |
$ | 26,903 | $ | | $ | | $ | 26,903 |
The Company used implicit interest rates of comparable unsecured obligations to
calculate the fair value of the Companys $30 million 8% Series 2000 exempt facility industrial
revenue bonds at June 30, 2011, and December 31, 2010. The Company used its current trading data
to determine the fair value of the Companys $166.5 million 1.875% convertible debentures at June
30, 2011, and December 31, 2010.
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The commentary that follows should be read in conjunction with the consolidated financial
statements included in this quarterly report and with the information provided in the Companys
March 31, 2011 Quarterly Report on Form 10-Q and in the Companys 2010 Annual Report on Form
10-K.
16
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Overview
Stillwater Mining Company (the Company) is a Delaware corporation, headquartered in
Billings, Montana and listed on the New York Stock Exchange under the symbol SWC. The Company
mines, processes, refines and markets palladium and platinum ores from two underground mines
situated within the J-M Reef, an extensive trend of PGM mineralization located in Stillwater and
Sweet Grass Counties in south central Montana. Ore produced from each of the mines is crushed
and concentrated in a mill at each mine site. The resulting concentrates are then trucked to the
Companys smelting and refining complex in Columbus, Montana which processes the mine
concentrates and also recycles spent catalyst materials received from third parties. A portion
of the recycling material is purchased for the Companys own account and the balance is toll
processed on behalf of others. The finished product of the base metal refinery is a PGM-rich
filter cake which is shipped to third parties for final refining into finished metal.
In the fourth quarter of 2010, the Company announced two new expansion projects along the
J-M Reef. The first of these, known as the Blitz project, is expected to develop new underground
drifts on two levels from the current Stillwater Mine toward the eastern extremity of the reef.
The other project, known as Graham Creek, is expected to develop about 8,200 feet toward the west
from the existing East Boulder Mine infrastructure, using a tunnel boring machine (TBM). East
Boulder Mines TBM which was used about a decade ago to develop initial access to the JM-Reef and
then the west footwall lateral access paralleling the mineralized JM-Reef, has recently been
re-commissioned for this new project. Initial work will assess the continuity and structural
controls related to the JM-Reef in this area on the far western end of the Stillwater Complex.
The Company also completed on November 30, 2010, the acquisition of the PGM-Copper assets of
Marathon PGM Corporation, or Marathon PGM, for $63.6 million in cash and 3.88 million Stillwater
common shares with a fair value as of the date of the acquisition of $73.4 million. Assuming
successful completion of exploration and development activities and issuance of full permitting,
the Marathon PGM-Cu property is currently anticipated to support an annual production of
approximately 200,000 ounces of PGMs and about 37.0 million pounds of copper per year beginning
in 2014 or 2015. The acquisition expanded the Companys leverage to PGMs, while diversifying the
Companys ore body exposure beyond the J-M Reef and brought a broader exposure to copper.
Significant Recent Developments
On July 11, 2011 the Company entered into an arrangement agreement to acquire all of the
outstanding shares of Peregrine Metals Ltd (Peregrine). Peregrine, based in Vancouver, Canada,
owns the Altar project, a large, undeveloped property located in the San Juan province of
Argentina with significant copper and gold deposits. If completed, the Peregrine acquisition
will significantly diversify the Companys ore body exposure into copper and gold. Based on the
118.0 million Peregrine shares outstanding on July 11, 2011, the Company expects to issue
approximately 9.6 million shares of Stillwater common stock and $159.3 million in cash as
consideration to the Peregrine shareholders upon the closing of this transaction. In addition,
the Company also expects to issue up to approximately 2.5 million shares of Stillwater common
stock and $41.2 million in cash upon the exercise of all outstanding Peregrine options and
warrants prior to the completion of the acquisition. Exercise of these options and warrants
could result in as much as $35.0 million in cash coming into Peregrine, which would be retained
by the Company. To the extent outstanding Peregrine options and warrants remain unexercised as
of the transaction closing date, they will be exchanged for options and warrants to purchase
shares of Stillwater common stock and the option and warrant holders will receive cash upon
exercise, in the same proportions as the acquisition consideration payable to Peregrine
shareholders. The net cash outlay for Stillwater in the transaction after considering cash from
the exercise of options and warrants will be approximately $164.0 million. While the final value
of the transaction will depend upon the Companys share price at closing and the number of
Peregrine warrants and options ultimately exercised, the Company expects to issue about
12.1 million new shares and expend net cash of approximately $164.0 million in completing the
acquisition. In addition, the Company expects to incur approximately $10.0 million of
transaction costs. The acquisition is anticipated to close in the fourth quarter of 2011.
The acquisition is subject to a number of closing conditions and contingencies, including
approval by shareholders of Peregrine, review and approval under the Investment Canada Act and
approval by the British Columbia Supreme Court. Subject to satisfaction of these conditions,
closing is expected to occur in the fourth quarter of
2011. The completion of exploration, permitting and development of
17
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the Altar project to achieve full-scale production is currently estimated to take between
six and eight years and cost between $2.0 billion and $2.5 billion.
These recent developments, particularly the Marathon acquisition and pending Peregrine
acquisition, represent significant diversification opportunities beyond the Companys operations
in the J-M Reef. These acquisitions follow several years of evaluating possible acquisitions in
an effort to reduce the Companys exposure to a single mining property. The Company currently
expects to finance the cash portion of the Peregrine acquisition consideration from its available
cash and further expects to finance requisite working capital and the exploration, permitting and
development of the two projects through a combination of cash flows from operations and future
financing as opportunities warrant. The Company may also seek to partner with one or more other
mining or development companies.
Estimates of the project timing, cost, production yield and financing of the Marathon and
Altar projects are preliminary and, in the case of Peregrine, have been formulated based on
information pertaining to the Altar project derived from Peregrine. The Company has not yet
completed a feasibility study with respect to the Altar project, and is currently conducting an
advanced engineering study with respect to the Marathon Project and does not possess the same
degree of knowledge and understanding of the Peregrine or Marathon properties as it does with
respect to the mining properties it has owned and operated for a number of years. Accordingly,
undue reliance should not be placed on the forward-looking information presented for these
projects. The estimates presented herein are based on a number of assumptions and management
decisions that are subject to significant uncertainties and contingencies, many of which are
beyond the Companys control. These assumptions and management decisions may prove incorrect,
and many of the factors that will impact actual project timing, cost, production yield and
financing plans are beyond the Companys control. Many factors could cause the timing, cost,
production yields and financing mix to differ from the Companys current expectations and those
differences could be material.
The four-year labor agreement between the Company and United Steel Workers (USW)
International Union Local 11-0001 covering represented employees at the Stillwater Mine and at
the Companys processing facilities in Columbus, Montana, expired on July 1, 2011. By mutual
agreement, the existing contract was extended through July 9, 2011, in order to allow time for
the union membership to vote on a new labor agreement. Voting on the contract was completed on
July 8, 2011, affirming the new agreement. The Company experienced no work stoppage related to
negotiation and ratification of the new agreement. The new labor agreement has a term of four
years, expiring on June 1, 2015, and provides for increases in base wage rates of five percent in
each of the first two years of the agreement and four percent in each of its final two years. It
also restructures medical benefits to provide more focus on assisting employees and their
families in maintaining good health, and it enhances certain incentive programs.
On July 27, 2011, the Companys common shares were conditionally approved for listing on the
Toronto Stock Exchange (TSX), subject to the fulfillment of standard conditions. The Stillwater
common shares are expected to begin trading on the TSX under the symbol SWC prior to the end of
August 2011. The Company is reviewing its Canadian filings in order to comply with the filing
requirements applicable to foreign entities whose shares are traded on the TSX.
Second Quarter Results
During the second quarter of 2011, the Company reported mine production
of 142,700 combined ounces of palladium and platinum up from 112,600 ounces in the comparable
quarter last year. The improved production reflected stronger ore grades in the off-shaft area
of the Stillwater Mine and the restart in 2011 of production from the east side of the mine.
Production at the East Boulder Mine was close to plan both in the second quarter of 2011 and
2010.
For the second quarter of 2011, the Company reported net income of $42.7 million, or $0.39
per fully diluted share, an increase from $14.6 million, or $0.15 per share, reported in the
second quarter 2010. PGM prices decreased during the second quarter of 2011, but remained
substantially higher than a year earlier. The Companys average realization on sales of mined
palladium was $752 per ounce in the 2011 second quarter, up 53.2% from an average of $491 per
ounce in the second quarter of 2010 but down from the $784 per ounce average in this years first
quarter. Similarly for platinum sales, the Company realized an average of $1,769 per ounce in
this years second quarter, up 15.9% from the average $1,526 per ounce in the same quarter last
year but lower than from the $1,782 per ounce average in the 2011 first quarter.
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Factors that may have driven the increase in prices since the second quarter of 2010 appear
to include the following:
| Continuing recovery in PGM demand from the automotive sector worldwide, reflecting growth in car build rates and some inventory restocking; | |
| Growth in ETF holdings of palladium and platinum, despite intermittent periods of liquidation; | |
| Multiple production challenges, particularly for the South African producers; | |
| Negligible exports of palladium during 2011 from the Russian state stockpile; and | |
| Implementation of new emission standards in the United States for off-road diesel equipment in 2011. |
The Companys PGM sales volumes from its mining operations increased to 136,600 combined
ounces of palladium and platinum in the second quarter of 2011, up from 115,100 ounces in the
first quarter of 2011 and 116,700 ounces sold during the second quarter of 2010. Despite the
increased sales during this years second quarter, sold ounces continued to trail mined ounces
produced. The main differences are a matter of inventory timing, as produced material may spend
several weeks in processing before it becomes available for sale, and increased mined ounces
produced quarter over quarter, which can result in fewer ounces available for sale during a
particular period than ounces produced in the same period. Maintenance downtime in the smelter
and the need to prioritize delivery commitments under recycling forward sales also from time to
time may exacerbate these differences, although such differences should even out over time.
The Companys combined average realized price for each metal differs from equivalent average
market prices as the result of various contractual provisions, including small contractual
discounts and selling prices based on monthly averages which generally lag the market price by
one month. In addition, the Companys average realized price for mined metals differs from
recycled metals due to contractual provisions and timing differences.
The Companys recycling volume increased to 125,200 ounces of PGMs, an increase of 26.2%
over the 99,200 recycled in the second quarter of 2010. Recycled PGM ounces sold (which include
palladium, platinum and rhodium) increased by 67.0% to 61,300 ounces in the 2011 second quarter,
from 36,700 ounces for the second quarter of 2010. In addition, during the second quarter of
2011, the Company processed and returned 56,700 ounces of material tolled for third parties,
compared to 76,700 ounces tolled and returned in the second quarter of 2010.
Total consolidated cash costs per ounce, a non-GAAP measure of extraction efficiency
explained more fully later in this discussion, at $384 per ounce during the second quarter were
well below the Companys annual 2011 guidance of $430 per ounce and lower than the $393 per ounce
reported in the 2010 second quarter. Much of the improvement is attributable to strong mine
production during the second quarter of this year. Year to date through June, total consolidated
cash costs per ounce have averaged $410 per ounce, compared to $378 per ounce for the same period
last year, in part reflecting higher royalties and taxes on higher PGM prices in 2011. Labor
costs are also higher, reflecting higher wage rates and an increase in employee count since 2010.
In monitoring the Companys cost performance, management generally breaks total cash costs
in any period (a non-GAAP measure discussed below that excludes inventory effects, recycling
costs, depreciation and amortization, and in this case, calculated before recycling, by-products
and development credits) into several key categories, including payroll and benefits, materials
and supplies, utilities and fuel, contracted services, and royalties, taxes and insurance. The
relative proportions of such costs vary, particularly because royalties, taxes and insurance are
determined to a large extent by the level of metal prices and over the past several quarters have
generally increased as PGM prices have increased. During the first six months of 2011,
royalties, taxes and insurance comprised about 16% of operating costs, up from about 14% in the
same period of 2010. During the same period, payroll and benefit costs declined to about 46% of
total cash costs in the first six months of 2011 from about 49% in the first six months of 2010.
Other cost components remained comparatively flat during the same period. The Companys total
available liquidity, expressed as cash plus short-term investments, strengthened during the
quarter and at June 30, 2011, was $254.9 million, up from $208.4 million at December 31, 2010.
Net working capital (including cash and investments) also increased over the quarter to $376.5
million at June 30, 2011 from $291.2 million at year end 2010. During the second quarter 2011,
working capital uses increased $9.0 million as the recycling business grew.
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Mining Operations
As announced on July 11, 2011, the Company increased its 2011 annual forecast for mined
palladium and platinum production to 515,000 ounces from its original guidance of 500,000 ounces.
Mined production of palladium and platinum has exceeded original estimates for the first two
quarters of 2011. Total mine production of PGMs during the second quarter of 2011 was 142,700
ounces and 273,800 ounces year to date in 2011. Production has exceeded expectations due
primarily to more tons mined than anticipated, higher ore grades in the lower off shaft area of
the Stillwater Mine and the contribution of higher grades from the east side of the mine.
Although the Company believes that production for 2011 is likely to be higher than originally
planned, this cautious increase recognizes that mining conditions at both mines may be a bit more
difficult during the second half of this year and there may be a need to divert some mining
resources into development.
Capital spending is planned to increase from the $50.3 million in 2010 to about $120.0
million in 2011. Capital expenditures during the second quarter of 2011 totaled $23.1 million,
and are expected to increase steadily as the year progresses. The higher 2011 spending target is
primarily attributable to equipment replacement and expanded development efforts in the Montana
mines, plus approximately $10.0 million of spending for the Marathon PGM-Cu project, $10.0 to
$15.0 million for new resource developments within the J-M Reef, and $8.0 million for a new slag
cleaning circuit in the Columbus processing facilities.
During the fourth quarter of 2010, the company announced two new resource development
projects along the Stillwater Complex in Montana: the Blitz project, immediately to the east of
the Companys Stillwater Mine, and the Graham Creek project, immediately to the west of the
Companys East Boulder Mine. Depending on the ultimate quality of the resource in these areas,
these projects have the potential to extend the life of the existing mines and may allow the
Company to increase annual mine production. In addition, these projects provide the opportunity
to expand the Companys understanding of undeveloped areas along the J-M Reef.
The Blitz project now anticipates developing two 20,000-foot parallel drifts east from the
existing infrastructure of the Stillwater Mine. One of these drifts will be driven
conventionally, the other with a newly acquired and refurbished TBM. The Company expects to take
delivery on the TBM late in 2011 and have it in operation by the second quarter of 2012. Full
completion of the Blitz project is expected to take between five and six years, but initial ore
production from Blitz could begin as early as 2015. Although the Blitz project will share some
facilities with the Stillwater Mine, it will be operated independently of the Stillwater
operation. The cost of the Blitz project is anticipated to be approximately $180.0 million
spread over about six years. The Company is also seeking to permit a separate surface access for
ventilation and delivery of materials in support of this project.
The Graham Creek project will utilize an existing TBM at the East Boulder Mine to extend the
existing drift about 8,200 feet to the west from the current western extremity of the mine. The
resource evaluation, with its more limited scope, is expected to take about five years to complete at a cost
of approximately $8.0 million. The plan would require installing a new ventilation raise at the
end of the drift and constructing additional infrastructure once the development phase is
completed. Year to date in 2011, the TBM has developed approximately 1,250 feet of new drift
before idling it temporarily to allow for definitional drilling and an access breakout behind it.
The TBM is expected to resume operation in November of 2011.
Second quarter 2011 palladium and platinum production at the Stillwater Mine totaled 108,900
ounces, an improvement of 10.4% over the 98,600 ounces in the first quarter of 2011 and an
increase of 25.8% over the 86,600 ounces produced in the fourth quarter of 2010. The increased
production in the second quarter was driven by a combination of more tons mined, improved ore
grades in the lower off shaft and resuming production from the east side of the mine that was
idled in 2008.
Stillwater Mines total cash costs of $367 per ounce for the second quarter of 2011 were
lower than the $387 per ounce for the second quarter of 2010. Cash costs per ore ton mined at
the Stillwater Mine were $190 for the second quarter, higher than the $165 per ton reported for
the second quarter of 2010, in part reflecting the higher costs of mining on the east side.
Capital expenditures at the Stillwater Mine were $16.3 million for the second quarter of 2011,
less than planned, but more than the $9.1 million spent during the second quarter of 2010.
Primary and secondary development for second quarter 2011 at the Stillwater Mine were about 5.8%
behind plan with primary development advancing about 8,300 feet, and secondary development
advancing about 3,900 feet. Diamond drilling footage totaled about 84,200 feet at the Stillwater
Mine for the second quarter of 2011, about 13.2% less than planned. The shortfall in development
and drilling footages is mainly the result of resources being allocated to mining. The mine
would expect to make up most of these development shortfalls by year end.
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Managements assessment of mining conditions for 2011 suggest that future ore grades in the
lower off-shaft area of the Stillwater Mine are likely to remain more variable on average than in
the past, reflecting the trend toward smaller stopes in that area than experienced in the past.
This inherently leads to higher unit costs. In planning for 2011, the Company has taken these
lower grades into account and has resumed planned production on the east side of the mine. In
the past the east side has enjoyed higher ore grades but also encountered more difficult mining
conditions and higher costs. These higher cost stopes are economic at current PGM prices.
Mining production at the East Boulder Mine was on plan for the second quarter of 2011, with
combined palladium and platinum production of 33,800 ounces. Total cash costs of $442 per mined
ounce were slightly below plan for the quarter. During the second quarter of 2010 the East
Boulder Mine produced 33,400 ounces of palladium and platinum at a total cash cost of $407 per
ounce. The increased cash costs were directionally in line with a manpower increase of 17.8%,
plus the effect on royalty and tax expense of higher PGM prices. Capital expenditures at the
mine were $4.2 million in the second quarter of 2011 compared to $1.2 million in the second
quarter of 2010. Actual primary development at the East Boulder Mine advanced about 3,400 feet
during the 2011 second quarter, and secondary development advanced 2,700 feet during the quarter.
In total, development footage at the East Boulder Mine is ahead of plan, in part because the TBM
is operating. Diamond drilling footage totaled about 21,500 feet for the second quarter, behind
plan, but is expected to catch up to plan during the remainder of the year.
PGM Recycling
The Company also recycles spent catalyst material, commingled with its mine concentrates,
through its smelting and refining facilities in Columbus, Montana, ultimately recovering the
palladium, platinum and rhodium from these materials. As noted
previously, total recycle ounces processed (purchased and tolled) in the second quarter of 2011 were 125,200 ounces, up 26.2%
when compared to 99,200 ounces in the second quarter of 2010. For the second quarter of 2011,
the Company earned $3.4 million from recycling operations on revenues of $82.9 million,
reflecting a combined average realization of $1,330 per sold ounce. For the second quarter of
2010, the Company also reported net income from recycling operations of $3.4 million, on revenues
of $42.3 million and a combined average realization of $1,106 per sold ounce. Higher combined
average realizations and higher sales volumes were offset by lower volumes of toll ounces
processed and increased costs as a result of modifications to supplier contracts that allow the
Company to remain competitive in the recycling business. Total tons of recycling material
processed during the second quarter of 2011, including tolled material, averaged 21.0 tons per
day, compared to 16.6 tons per day in the second quarter of 2010. Higher PGM prices continue to
create a strong incentive for suppliers to collect recycling material. During first quarter
2011, the Company entered into sourcing arrangements for catalyst material with several new
suppliers.
During the past couple of years, the Company has completed a number of projects in support
of its recycling activities. In May 2009, the Company commissioned a new electric furnace in the
Columbus smelter, increasing throughput capacity and creating backup furnace capacity in the
event of planned or unforeseen outages. During the third quarter 2010, the Company commissioned
a dedicated catalyst receiving, crushing and sampling plant that allows for the segregation and
handling of multiple batches of recycling material simultaneously. During the first quarter of
2011, the Company commissioned a state-of-the-art assay laboratory, constructed and equipped in
2010, which utilizes an automated x-ray facility that provides accurate results with faster
turnaround times than conventional fire assay methods. New laboratory software supports this
automated x-ray system, as well as other laboratory processes.
These investments are intended to increase the Companys capacity to receive and process
spent catalytic materials and to speed up the processing of such material. The aim is to
strengthen the Companys competitive position in the recycling business by sharply reducing the
turn-around time on recycling lots, allowing suppliers to receive settlement payments more
quickly and so reduce their working capital requirements. Faster assay information also allows
the Company and its suppliers to keep pace with an increasingly complex array of different
catalyst formulations.
In sourcing recycled automotive catalysts, the Company only advances funds to its suppliers
when the associated material for recycling is awaiting transit or is already in transit to the
Columbus processing facilities. The new recycling sampling and assay facilities should allow the
Company to accelerate final settlements with suppliers, thereby reducing the amount of working
capital they require. Outstanding procurement advances that were not backed up by inventory
physically in the Companys possession at June 30, 2011 and 2010, totaled $2.6
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million and $3.1 million, respectively.
Marathon PGM-Cu Project
During the first half of 2011, the Company continued environmental assessment and permitting
work at its Marathon PGM-Copper project in Ontario, Canada. Additional delineation drilling also
is ongoing at Marathon in order to optimize design of the pit configurations and ensure proper
placement of the tailings facility. Exploration drilling also is under way on various other
properties in the area where the Company holds mineral interests. The Company currently expects
to complete construction and begin mining on the Marathon PGM-Cu project in late 2014 or 2015,
although until permitting is completed, there can be no assurance that this time frame will be
met.
The Company completed the acquisition of the PGM assets of Marathon PGM Corporation during
the fourth quarter of 2010. The principal asset acquired is the Marathon PGM-Cu development
project near the town of Marathon, Ontario on the north shore of Lake Superior. Based on a
completed definitive feasibility study, the Marathon deposit contains the potential for PGM
production of 200,000 ounces per year (at a ratio of about 4 to 1 palladium to platinum) and
annual copper production of approximately 37.0 million pounds per year. Mine life, based on the
feasibility study reserves, is anticipated to be approximately 11.5 years. The Company expects to finance the
Marathon PGM-Cu project through internally generated funds, supplemented by external financing if
market conditions so warrant. The Company has assembled an experienced management team to direct
the Marathon PGM-Cu project. A separate exploration team also has been established to conduct a
drilling and evaluation program on the Companys various Canadian properties.
The Marathon transaction fits well into the Companys long-term strategy to diversify its
mining activities. The Marathon area is well developed with extensive public infrastructure
already established, and there is other active mining in the general vicinity of the project.
The new mine is projected to create a significant number of jobs in an area with relatively high
unemployment. The Companys focus on environmental stewardship should serve it well in this
region.
In the Province of Ontario, ancillary activities associated with the development of a mine,
such as establishment of transmission corridors and disposition of Crown lands, are subject to
the provincial Environmental Assessment Act, while private mining development projects that
trigger the Federal Environmental Assessment Act are reviewed by the federal government. In
October 2010, Canadas Environment Minister announced his decision to refer assessment of the
Marathon PGM-Cu project to an independent Federal Review Panel. Following that decision,
Stillwater requested that consideration be given to establishing a joint federal/provincial
review panel in order to better coordinate all assessment activities related to the Marathon
PGM-Cu project. In moving forward with this voluntary harmonization agreement, Stillwater is
hopeful that the coordinated review will reduce duplication and permitting delays while improving
the overall process from a consultation and disclosure perspective. This fits in well with
Stillwaters corporate culture of transparency and its proactive approach to environmentally and
socially responsible development.
In preparation for the environmental assessment, Stillwater Canada Inc. and its predecessors
have gathered extensive baseline information dealing with the natural environment and social and
cultural background around the project area. These baseline studies have been underway since
2001 and have been supplemented and updated further since 2007. The baseline program includes
research related to climate and meteorology, air quality, noise, geology, soils, wildlife,
vegetation, groundwater, surface water, fish and fish habitat, socioeconomics, land use, and
cultural and traditional knowledge. Analysis and computer modeling by third-party environmental,
engineering and consulting firms are currently under way to assess the cultural and environmental
effects of all phases of the mines life cycle from construction through operation and closure.
Additionally, the Company is committed to consulting and working with aboriginal groups, local
communities, federal and provincial government representatives and the public at large in order
to move the project forward constructively.
Areas of Strategic Emphasis
The Companys three-fold strategy continues to be 1) to operate responsibly, 2) to market
the Companys primary product, palladium, and 3) to grow and diversify the Company. This
strategy is intended to mitigate the Companys financial and operating risks and to add scale.
These priorities emerged as a result of the volatile swings in the palladium price over the past
decade and in anticipation of the loss of downside price protection once
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the pricing floors in the Companys automotive contracts expired at the end of 2010.
Stillwater continues to be a palladium producer with an expanding palladium production
profile. Existing mining operations are expected to yield in excess of 500,000 ounces of
palladium and platinum this year at a ratio of palladium to platinum of 3.3 to 1. The Company
pursues a vigorous marketing campaign for palladium. These efforts target both palladium jewelry
and the industrial markets and have been successful in fostering new markets and in nurturing
existing markets. In 2011 the Company budgeted $10.0 million for palladium marketing and to date
in 2011 has expensed $3.4 million in its efforts to market palladium through the Palladium
Alliance International, a trade organization established for that purpose in early 2006.
The Company has continued its pursuit of growth, first in the palladium sector, recognizing
that such growth is limited by the scarcity of attractive PGM resources worldwide and in
particular outside of South Africa and Russia. The Company has long communicated that it needs
diversity in order to provide longer-term sustainability, and that it would consider copper or
nickel operations, particularly if such projects contained precious metals with a primary bias
towards PGMs but also considering investments in gold and/or silver. If the Company is
successful in developing the Peregrine property, it will have achieved a meaningful
diversification and become a broader mining company with three principal products, namely
palladium, copper and gold.
1. Existing Operations and Opportunities Strategic Emphasis
The
Company holds patented and unpatented lode or mill site claims along
the alignment of the J-M
Reef, a high-grade PGM resource uplifted within the Beartooth Mountains of south-central Montana
just north of Yellowstone National Park. The J-M Reef extends 28 miles horizontally, averages
about 1 1/2 miles in height and is typically about 5 feet wide. It is the highest-grade PGM
deposit and one of the largest precious metal reserves controlled by a single company in the
world. The Companys proven and probable ore reserves, at the end of 2010, totaled 40.8 million
tons at an average grade of 0.49 ounces per ton. Broken out by mine site, the Stillwater Mine
has 15.7 million tons at an average ore grade of 0.63 ounces per ton, containing 9.8 million
ounces; and the East Boulder Mine has 25.1 million tons with an average grade of 0.40 ounces per
ton, containing 10.0 million ounces.
The Company initiated two additional projects in 2010 along the J-M Reef which have the
potential to significantly expand the Companys ore resource there and may provide the potential
for increased production over time. The Blitz project is situated immediately to the east of the
Companys Stillwater Mine and the Graham Creek project just to the west of the Companys East
Boulder Mine. Initial development of the two projects will require capital of approximately
$188.0 million over the next six years.
In late 2003 the Company stepped up its efforts to develop and grow a sustainable PGM
recycling business. The Companys recycling business is facilitated by the copper and nickel
by-products in the concentrate stream produced from the Montana mines, which act metallurgically
as PGM collectors in the molten bath of the Companys electric arc furnace. The recycling
business became sufficiently large that in 2008 the Company determined to add additional
infrastructure to support its growth. This included a new electric arc furnace in 2009, a unique
catalytic converter preparation and sampling plant in 2010 and a state of the art automated assay
laboratory commissioned earlier this year. The Company is currently rebuilding the former
furnace, which will operate as a slag-cleaning furnace for the growing recycle volumes and
provide operational back-up for the new furnace. The slag-cleaning furnace is expected to be
operational by the end of this year.
2. Markets and Marketing Strategic Emphasis
The Companys Montana mineral reserves and resources are palladium rich, like most all
northern-hemisphere PGM deposits, with the J-M Reef having an average palladium to platinum ratio
of about 3.3 to 1. Being palladium rich, the Companys PGM production has a lower weighted
average market basket price than the South African producers, which are platinum rich, often
enjoying platinum to palladium ratio of about 2 to 1. Thus, with palladium currently at $804 per
ounce and platinum at $1,780 the Stillwater PGM market basket price is about $1,030 per ounce,
while the South African market basket is $1,490 per ounce. This difference puts Stillwater at a
competitive disadvantage.
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There has been a dramatic improvement in the Stillwater PGM market basket price over the
last 18 months. Prior to that, the price of palladium generally averaged about 25-26% of the
price of platinum. If that were still the case today the Companys PGM market basket price would
only be about $760 per ounce, 26% lower (and the South African PGM market basket would be about
$1,343, or 10% lower). The change over the last 18 months has been a rerating of the price of
palladium upwards against the price of platinum, so that today the price for palladium is 45% of
the price of platinum a 73% improvement.
The Company has highlighted for several years the misalignment of the palladium price
relative to the price of platinum. Until recently, however, this marketing effort has been
conducted in the face of a continuing oversupply of palladium, attributable principally to the
Russian governments ongoing liquidation of its vast strategic stockpile of palladium over the
last 20 years. This stockpile, which at its peak contained an estimated 30 million ounces of
palladium, is now thought to be nearly exhausted. The Companys marketing efforts in recent
years have been aided by recovery in demand from the catalytic converter market, the dominant
market for both platinum and palladium, as automotive production has surged strongly ahead and
palladium has predominated in catalytic converters due to favorable economics. Indeed today
palladium constitutes over 90% of the metal used for catalytic conversion of emissions from
gasoline engines.
While the palladium market has been through a tumultuous decade, this new market dynamic
emerged strongly in 2010 as the price of palladium moved up against platinum. In considering the
changing market dynamics for palladium, the Company believes that the convergence between the
palladium and platinum prices is not yet finished, and that going forward palladium may trade
yet higher against the price of platinum. Supporting this is the fact that catalytic converter
technology now permits a one-for-one substitution ratio between palladium and platinum for
gasoline emission catalytic converters, and also a one-for-one substitution ratio for the 50%
portion of diesel catalytic converters that can utilize palladium. Thus, at the current price
ratio palladium predominates in the catalytic converter market. The catalytic converter market
in 2010 consumed approximately 64% of the 8.5 million ounces of palladium supplied to the market,
which included about one million ounces of residual palladium coming from the Russian
governments strategic stockpile. Without the Russian inventory sales, in 2010 catalytic
converters consumed 73% of the palladium supplied from primary mine production and recycled
materials. Not far behind is platinum, however, where in 2010 catalytic converters consumed 49%
of the 7.5 million ounces supplied from primary mine production and recycled materials.
Further, the fundamentals behind palladiums pricing shift appear to signal a new economic
dynamic for palladium. The price of platinum, due to constraints on production worldwide, is
being pressured upward by cost push economics in order to have sufficient supplies of
platinum available in the market, the price must rise to cover the marginal cost of production.
Numerous challenges, particularly in South Africa, have combined to drive up the cost of
producing platinum and to an even greater degree, the cost of replacing each ounce of platinum
produced. At the same time, due to the one-for-one substitutability of palladium for platinum in
catalytic converters, the palladium price is now being driven by price pull economics. As the
platinum price rises due to increasing costs, there is growing demand for the limited supply of
less expensive palladium, which in turn pulls its price higher against that of platinum as
producers seek it as a substitute for platinum. This dynamic may be reducing the Companys
traditional risk as a swing producer of palladium (over 90% of palladium is produced secondarily
as a by-product of either platinum or nickel production) to one where the price of palladium is
driven by the price of platinum. As a swing producer, Stillwater and the other primary palladium
producers at low palladium prices have had to consider suspending or restructuring operations,
while the palladium production of the major producers largely continued, driven by the economics
of their primary product either platinum or nickel. Indeed one of the Companys competitors
was compelled to suspend production following the price drop in 2008. Stillwater was able to
maintain its production during the same period as a result of the floor prices in its
then-existing auto contracts, which have since expired.
3. Growth and Diversification Strategic Emphasis
In early 2010, recognizing that the market for palladium was likely to change, the Company
began evaluating expansion opportunities along the J-M Reef, resulting in the Blitz and Graham
Creek projects. It also moved swiftly to assess other available PGM properties. Along with the
acquisition of the Marathon PGM-Cu project in Ontario, near the north shore of Lake Superior, the
Company also purchased the adjacent Bermuda property from
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Benton Resources. In the Companys view, these properties constitute the only near-term
opportunities to bring new PGM production on line in North America. The Marathon PGM-Cu project
is now advancing through the permitting stage, and post-feasibility detailed engineering has
begun there. The property is expected to be in operation by late 2014 or 2015 and is expected to
produce approximately 200,000 ounces per year of PGMs at a palladium to platinum ratio of about 4
to 1. Importantly, it will also include significant by-product copper, about 37 million pounds
per year which, at current prices, is projected to cover all operating costs. The Marathon
PGM-Cu project potentially will increase the Companys total annual PGM production by 40%, lower
the Companys average PGM cash cost by up to 30%, and diversify it into copper.
The Company has spent the better part of the last decade searching North America for PGM
opportunities. There are other properties in North America that will ultimately be advanced to
production, but these are mainly controlled by others and believed to be many years away from
starting up. The Company also has looked in the only other two regions of the world containing
promising commercial PGM opportunities South Africa and Russia. The Company has declined
opportunities in both regions, concluding that the quality properties are already controlled by
the major operators in both countries.
Management has been concerned that despite palladium finally having achieved a robust market
outlook, the Company continues to be too heavily dependent on a single product, which has only
one dominant market. As such, it was felt that the Companys commercial and operating risk
profile is unacceptably high for the long term. The Marathon acquisition represented an initial
step toward diversification that is with PGMs and copper in Canada. However, the Company
continued to consider additional diversification in order to fully mitigate its one-product,
one-location and one-market exposure.
The Companys contemplated acquisition of Peregrine Metals does just that. It provides a
value-adding diversification step with copper and gold. Based on its long-term value prospects,
the Company concluded to pay for the acquisition using Stillwater shares and cash. Management
believes that the proportionate use of its common stock in the acquisition will be more than
offset by the long-term value creation. Although the Peregrine asset is largely a copper
development, Stillwater is expected to remain primarily a PGM producer until the Altar project
comes on line, likely not before 2018.
Importantly, Peregrine brings an opportunity for the Company to add significant value, both
by completing the drilling of the very early stage Quebrada De La Mina gold discovery on
Peregrines property, situated about two kilometers west of the main Altar project, as well as by
fully delineating the Altar porphyry copper/gold resource. The
Peregrines Preliminary Economic Assessment (PEA), currently
underway, is expected to be published in the fourth quarter of 2011. For the next three to five years the
Companys efforts at the Altar property will be to more fully
define the resource and then produce a feasibility study and a
definitive engineering study which is expected to cost about $25.0
million per year. We expect to expense these costs as exploration
expense until a feasibility study is completed on the Altar project.
If the value and opportunity are confirmed we intend to then assess
various options for funding the development of the project, including
possibly bringing in a joint venture partner to share in the risk of
this very large project.
The Companys principal business is producing PGMs, and in particular palladium. Stillwater
remains a primary producer of palladium, with a palladium growth profile and a belief that the
palladium price is poised to increase further as its market dynamics continue to strengthen. The
Company expects to add significant new PGM value through continuing staged growth in recycling,
the Marathon PGM-Cu project, the Blitz project, and the Graham Creek project. Management is
committed to the pursuit of PGM growth opportunities. The Peregrine acquisition represents a
potentially transformational opportunity in the years ahead. If successful in developing the
Peregrine property and to a large degree being dependent on future copper prices, the Company
believes that it will have achieved a meaningful diversification on behalf of shareholders which
balances some of the current risks facing the Company and at the same time will have become a
broader international mining company.
25
Table of Contents
RESULTS OF OPERATIONS
Comparison of Three- Month Periods Ended June 30, 2011 and 2010
The Companys total revenues increased by 65.0% to $222.6 million in the second quarter of
2011 compared to $134.9 million for the second quarter of 2010. The following analysis covers
key factors contributing to the increase in revenues:
SALES AND PRICE DATA
Three Months Ended | ||||||||||||||||
June 30, | Increase | Percentage | ||||||||||||||
(in thousands, except for average prices) | 2011 | 2010 | (Decrease) | Change | ||||||||||||
Revenues |
$ | 222,605 | $ | 134,861 | $ | 87,744 | 65 | % | ||||||||
Ounces Sold: |
||||||||||||||||
Mine Production: |
||||||||||||||||
Palladium (oz.) |
108 | 90 | 18 | 20 | % | |||||||||||
Platinum (oz.) |
29 | 27 | 2 | 7 | % | |||||||||||
Total |
137 | 117 | 20 | 17 | % | |||||||||||
PGM recycling: (1) |
||||||||||||||||
Palladium (oz.) |
31 | 18 | 13 | 72 | % | |||||||||||
Platinum (oz.) |
26 | 15 | 11 | 73 | % | |||||||||||
Rhodium (oz.) |
4 | 4 | | | ||||||||||||
Total |
61 | 37 | 24 | 65 | % | |||||||||||
By-products from mining: (2) |
||||||||||||||||
Rhodium (oz.) |
| 1 | (1 | ) | (100 | %) | ||||||||||
Gold (oz.) |
2 | 2 | | | ||||||||||||
Silver (oz.) |
1 | 1 | | | ||||||||||||
Copper (lb.) |
219 | 217 | 2 | 1 | % | |||||||||||
Nickel (lb.) |
331 | 343 | (12 | ) | (3 | %) | ||||||||||
Average realized price per ounce (3) |
||||||||||||||||
Mine Production: |
||||||||||||||||
Palladium ($/oz.) |
$ | 752 | $ | 491 | $ | 261 | 53 | % | ||||||||
Platinum ($/oz.) |
$ | 1,769 | $ | 1,526 | $ | 243 | 16 | % | ||||||||
Combined ($/oz.) (4) |
$ | 964 | $ | 725 | $ | 239 | 33 | % | ||||||||
PGM recycling: (1) |
||||||||||||||||
Palladium ($/oz.) |
$ | 785 | $ | 444 | $ | 341 | 77 | % | ||||||||
Platinum ($/oz.) |
$ | 1,787 | $ | 1,556 | $ | 231 | 15 | % | ||||||||
Rhodium ($/oz.) |
$ | 2,381 | $ | 2,527 | $ | (146 | ) | (6 | %) | |||||||
By-products from mining: (2) |
||||||||||||||||
Rhodium ($/oz.) |
$ | 1,981 | $ | 2,660 | $ | (679 | ) | (26 | %) | |||||||
Gold ($/oz.) |
$ | 1,508 | $ | 1,203 | $ | 305 | 25 | % | ||||||||
Silver ($/oz.) |
$ | 39 | $ | 18 | $ | 21 | 117 | % | ||||||||
Copper ($/lb.) |
$ | 3.97 | $ | 3.01 | $ | 0.96 | 32 | % | ||||||||
Nickel ($/lb.) |
$ | 10.00 | $ | 9.25 | $ | 0.75 | 8 | % | ||||||||
Average market price per ounce (3) |
||||||||||||||||
Palladium ($/oz.) |
$ | 759 | $ | 494 | $ | 265 | 54 | % | ||||||||
Platinum ($/oz.) |
$ | 1,781 | $ | 1,628 | $ | 153 | 9 | % | ||||||||
Combined ($/oz.) (4) |
$ | 972 | $ | 750 | $ | 222 | 30 | % |
(1) | Ounces sold and average realized price per ounce from PGM recycling relate to ounces produced from processing of catalyst materials. | |
(2) | By-product metals sold reflect contained metal. Realized prices reflect net values (discounted due to product form and transportation and marketing charges) per unit received. | |
(3) | The Companys average realized price represents revenues, which include the effect of any applicable agreement floor and ceiling prices, hedging gains and losses realized on commodity instruments and agreement discounts, divided by ounces sold. The average market price represents the average London Bullion Market Association afternoon postings for the actual months of the period. | |
(4) | The Company reports a combined average realized and a combined average market price of palladium and platinum at the same ratio as ounces that are produced from the base metal refinery. |
26
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Net revenues from sales of mine production (includes by-products) were $139.7
million in the second quarter of 2011, compared to $92.6 million for the same period in 2010, a
50.9% increase. The increase in mine production
revenues reflects higher market prices and increased volumes sold in the second quarter of 2011
than in the second quarter of 2010. The Companys average combined realized price on sales of
palladium and platinum from mining operations was $964 per ounce in the second quarter of 2011,
compared to $725 per ounce in the same quarter of 2010. The total quantity of mined palladium
and platinum sold increased by 17.1% to 136,600 ounces in the second quarter of 2011, compared to
116,700 ounces sold during the same time period in 2010.
Revenues from PGM recycling increased to $82.9 million in the second quarter of 2011, or
96.0%, from $42.3 million in the second quarter of 2010. The increase in PGM recycling revenues
is a combination of higher prices realized for PGM sales thus far in 2011 as compared to 2010,
and higher volumes sold. The Companys combined average realization on recycling sales (which
include palladium, platinum and rhodium) was $1,330 per ounce in the second quarter of 2011, up
20.3% from $1,106 per ounce realized in the second quarter of last year. Recycled ounces sold
increased to 61,300 ounces in the second quarter of this year from 36,700 ounces in the second
quarter of 2010.
The Companys total costs of metals sold (before depletion, depreciation, amortization, and
corporate overhead expenses) increased to $144.6 million in the second quarter of 2011 from $94.2
million in the second quarter of 2010, a 53.5% increase. The higher cost in 2011 was driven
primarily by higher volumes of recycling material purchased (and the related higher value of the
contained metals) and higher levels of costs of mine production.
The costs of metals sold from mine production totaled $65.1 million for the second quarter
of 2011, compared to $55.0 million for the second quarter of 2010, an 18.4% increase. The
increase reflected higher labor and contracting costs between the two periods.
Total consolidated cash costs per ounce produced, a non-GAAP measure of extraction
efficiency, in the second quarter of 2011 decreased by 2.3% to $384 per ounce, compared to $393
per ounce in the second quarter of 2010. This improvement reflected much stronger mine
production, which more than offset somewhat higher total operating costs in 2011.
The costs of metals sold from PGM recycling were $79.6 million in the second quarter of
2011, compared to $39.3 million in the second quarter of 2010, an increase of 102.5%. This
increase was due both to higher recycling volumes processed and sold and the related higher
market value of the materials acquired for processing.
During the second quarter of 2011, the Companys mining operations produced 142,700 ounces
of PGMs, a 26.7% improvement over the 112,600 ounce production in the second quarter of 2010.
Production in the second quarter of 2011 included 109,800 ounces of palladium and 32,900 ounces
of platinum compared to 87,000 palladium ounces and 25,600 platinum ounces produced in the second
quarter of 2010. Production at the Stillwater Mine increased to 108,900 ounces, an improvement
over the 79,200 ounces produced in the second quarter of 2010, and production at the East Boulder
Mine increased slightly to 33,800 ounces from 33,400 ounces in the same period last year. The
production increase at the Stillwater Mine was driven by a combination of more tons mined than
anticipated and higher ore grades than planned in the lower off shaft and east areas of the mine.
The small production increase at the East Boulder Mine reflected normal variability in mining
conditions.
Total marketing, general and administrative, research and development and exploration
expenses in the second quarter of 2011 were $13.4 million compared to $8.1 million in the same
period of 2010.
Total interest income for the second quarter of 2011 increased to $1.0 million from $0.5
million in the corresponding quarter of 2010, mostly reflecting the Companys increased balance
of cash, cash equivalents and short-term investments. Interest earned on recycling volumes in
the second quarter of 2011 contributed $0.5 million to net income in comparison to $0.4 million
in the second quarter of 2010. Interest expense for both time periods, second quarter of 2011
and 2010 was $1.6 million each.
In the second quarter of 2011, other comprehensive income (loss) included a total decrease
in the fair value of available-for-sale investment securities and long-term mutual fund
investments of $0.1 million and less than $0.1
27
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million in the same period of 2010.
Comparison of Six- Month Periods Ended June 30, 2011 and 2010
The Companys total revenues increased by 46.4% to $392.7 million for the first six months
of 2011 compared to $268.3 million for the same period in 2010. The following analysis covers
key factors contributing to the increase in revenues:
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Table of Contents
SALES AND PRICE DATA
Six Months Ended | ||||||||||||||||
June 30, | Increase | Percentage | ||||||||||||||
(in thousands, except for average prices) | 2011 | 2010 | (Decrease) | Change | ||||||||||||
Revenues |
$ | 392,666 | $ | 268,332 | $ | 124,334 | 46 | % | ||||||||
Ounces Sold: |
||||||||||||||||
Mine Production: |
||||||||||||||||
Palladium (oz.) |
199 | 194 | 5 | 3 | % | |||||||||||
Platinum (oz.) |
53 | 58 | (5 | ) | (9 | %) | ||||||||||
Total |
252 | 252 | | | ||||||||||||
PGM recycling: (1) |
||||||||||||||||
Palladium (oz.) |
57 | 37 | 20 | 54 | % | |||||||||||
Platinum (oz.) |
40 | 29 | 11 | 38 | % | |||||||||||
Rhodium (oz.) |
7 | 7 | | | ||||||||||||
Total |
104 | 73 | 31 | 42 | % | |||||||||||
Other: (5) |
||||||||||||||||
Palladium (oz.) |
| 10 | (10 | ) | (100 | %) | ||||||||||
By-products from mining: (2) |
||||||||||||||||
Rhodium (oz.) |
| 2 | (2 | ) | (100 | %) | ||||||||||
Gold (oz.) |
4 | 4 | | | ||||||||||||
Silver (oz.) |
3 | 3 | | | ||||||||||||
Copper (lb.) |
394 | 478 | (84 | ) | (18 | %) | ||||||||||
Nickel (lb.) |
671 | 655 | 16 | 2 | % | |||||||||||
Average realized price per ounce (3) |
||||||||||||||||
Mine Production: |
||||||||||||||||
Palladium ($/oz.) |
$ | 767 | $ | 449 | $ | 318 | 71 | % | ||||||||
Platinum ($/oz.) |
$ | 1,775 | $ | 1,473 | $ | 302 | 21 | % | ||||||||
Combined ($/oz.) (4) |
$ | 978 | $ | 681 | $ | 297 | 44 | % | ||||||||
PGM recycling: (1) |
||||||||||||||||
Palladium ($/oz.) |
$ | 724 | $ | 403 | $ | 321 | 80 | % | ||||||||
Platinum ($/oz.) |
$ | 1,756 | $ | 1,475 | $ | 281 | 19 | % | ||||||||
Rhodium ($/oz.) |
$ | 2,336 | $ | 2,226 | $ | 110 | 5 | % | ||||||||
Other: (5) |
||||||||||||||||
Palladium ($/oz.) |
$ | | $ | 462 | $ | (462 | ) | (100 | %) | |||||||
By-products from mining: (2) |
||||||||||||||||
Rhodium ($/oz.) |
$ | 1,981 | $ | 2,540 | $ | (559 | ) | (22 | %) | |||||||
Gold ($/oz.) |
$ | 1,444 | $ | 1,148 | $ | 296 | 26 | % | ||||||||
Silver ($/oz.) |
$ | 35 | $ | 17 | $ | 18 | 106 | % | ||||||||
Copper ($/lb.) |
$ | 4.06 | $ | 3.05 | $ | 1.01 | 33 | % | ||||||||
Nickel ($/lb.) |
$ | 10.28 | $ | 8.75 | $ | 1.53 | 17 | % | ||||||||
Average market price per ounce (3) |
||||||||||||||||
Palladium ($/oz.) |
$ | 775 | $ | 467 | $ | 308 | 66 | % | ||||||||
Platinum ($/oz.) |
$ | 1,787 | $ | 1,595 | $ | 192 | 12 | % | ||||||||
Combined ($/oz.) (4) |
$ | 987 | $ | 723 | $ | 264 | 37 | % |
(1) | Ounces sold and average realized price per ounce from PGM recycling relate to ounces produced from processing of catalyst materials. | |
(2) | By-product metals sold reflect contained metal. Realized prices reflect net values (discounted due to product form and transportation and marketing charges) per unit received. | |
(3) | The Companys average realized price represents revenues, which include the effect of any applicable agreement floor and ceiling prices, hedging gains and losses realized on commodity instruments and agreement discounts, divided by ounces sold. The average market price represents the average London Bullion Market Association afternoon postings for the actual months of the period. | |
(4) | The Company reports a combined average realized and a combined average market price of palladium and platinum at the same ratio as ounces that are produced from the base metal refinery. | |
(5) | Ounces sold and average realized price per ounce from other relate to ounces purchased in the open market for resale. |
29
Table of Contents
Net revenues from sales of mine production were $261.7 million in the first six months
of 2011, compared to $187.8 million for the same period in 2010, a 39.4% increase. The
Companys average combined realized price on sales of palladium and platinum from mining
operations was $978 per ounce in the first six months of 2011, compared to $681 per ounce in the
same period of 2010. The total quantity of mined palladium and platinum sold in the first half
of 2011 and 2010, remained constant at 251,700 ounces.
Revenues from PGM recycling increased to $131.0 million in the first six months of 2011,
from $75.9 million for the same period in 2010. The increase in PGM recycling revenues reflects
stronger realized prices for PGM sales thus far in 2011 as compared to 2010, as well as much
higher volumes sold. The Companys combined average realization on recycling sales (which
include palladium, platinum and rhodium) was $1,234 per ounce in the first six months of 2011,
up 23.0% from $1,003 per ounce in the first six months of last year. Recycled ounces sold
increased 43.1% to 104,000 ounces in the first half of this year from 72,700 ounces in the same
period of 2010.
The Company also purchases PGMs for re-sale from time to time. During the first half of
2011, the Company did not make any purchases of PGMs on the open market for resale. In the
first half of 2010, revenue from such sales totaled approximately $4.6 million on 10,000 ounces
of palladium purchased in the open market and resold at cost.
The Companys total costs of metals sold (before depletion, depreciation, amortization, and
corporate overhead) increased to $250.1 million for the first six months of 2011, from $187.7
million for the same period of 2010, a 33.2% increase. The higher cost in 2011 was driven
primarily by higher volumes of recycling material purchased (and the related higher market value
of the contained metals).
The costs of metals sold from mine production equaled $125.3 million for the first six
months of 2011, compared to $112.8 million for the same period of 2010, an 11.1% increase. A
portion of this increase resulted from higher expense for ad valorem severance and tax
obligations as a result of higher PGM prices; the remainder reflected higher mine production
levels in the 2011 period.
Total consolidated cash costs per ounce produced, a non-GAAP measure of extraction
efficiency, in the first six months of 2011 increased to $410 per ounce, compared to $378 per
ounce in the same period of 2010. The increase was attributable in part to higher expenses for
royalties and taxes and higher metal prices in 2011.
The costs of metals sold from PGM recycling activities increased to $124.7 million in the
first six months of 2011, compared to $70.3 million in the same period of 2010. Higher
recycling volumes processed and sold coupled with the related higher value of the contained
metal per ton to acquire recycled material contributed to the higher costs of metals sold from
PGM recycling activities.
There were no costs of metals sold from sales of palladium acquired for re-sale in the
first six months of 2011. In comparison, the cost to acquire 10,000 ounces of palladium in the
first six months of 2010 was $4.6 million.
During the first six months of 2011, the Companys mining operations produced 273,800
ounces of PGMs, including 210,900 and 62,900 ounces of palladium and platinum, respectively.
This exceeds the 241,600 ounces of PGMs produced in the same period of 2010, which included
186,100 and 55,500 ounces of palladium and platinum, respectively. Production at the Stillwater
Mine increased 18.2% to 207,500 ounces in the first six months of 2011, from 175,500 ounces in
the same period of 2010, while production at the East Boulder Mine remained stable at 66,300
ounces in the first six months of 2011 compared to 66,100 ounces in the same period in 2010.
Higher ore grades in the lower off shaft area of the Stillwater Mine and the contribution of
higher grades from the east side of the mine were factors in the overall increase in mine
production for the first six months of 2011 as compared to the same period in 2010.
Total marketing, general and administrative, research and development and exploration
expenses in the first six months of 2011 were $21.1 million, compared to $14.9 million during
the same period of 2010, a 41.6%
30
Table of Contents
increase. During the first six months of 2011, the Company
incurred increased costs for business development and marketing programs.
Total interest income for the first six months of 2011 increased to $1.7 million from $0.9
million in the first half of 2010. Interest earned on recycling volumes in the first six months
of 2011 contributed $0.9 million to net income in comparison to $0.7 million in the same period
of 2010. Interest expense in the first six months of 2011 was $3.3 million, remaining constant
with the same period of 2010.
In the first six months of 2011, other comprehensive income (loss) included an unrealized
loss due to the change in the fair value of available-for-sale investment securities and
long-term mutual fund investments of $0.1 million. The unrealized loss due to the change in the
fair value of these investments in the comparable period of 2010 was $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
For the second quarter of 2011, net cash provided by operating activities was $58.8 million
compared to $21.1 million in the second quarter of 2010. The Companys net cash flow from
operating activities is affected by several key factors, including net realized prices for its
products, cash costs of production, and the level of PGM production from the mines. Mining
productivity rates and ore grades in turn can affect both PGM production and cash costs of
production. Net cash flow from operations also includes changes in non-cash working capital,
including changes to inventories and advances.
In its recycling activities, the Company customarily enters into fixed forward contracts
that set the selling price for a significant portion of the recovered PGMs. Consequently, for
outstanding recycling lots a change in the market price of palladium and platinum on sales of
recycling materials would have little or no effect on margins earned from this activity or on
cash flow from operations. However, a percentage change in market prices would affect margins on
future lots by about the same percentage as the change in price. It normally takes existing lots
of recycling material two to three months from the date of receipt to flow through to sales.
Changes in the cash costs of production generally flow through dollar-for-dollar into cash
flow from operations. A reduction due to grade in total mine production of 10%, or about 50,000
palladium and platinum ounces per year, would reduce cash flow from operations by an estimated
$47.6 million per year at the price and cost levels prevailing at June 30, 2011.
Net cash provided by investing activities was $2.9 million in the second quarter of 2011,
comprised of $23.1
million of capital expenditures, $25.8 million as a net decrease in short-term investments and
proceeds from the sale of equipment assets of $0.2 million. In the same period of 2010,
investing activities consumed a net $96.4 million, comprised of $13.9 million of capital
expenditures and $82.6 million net increase in short-term investments.
The Company received minimal proceeds during the second quarter of 2011 from the exercise of
outstanding stock options in comparison to $0.7 million received in the second quarter of 2010.
At June 30, 2011, the Companys available cash was $105.0 million, compared to $19.4 million
at December 31, 2010. If highly liquid short-term investments are included with available cash,
the Companys balance sheet liquidity increases to $254.9 million at June 30, 2011, up from
$208.4 million at December 31, 2010. It had $196.0 million of debt outstanding, unchanged from
December 31, 2010. The Companys total debt includes $166.5 million outstanding in the form of
convertible debentures due in 2028 and $29.5 million of Exempt Facility Revenue Bonds due in
2020. The Company expects to pay $5.5 million of interest due during 2011 related to its
outstanding debt obligations, of which $2.8 million was paid during the first six months. The
Company does not currently have in place any revolving credit facility or other short-term credit
commitment. While the lack of a credit agreement may create vulnerability under certain
circumstances for the Company, management believes that under present circumstances the Companys
liquidity is adequate to support its existing business operations.
The Companys mine expansion plans (the Blitz and Graham Creek projects), together with the
development of the Marathon and Peregrine properties, will require significant capital. The
capital to fund these projects will be
31
Table of Contents
needed over time and the Company also recognizes that each
will be developed in stages. The Companys current operations are expected to contribute cash
flow for a portion of the needed capital. Remaining capital needs will be assessed and reviewed
over time as the Company has not committed to an overall financing plan. Capital needs will also
be a function of the development of projects and the cash flow then being generated. For
example, the Marathon development is expected to occur in three to four years whereas Peregrines
mine development will occur over a longer period. As a general matter the Company expects to be
able to access additional financing as opportunities develop and are determined to be
appropriate. The Company may also consider bringing in a joint venture partner to one or more of
the projects, depending on the value and terms.
In connection with the signing of the Peregrine arrangement agreement, the Company received
a bridge capital loan commitment of $200.0 million in order to provide for additional working
capital support if needed following the closing of the Peregrine acquisition. The Company
intends to consider entering into a revolving credit facility or other financing in the near
future in order to eliminate the bridge commitment facility.
CONTRACTUAL OBLIGATIONS
The Company is obligated to make future payments under various debt agreements and
regulatory obligations. The following table represents significant contractual cash obligations
and other commercial and regulatory commitments, including related interest payments, as of June
30, 2011:
(in thousands) | 2011 (1) | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||||||||||||||||||
Convertible debentures |
$ | | $ | | $ | 166,500 | $ | | $ | | $ | | $ | 166,500 | ||||||||||||||
Exempt Facility Revenue Bonds |
| | | | | 30,000 | 30,000 | |||||||||||||||||||||
Operating leases |
201 | 367 | 281 | 234 | 2 | 1 | 1,086 | |||||||||||||||||||||
Asset retirement obligations |
| | | | | 144,271 | 144,271 | |||||||||||||||||||||
Payments of interest (2) |
3,961 | 5,522 | 3,961 | 2,400 | 2,400 | 10,800 | 29,044 | |||||||||||||||||||||
Other liabilities |
12,796 | 5,553 | | | | | 18,349 | |||||||||||||||||||||
Total |
$ | 16,958 | $ | 11,442 | $ | 170,742 | $ | 2,634 | $ | 2,402 | $ | 185,072 | $ | 389,250 | ||||||||||||||
(1) | Amounts represent cash obligations for July through December 2011. | |
(2) | Interest payments on the convertible debentures noted in the above table are calculated up to March 15, 2013, the date the holders of the debentures can exercise their put option. |
Interest payments noted in the table above assume all are based on fixed rates of
interest. Amounts included in other noncurrent liabilities that are anticipated to be paid in
2011 and 2012, include property taxes and severance taxes.
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. These statements may contain words such as
believes, anticipates, plans, expects, intends, estimates or similar expressions.
Such statements also include, but are not limited to, comments regarding expansion plans, costs,
grade, production and recovery rates; permitting; financing needs and the terms of future credit
facilities; capital expenditures; increases in processing capacity; cost reduction measures;
safety; timing for engineering studies; environmental permitting and compliance; litigating;
labor matters; and the palladium and platinum market. These statements are not guarantees of
the Companys future performance and are subject to risks, uncertainties and other important
factors that could cause its actual performance or achievements to differ materially from those
expressed or implied by these forward-looking statements. Additional information regarding
factors that could cause results to differ materially from managements expectations is found in
the Companys 2010 Annual Report on Form 10-K on file with the United States Securities and
Exchange Commission and available on the Companys website.
The Company intends that the forward-looking statements contained herein be subject to the
above-mentioned statutory safe harbors. Investors are cautioned not to rely on forward-looking
statements. The Company disclaims any obligation to update forward-looking statements.
32
Table of Contents
CRITICAL ACCOUNTING POLICIES
The Companys critical accounting policies are discussed in detail in the Companys 2010
Annual Report on Form 10-K.
33
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Stillwater
Mining Company
Key Factors
(Unaudited)
Key Factors
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
OPERATING AND COST DATA FOR MINE PRODUCTION |
||||||||||||||||
Consolidated: |
||||||||||||||||
Ounces produced (000) |
||||||||||||||||
Palladium |
110 | 87 | 211 | 186 | ||||||||||||
Platinum |
33 | 26 | 63 | 56 | ||||||||||||
Total |
143 | 113 | 274 | 242 | ||||||||||||
Tons milled (000) |
297 | 263 | 590 | 534 | ||||||||||||
Mill head grade (ounce per ton) |
0.52 | 0.46 | 0.50 | 0.48 | ||||||||||||
Sub-grade tons milled (000) (1) |
18 | 22 | 40 | 46 | ||||||||||||
Sub-grade tons mill head grade (ounce per ton) |
0.18 | 0.14 | 0.18 | 0.17 | ||||||||||||
Total tons milled (000) (1) |
315 | 285 | 630 | 580 | ||||||||||||
Combined mill head grade (ounce per ton) |
0.50 | 0.44 | 0.48 | 0.46 | ||||||||||||
Total mill recovery (%) |
92 | 91 | 92 | 91 | ||||||||||||
Total operating costs per ounce (Non-GAAP) (2) |
$ | 298 | $ | 321 | $ | 317 | $ | 310 | ||||||||
Total cash costs per ounce (Non-GAAP) (2) |
$ | 384 | $ | 393 | $ | 410 | $ | 378 | ||||||||
Total production costs per ounce (Non-GAAP) (2) |
$ | 488 | $ | 540 | $ | 521 | $ | 521 | ||||||||
Total operating costs per ton milled (Non-GAAP) (2) |
$ | 135 | $ | 126 | $ | 138 | $ | 129 | ||||||||
Total cash costs per ton milled (Non-GAAP) (2) |
$ | 174 | $ | 155 | $ | 178 | $ | 157 | ||||||||
Total production costs per ton milled (Non-GAAP) (2) |
$ | 221 | $ | 213 | $ | 226 | $ | 217 | ||||||||
Stillwater Mine: |
||||||||||||||||
Ounces produced (000) |
||||||||||||||||
Palladium |
84 | 61 | 160 | 135 | ||||||||||||
Platinum |
25 | 18 | 48 | 41 | ||||||||||||
Total |
109 | 79 | 208 | 176 | ||||||||||||
Tons milled (000) |
195 | 166 | 389 | 345 | ||||||||||||
Mill head grade (ounce per ton) |
0.59 | 0.51 | 0.57 | 0.54 | ||||||||||||
Sub-grade tons milled (000) (1) |
15 | 20 | 32 | 35 | ||||||||||||
Sub-grade tons mill head grade (ounce per ton) |
0.19 | 0.15 | 0.20 | 0.16 | ||||||||||||
Total tons milled (000) (1) |
210 | 186 | 421 | 381 | ||||||||||||
Combined mill head grade (ounce per ton) |
0.56 | 0.47 | 0.54 | 0.51 | ||||||||||||
Total mill recovery (%) |
93 | 92 | 92 | 92 | ||||||||||||
Total operating costs per ounce (Non-GAAP) (2) |
$ | 284 | $ | 316 | $ | 310 | $ | 296 | ||||||||
Total cash costs per ounce (Non-GAAP) (2) |
$ | 367 | $ | 387 | $ | 397 | $ | 361 | ||||||||
Total production costs per ounce (Non-GAAP) (2) |
$ | 476 | $ | 532 | $ | 514 | $ | 496 | ||||||||
Total operating costs per ton milled (Non-GAAP) (2) |
$ | 148 | $ | 135 | $ | 153 | $ | 136 | ||||||||
Total cash costs per ton milled (Non-GAAP) (2) |
$ | 190 | $ | 165 | $ | 196 | $ | 166 | ||||||||
Total production costs per ton milled (Non-GAAP) (2) |
$ | 247 | $ | 227 | $ | 253 | $ | 229 |
34
Table of Contents
Stillwater Mining Company
Key Factors (continued)
(Unaudited)
Key Factors (continued)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
OPERATING AND COST DATA FOR MINE PRODUCTION
(Continued) |
||||||||||||||||
East Boulder Mine: |
||||||||||||||||
Ounces produced (000) |
||||||||||||||||
Palladium |
26 | 26 | 51 | 51 | ||||||||||||
Platinum |
8 | 8 | 15 | 15 | ||||||||||||
Total |
34 | 34 | 66 | 66 | ||||||||||||
Tons milled (000) |
102 | 97 | 201 | 189 | ||||||||||||
Mill head grade (ounce per ton) |
0.37 | 0.38 | 0.37 | 0.38 | ||||||||||||
Sub-grade tons milled (000) (1) |
3 | 3 | 8 | 10 | ||||||||||||
Sub-grade tons mill head grade (ounce per ton) |
0.11 | 0.09 | 0.11 | 0.18 | ||||||||||||
Total tons milled (000) (1) |
105 | 100 | 209 | 199 | ||||||||||||
Combined mill head grade (ounce per ton) |
0.36 | 0.37 | 0.36 | 0.37 | ||||||||||||
Total mill recovery (%) |
90 | 90 | 89 | 90 | ||||||||||||
Total operating costs per ounce (Non-GAAP) (2) |
$ | 340 | $ | 331 | $ | 339 | $ | 347 | ||||||||
Total cash costs per ounce (Non-GAAP) (2) |
$ | 442 | $ | 407 | $ | 450 | $ | 423 | ||||||||
Total production costs per ounce (Non-GAAP) (2) |
$ | 528 | $ | 562 | $ | 542 | $ | 589 | ||||||||
Total operating costs per ton milled (Non-GAAP) (2) |
$ | 108 | $ | 110 | $ | 107 | $ | 115 | ||||||||
Total cash costs per ton milled (Non-GAAP) (2) |
$ | 141 | $ | 136 | $ | 143 | $ | 140 | ||||||||
Total production costs per ton milled (Non-GAAP) (2) |
$ | 168 | $ | 187 | $ | 172 | $ | 196 |
(1) | Sub-grade tons milled includes reef waste material only. Total tons milled includes ore tons and sub-grade tons only. See Proven and Probable Ore Reserves Discussion in the Companys 2010 Annual Report on Form 10-K for further information. | |
(2) | Total operating costs include costs of mining, processing and administrative expenses at the mine site (including mine site overhead and credits for metals produced other than palladium and platinum from mine production). Total cash costs include total operating costs plus royalties, insurance and taxes other than income taxes. Total production costs include total cash costs plus asset retirement costs and depreciation and amortization. Income taxes, corporate general and administrative expenses, asset impairment write-downs, gain or loss on disposal of property, plant and equipment, restructuring costs and interest income and expense are not included in total operating costs, total cash costs or total production costs. Operating costs per ton, operating costs per ounce, cash costs per ton, cash costs per ounce, production costs per ton and production costs per ounce are non-GAAP measurements that management uses to monitor and evaluate the efficiency of its mining operations. These measures of cost are not defined under U.S. Generally Accepted Accounting Principles (GAAP). Please see Reconciliation of Non-GAAP Measures to Costs of Revenues and the accompanying discussion for additional detail. |
35
Table of Contents
Stillwater Mining Company
Key Factors (continued)
(Unaudited)
Key Factors (continued)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands, where noted) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
SALES AND PRICE DATA |
||||||||||||||||
Ounces sold (000) |
||||||||||||||||
Mine production: |
||||||||||||||||
Palladium (oz.) |
108 | 90 | 199 | 194 | ||||||||||||
Platinum (oz.) |
29 | 27 | 53 | 58 | ||||||||||||
Total |
137 | 117 | 252 | 252 | ||||||||||||
PGM recycling: (1) |
||||||||||||||||
Palladium (oz.) |
31 | 18 | 57 | 37 | ||||||||||||
Platinum (oz.) |
26 | 15 | 40 | 29 | ||||||||||||
Rhodium (oz.) |
4 | 4 | 7 | 7 | ||||||||||||
Total |
61 | 37 | 104 | 73 | ||||||||||||
Other: (5) |
||||||||||||||||
Palladium (oz.) |
| | | 10 | ||||||||||||
By-products from mining: (2) |
||||||||||||||||
Rhodium (oz.) |
| 1 | | 2 | ||||||||||||
Gold (oz.) |
2 | 2 | 4 | 4 | ||||||||||||
Silver (oz.) |
1 | 1 | 3 | 3 | ||||||||||||
Copper (lb.) |
219 | 217 | 394 | 478 | ||||||||||||
Nickel (lb.) |
331 | 343 | 671 | 655 | ||||||||||||
Average realized price per ounce (3) |
||||||||||||||||
Mine production: |
||||||||||||||||
Palladium ($/oz.) |
$ | 752 | $ | 491 | $ | 767 | $ | 449 | ||||||||
Platinum ($/oz.) |
$ | 1,769 | $ | 1,526 | $ | 1,775 | $ | 1,473 | ||||||||
Combined ($/oz)(4) |
$ | 964 | $ | 725 | $ | 978 | $ | 681 | ||||||||
PGM recycling: (1) |
||||||||||||||||
Palladium ($/oz.) |
$ | 785 | $ | 444 | $ | 724 | $ | 403 | ||||||||
Platinum ($/oz.) |
$ | 1,787 | $ | 1,556 | $ | 1,756 | $ | 1,475 | ||||||||
Rhodium ($/oz) |
$ | 2,381 | $ | 2,527 | $ | 2,336 | $ | 2,226 | ||||||||
Other: (5) |
||||||||||||||||
Palladium ($/oz.) |
$ | | $ | | $ | | $ | 462 | ||||||||
By-products from mining: (2) |
||||||||||||||||
Rhodium ($/oz.) |
$ | 1,981 | $ | 2,660 | $ | 1,981 | $ | 2,540 | ||||||||
Gold ($/oz.) |
$ | 1,508 | $ | 1,203 | $ | 1,444 | $ | 1,148 | ||||||||
Silver ($/oz.) |
$ | 39 | $ | 18 | $ | 35 | $ | 17 | ||||||||
Copper ($/lb.) |
$ | 3.97 | $ | 3.01 | $ | 4.06 | $ | 3.05 | ||||||||
Nickel ($/lb.) |
$ | 10.00 | $ | 9.25 | $ | 10.28 | $ | 8.75 | ||||||||
Average market price per ounce (3) |
||||||||||||||||
Palladium ($/oz.) |
$ | 759 | $ | 494 | $ | 775 | $ | 467 | ||||||||
Platinum ($/oz.) |
$ | 1,781 | $ | 1,628 | $ | 1,787 | $ | 1,595 | ||||||||
Combined ($/oz)(4) |
$ | 972 | $ | 750 | $ | 987 | $ | 723 |
(1) | Ounces sold and average realized price per ounce from PGM recycling relate to ounces produced from processing of catalyst materials. | |
(2) | By-product metals sold reflect contained metal. Realized prices reflect net values (discounted due to product form and transportation and marketing charges) per unit received. | |
(3) | The Companys average realized price represents revenues, which include the effect of any applicable agreement floor and ceiling prices, hedging gains and losses realized on commodity instruments and agreement discounts, divided by ounces sold. The average market price represents the average London Bullion Market Association afternoon postings for the actual months of the period. | |
(4) | The Company reports a combined average realized and a combined average market price of palladium and platinum at the same ratio as ounces that are produced from the base metal refinery. | |
(5) | Ounces sold and average realized price per ounce from other relate to ounces purchased in the open market for resale. |
36
Table of Contents
Reconciliation of Non-GAAP Measures to Costs of Revenues
The Company utilizes certain non-GAAP measures as indicators in assessing the performance
of its mining and processing operations during any period. Because of the processing time
required to complete the extraction of finished PGM products, there are typically lags of one to
three months between ore production and sale of the finished product. Sales in any period
include some portion of material mined and processed from prior periods as the revenue
recognition process is completed. Consequently, while costs of revenues (a GAAP measure
included in the Companys Consolidated Statement of Operations and Comprehensive Income)
appropriately reflects the expense associated with the materials sold in any period, the Company
has developed certain non-GAAP measures to assess the costs associated with its producing and
processing activities in a particular period and to compare those costs between periods.
While the Company believes that these non-GAAP measures may also be of value to outside
readers, both as general indicators of the Companys mining efficiency from period to period and
as insight into how the Company internally measures its operating performance, these non-GAAP
measures are not standardized across the mining industry and in most cases will not be directly
comparable to similar measures that may be provided by other companies. These non-GAAP measures
are only useful as indicators of relative operational performance in any period, and because
they do not take into account the inventory timing differences that are included in costs of
revenues, they cannot meaningfully be used to develop measures of earnings or profitability. A
reconciliation of these measures to costs of revenues for each period shown is provided as part
of the following tables, and a description of each non-GAAP measure is provided below.
Total Costs of Revenues: For the Company as a whole, this measure is equal to total costs
of revenues, as reported in the Consolidated Statement of Operations and Comprehensive Income.
For the Stillwater Mine, the East Boulder Mine, and other PGM activities, the Company segregates
the expenses within total costs of revenues that are directly associated with each of these
activities and then allocates the remaining facility costs included in total cost of revenues in
proportion to the monthly volumes from each activity. The resulting total costs of revenues
measures for Stillwater Mine, East Boulder Mine and other PGM activities are equal in total to
total costs of revenues as reported in the Companys Consolidated Statement of Operations and
Comprehensive Income.
Total Production Costs (Non-GAAP): Calculated as total costs of revenues (for each mine or
combined) adjusted to exclude gains or losses on asset dispositions, costs and profit from
recycling activities, and timing differences resulting from changes in product inventories.
This non-GAAP measure provides a comparative measure of the total costs incurred in association
with production and processing activities in a period, and may be compared to prior periods or
between the Companys mines.
When divided by the total tons milled in the respective period, Total Production Cost per
Ton Milled (Non-GAAP) - measured for each mine or combined provides an indication of the cost
per ton milled in that period. Because of variability of ore grade in the Companys mining
operations, production efficiency underground is frequently measured against ore tons produced
rather than contained PGM ounces. Because ore tons are first actually weighed as they are fed
into the mill, mill feed is the first point at which production tons are measured precisely.
Consequently, Total Production Cost per Ton Milled (Non-GAAP) is a general measure of production
efficiency, and is affected both by the level of Total Production Costs (Non-GAAP) and by the
volume of tons produced and fed to the mill.
When divided by the total recoverable PGM ounces from production in the respective period,
Total Production Cost per Ounce (Non-GAAP) - measured for each mine or combined provides an
indication of the cost per ounce produced in that period. Recoverable PGM ounces from
production are an indication of the amount of PGM product extracted through mining in any
period. Because extracting PGM material is ultimately the objective of mining, the cost per
ounce of extracting and processing PGM ounces in a period is a useful measure for comparing
extraction efficiency between periods and between the Companys mines. Consequently, Total
Production Cost per Ounce (Non-GAAP) in any period is a general measure of extraction
efficiency, and is affected by the level of Total Production Costs (Non-GAAP), by the grade of
the ore produced and by the volume of ore produced in the period.
37
Table of Contents
Total Cash Costs (Non-GAAP): This non-GAAP measure is calculated by excluding the
depreciation and amortization and asset retirement costs from Total Production Costs (Non-GAAP)
for each mine or combined. The Company uses this measure as a comparative indication of the
cash costs related to production and processing in any period.
When divided by the total tons milled in the respective period, Total Cash Cost per Ton
Milled (Non-GAAP) - measured for each mine or combined provides an indication of the level of
cash costs incurred per ton milled in that period. Because of variability of ore grade in the
Companys mining operations, production efficiency underground is frequently measured against
ore tons produced rather than contained PGM ounces. Because ore tons are first weighed as they
are fed into the mill, mill feed is the first point at which production tons are measured
precisely. Consequently, Total Cash Cost per Ton Milled (Non-GAAP) is a general measure of
production efficiency, and is affected both by the level of Total Cash Costs (Non-GAAP) and by
the volume of tons produced and fed to the mill.
When divided by the total recoverable PGM ounces from production in the respective period,
Total Cash Cost per Ounce (Non-GAAP) - measured for each mine or combined provides an
indication of the level of cash costs incurred per PGM ounce produced in that period.
Recoverable PGM ounces from production are an indication of the amount of PGM product extracted
through mining in any period. Because ultimately extracting PGM material is the objective of
mining, the cash cost per ounce of extracting and processing PGM ounces in a period is a useful
measure for comparing extraction efficiency between periods and between the Companys mines.
Consequently, Total Cash Cost per Ounce (Non-GAAP) in any period is a general measure of
extraction efficiency, and is affected by the level of Total Cash Costs (Non-GAAP), by the grade
of the ore produced and by the volume of ore produced in the period.
Total Operating Costs (Non-GAAP): This non-GAAP measure is derived from Total Cash Costs
(Non-GAAP) for each mine or combined by excluding royalty, tax and insurance expenses from Total
Cash Costs (Non-GAAP). Royalties, taxes and insurance costs are contractual or governmental
obligations outside of the control of the Companys mining operations, and in the case of
royalties and most taxes, are driven more by the level of sales realizations rather than by
operating efficiency. Consequently, Total Operating Costs (Non-GAAP) is a useful indicator of
the level of production and processing costs incurred in a period that are under the control of
mining operations.
When divided by the total tons milled in the respective period, Total Operating Cost per
Ton Milled (Non-GAAP) - measured for each mine or combined provides an indication of the level
of controllable cash costs incurred per ton milled in that period. Because of variability of
ore grade in the Companys mining operations, production efficiency underground is frequently
measured against ore tons produced rather than contained PGM ounces. Because ore tons are first
actually weighed as they are fed into the mill, mill feed is the first point at which production
tons are measured precisely. Consequently, Total Operating Cost per Ton Milled (Non-GAAP) is a
general measure of production efficiency, and is affected both by the level of Total Operating
Costs (Non-GAAP) and by the volume of tons produced and fed to the mill.
When divided by the total recoverable PGM ounces from production in the respective period,
Total Operating Cost per Ounce (Non-GAAP) - measured for each mine or combined provides an
indication of the level of controllable cash costs incurred per PGM ounce produced in that
period. Recoverable PGM ounces from production are an indication of the amount of PGM product
extracted through mining in any period. Because ultimately extracting PGM material is the
objective of mining, the cost per ounce of extracting and processing PGM ounces in a period is a
useful measure for comparing extraction efficiency between periods and between the Companys
mines. Consequently, Total Operating Cost per Ounce (Non-GAAP) in any period is a general
measure of extraction efficiency, and is affected by the level of Total Operating Costs
(Non-GAAP), by the grade of the ore produced and by the volume of ore produced in the period.
38
Table of Contents
Reconciliation of Non-GAAP Measures to Costs of Revenues
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Consolidated: |
||||||||||||||||
Reconciliation to consolidated costs of revenues: |
||||||||||||||||
Total
operating costs (Non-GAAP) |
$ | 42,454 | $ | 36,093 | $ | 86,754 | $ | 74,834 | ||||||||
Royalties, taxes and other |
12,380 | 8,154 | 25,428 | 16,416 | ||||||||||||
Total cash
costs (Non-GAAP) |
$ | 54,834 | $ | 44,247 | $ | 112,182 | $ | 91,250 | ||||||||
Asset retirement costs |
144 | 133 | 285 | 263 | ||||||||||||
Depletion, depreciation and amortization |
15,395 | 16,589 | 31,196 | 35,045 | ||||||||||||
Depletion, depreciation and amortization (in inventory) |
(773 | ) | (136 | ) | (1,090 | ) | (577 | ) | ||||||||
Total
production costs (Non-GAAP) |
$ | 69,600 | $ | 60,833 | $ | 142,573 | $ | 125,981 | ||||||||
Change in product inventories |
(716 | ) | (653 | ) | (8,211 | ) | 4,038 | |||||||||
Cost of PGM recycling |
79,552 | 39,256 | 124,706 | 70,251 | ||||||||||||
PGM recycling depreciation |
265 | 39 | 527 | 83 | ||||||||||||
Add: Profit from PGM recycling |
3,600 | 3,367 | 6,639 | 6,266 | ||||||||||||
Total consolidated costs of revenues (1) |
$ | 152,301 | $ | 102,842 | $ | 266,234 | $ | 206,619 | ||||||||
Stillwater Mine: |
||||||||||||||||
Reconciliation to costs of revenues: |
||||||||||||||||
Total
operating costs (Non-GAAP) |
$ | 30,967 | $ | 25,057 | $ | 64,277 | $ | 51,922 | ||||||||
Royalties, taxes and other |
8,963 | 5,609 | 18,035 | 11,400 | ||||||||||||
Total cash
costs (Non-GAAP) |
$ | 39,930 | $ | 30,666 | $ | 82,312 | $ | 63,322 | ||||||||
Asset retirement costs |
133 | 123 | 264 | 244 | ||||||||||||
Depletion, depreciation and amortization |
12,169 | 11,305 | 24,156 | 24,002 | ||||||||||||
Depletion, depreciation and amortization (in inventory) |
(443 | ) | (1 | ) | (124 | ) | (520 | ) | ||||||||
Total
production costs (Non-GAAP) |
$ | 51,789 | $ | 42,093 | $ | 106,608 | $ | 87,048 | ||||||||
Change in product inventories |
(590 | ) | (417 | ) | (7,210 | ) | 51 | |||||||||
Add: Profit from PGM recycling |
2,732 | 2,370 | 5,020 | 4,535 | ||||||||||||
Total costs of revenues |
$ | 53,931 | $ | 44,046 | $ | 104,418 | $ | 91,634 | ||||||||
East Boulder Mine: |
||||||||||||||||
Reconciliation to costs of revenues: |
||||||||||||||||
Total
operating costs (Non-GAAP) |
$ | 11,487 | $ | 11,036 | $ | 22,477 | $ | 22,912 | ||||||||
Royalties, taxes and other |
3,417 | 2,545 | 7,393 | 5,016 | ||||||||||||
Total cash
costs (Non-GAAP) |
$ | 14,904 | $ | 13,581 | $ | 29,870 | $ | 27,928 | ||||||||
Asset retirement costs |
11 | 10 | 21 | 19 | ||||||||||||
Depletion, depreciation and amortization |
3,226 | 5,284 | 7,040 | 11,043 | ||||||||||||
Depletion, depreciation and amortization (in inventory) |
(330 | ) | (135 | ) | (966 | ) | (57 | ) | ||||||||
Total
production costs (Non-GAAP) |
$ | 17,811 | $ | 18,740 | $ | 35,965 | $ | 38,933 | ||||||||
Change in product inventories |
(126 | ) | (236 | ) | (1,001 | ) | (635 | ) | ||||||||
Add: Profit from PGM recycling |
868 | 997 | 1,619 | 1,731 | ||||||||||||
Total costs of revenues |
$ | 18,553 | $ | 19,501 | $ | 36,583 | $ | 40,029 | ||||||||
PGM recycling and Other (2) |
||||||||||||||||
Reconciliation to costs of revenues: |
||||||||||||||||
Cost of open market purchases |
$ | | $ | | $ | | $ | 4,622 | ||||||||
PGM recycling depreciation |
265 | 39 | 527 | 83 | ||||||||||||
Cost of PGM recycling |
79,552 | 39,256 | 124,706 | 70,251 | ||||||||||||
Total costs of revenues |
$ | 79,817 | $ | 39,295 | $ | 125,233 | $ | 74,956 | ||||||||
(1) | Revenues from the sale of mined by-products are credited against gross production costs for Non-GAAP presentation. Revenues from the sale of mined by-products are reported on the Companys financial statements as mined revenue and are included in consolidated costs of revenues. Total costs of revenues in the above table have been reduced by $8.0 million and $15.5 million for the second quarter of 2011 and 2010, respectively. | |
(2) | PGM recycling and Other include PGM recycling and metal purchased on the open market for resale. |
39
Table of Contents
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk, including the effects of adverse changes in metal
prices and interest rates as discussed below.
Commodity Price Risk
The Company produces and sells palladium, platinum and associated by-product metals
directly to its customers and also through third parties. As a result, financial performance
can be materially affected when prices for these commodities fluctuate. In order to manage
commodity price risk and to reduce the impact of fluctuation in prices, the Company has entered
into long-term agreements with suppliers and customers, from time to time has employed various
derivative financial instruments and attempts to maintain adequate liquidity to sustain
operations during a downturn in PGM prices. Because the Company hedges only with instruments
that have a high correlation with the value of the hedged transactions, changes in the fair
value of the derivatives are expected to be highly effective in offsetting changes in the value
of the hedged transaction.
As the development of the Companys Marathon project advances, the Company also will have
growing exposure to the price of copper. The closing of the Peregrine acquisition will further
increase the Companys price risk associated with copper. Changes in the market price of copper
will affect the Companys profitability and cash flow in the
future. Copper is traded on established
international exchanges and copper prices generally reflect market supply and demand, but prices
can also be influenced by speculative trading in the commodity or by currency exchange rates.
The Company has a supply agreement with General Motors Corporation (GM) that provides for
fixed quantities of palladium to be delivered to GM each month. The agreement provides for
pricing at a small discount to a trailing market price. The Company also has palladium and
platinum supply agreements with Ford Motor Company and BASF and a platinum supply agreement with
Tiffany & Co. The Company is continuing to negotiate potential supply arrangements with other
large PGM consumers and in the meantime is selling its remaining mine production under
month-to-month and spot sales agreements.
The Company customarily enters into fixed forward sales and from time to time in the past
has entered into financially settled forward sales transactions that may or may not be accounted
for as cash-flow hedges to mitigate the price risk in its PGM recycling and mine production
activities. Under these fixed forward transactions, typically metals contained in the spent
catalytic materials are sold forward at the time the materials are purchased and then are
delivered against the fixed forward contracts when the finished ounces are recovered. The
Company believes such transactions qualify for the exception to hedge accounting treatment
provided for in the accounting literature and so has elected to account for these transactions
as normal purchases and normal sales.
Financially settled forward sales provide another mechanism to offset fluctuations in metal
prices associated with future production, particularly in circumstances where the Company elects
to retain control of the final disposition of the metal. In financially settled forward sales,
the parties agree in advance to a net financial settlement in the future based on the difference
between the market price of the metal on the settlement date and a forward price set at
inception. Consequently, at the settlement date, the Company receives the net difference
between the forward price and the market price if the market price is below the forward price,
and the Company pays the difference between the forward price and the market price if the market
price is above the forward price. No metal changes hands between the parties in these
financially settled transactions. The Company generally has accounted for financially settled
forward transactions as cash flow hedges, as they are not eligible for treatment as normal
purchases and normal sales. However, if the Company determines not to document them as cash
flow hedges, these transactions are marked to market in each accounting period and the realized
and unrealized gains or losses are recognized in net income in each period. As of June 30, 2011
and 2010, the Company was not party to any financially settled forward agreements.
Periodically, the Company also has entered into financially settled forwards related to its
recycling segment which are not accounted for as cash flow hedges. The realized and unrealized
gains or losses on such transactions therefore are recognized in net income in each period.
40
Table of Contents
Diversification and Financing Risks
Through the Marathon acquisition and announced agreement to acquire Peregrine, the Company
is embarking on plans to expand its mining operations outside the United States and in the case
of Peregrine, to the primary mining of copper and gold. From a mining perspective, these
acquisitions will present a number of significant risks, including
foreign regulatory, political and
currency issues, the need to obtain appropriate permits, the
dependence on the market price of these metals, the need to hire experienced management and
personnel in each jurisdiction and the risks and costs associated with developing mines in each
jurisdiction.
The development of the Marathon and Peregrine projects, together with the expansion being
undertaken with the Blitz and Graham Creek projects, entail substantial costs. While cash flow
from operations will contribute to the cash requirement, the Company will need access to
additional financing that may come from the capital markets, joint venture partners or other
sources. While substantial funding for these projects is not needed in the immediate future,
there can be no assurance that sufficient funding will be available when needed or on terms
deemed favorable to the Company.
Dilution Risk
The Marathon and Peregrine transactions involve an aggregate cost of approximately $264.1
million in cash and approximately 16.0 million shares of Stillwater common stock. Recognizing
that the development of these properties will occur over an extended period, anticipated
earnings will also not be generated from these properties for some time. Accordingly, on a per
share basis, earnings will be negatively affected until these projects are profitable.
Interest Rate Risk
At June 30, 2011, all of the Companys outstanding long-term debt was subject to fixed
rates of interest. Interest income on payments to the Companys recycling suppliers is
generally linked to short-term inter-bank rates.
The Companys convertible debentures and industrial revenue bonds do not contain financial
covenants, other than change in control protection and, in the case of the convertible
debentures, investor make-whole provisions. Consequently, the Company is not subject to
conventional financial covenants at this time.
Foreign Currency Risk
With the acquisition of certain Canadian assets, the Company has gained some modest
exposure to fluctuations in the exchange rate between the Canadian dollar and the U.S. dollar.
While this exposure is currently limited to Canadian dollar cash deposits and expenses incurred
for the services of a few Canadian employees and contractors along with some associated support
costs, as the Companys commitments there expand in the future, the exposure may become more
material. The Company does not hedge this exposure at present, but may consider doing so in the
future as the scale of its Canadian operations grows.
Credit Risk
The Companys cash management guidelines allow for extending the available investment
maturities on a portion of its cash balances, expanding the suite of permissible investments,
and adjustment of the percentage limits on certain classes of investments. The Companys
investment securities at June 30, 2011, consisted of a mutual fund, federal agency notes and
commercial paper. All investment securities are classified as available-for-sale and are reported at fair value. The Companys intent is to hold its available-for-sale
investment securities until maturity and therefore any unrealized gain or loss is deemed to be
temporary.
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ITEM 4
CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
The Companys management, with the participation of the Companys Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on such evaluation, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the Companys
disclosure controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act.
Management believes, to the best of its knowledge, that (i) this report does not contain
any untrue statement of a material fact or omit to state any material fact necessary to make the
statements complete, accurate and not misleading, and (ii) the financial statements, and other
financial information included in this report, fairly present in all material respects the
Companys financial condition, results of operations and cash flows as of, and for, the periods
represented in this report.
In designing and evaluating the Companys disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived and well
operated, can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Additionally, in designing disclosure controls and
procedures, the Companys management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and procedures. The
Company also designed disclosure controls and procedures based in part upon assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
(b) Internal Control Over Financial Reporting.
In reviewing internal control over financial reporting as of June 30, 2011, management
determined that during the second quarter of 2011 there have not been any changes in the
Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the ordinary course
of business, primarily employee lawsuits. In the opinion of management, the ultimate
disposition of these matters is not expected to have a material adverse effect on the Companys
consolidated financial position, results of operations or liquidity.
ITEM 1A
RISK FACTORS
RISK FACTORS
The Company filed its Annual Report on Form 10-K for the year ended December 31, 2010 with
the Securities and Exchange Commission on February 22, 2011, which sets forth its risk factors
in Item 1A therein. As of June 30, 2011, there have been no material
changes in the Companys risk factors as previously disclosed in the Companys Annual Report on
Form 10-K for the year ended December 31, 2010.
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ITEM 5
OTHER INFORMATION
OTHER INFORMATION
Mine Safety Regulations
Safety performance at the Companys mining operations falls under the regulatory
jurisdiction of the U.S. Mine Safety and Health Administration (MSHA). MSHA performs detailed
quarterly inspections at each of the Companys mine sites and separately investigates any
occurrences deemed to pose a significant hazard to employee health and safety. The Company
cooperates fully with MSHA in its compliance responsibilities and maintains its own safety
management system to ensure that no employee is put at risk in carrying out his or her job
responsibilities and unsafe conditions are identified and remediated immediately.
MSHA enforcement powers include a broad range of alternatives, including issuing citations
for violations of mandatory health or safety standards under the Federal Mine Safety and Health
Act of 1977 (the Mine Act), elevated citations for violations that could significantly and
substantially contribute to a safety or health hazard, 104(b) withdrawal orders for failure to
abate a violation, 104(d) orders for unwarrantable failure of a mine operator to comply with
mandatory health or safety standards, 110(b)(2) citations for flagrant violations of the Mine
Act, and 107(a) imminent danger withdrawal orders. In addition, MSHA has authority to put on
notice or close mining operations that demonstrate a continuing pattern of violations of the
Mine Act and to impose criminal penalties on mine operators who fail to address violations of
mine health and safety standards.
In legislation signed into law on July 21, 2010, publicly traded mining companies are
required to disclose certain statistics pertaining to their compliance with the Mine Act. For
the quarter ending June 30, 2011, none of the Companys mines received written notice from MSHA
of (i) a flagrant violation under section 110(b)(2) of the Mine Act; (ii) a pattern of
violations of mandatory health or safety standards that are of such nature as could have
significantly and substantially contributed to the cause
and effect of other mine health or safety hazards under section 104(e) of the Mine Act; or
(iii) the potential to have such a pattern. During the quarter ending June 30, 2011, the
Company experienced no fatalities at any of its mines.
The table below includes these statistics for the second quarter of 2011. For each mine site,
the numbers listed below are numbers of actual issuances of citations/orders except for proposed
assessment dollar values.
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Proposed | Pending | |||||||||||||||||||||||
Section | Section | Section | Section | Assessment | Legal | |||||||||||||||||||
104 (S&S) | 104 (b) | 104 (d) | 107 (a) | (in 000s) | Actions | |||||||||||||||||||
Stillwater Mine |
16 | | | | $ | 13 | 6 | |||||||||||||||||
East Boulder Mine |
4 | | | | $ | 3 | 7 |
As of the quarter ending June 30, 2011, the Company had a total of 13 matters
pending before the Federal Mine Safety and Health Review Commission. This includes legal actions
that were initiated prior to the three months ending June 30, 2011, and which do not necessarily
relate to the citations, orders or proposed assessments issued by MSHA during such three-month
period.
The Company believes that the ultimate disposition of these alleged Mine Act violations and
the pending legal dockets before the Commission will not have a material adverse effect on the
Companys business, financial condition, results of operations or liquidity.
ITEM 6
EXHIBITS
EXHIBITS
See attached exhibit index
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SIGNATURES
Pursuant to the requirements 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) |
||||
Date: August 3, 2011 |
By: | /s/ Francis R. McAllister | ||
Francis R. McAllister | ||||
Chairman and Chief Executive
Officer (Principal Executive Officer) |
||||
Date: August 3, 2011 |
By: | /s/ Gregory A. Wing | ||
Gregory A. Wing | ||||
Vice President and Chief Financial Officer (Principal Financial Officer) |
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EXHIBITS
Number | Description | |
10.1 |
Articles of Agreement between Stillwater Mining Company (Stillwater Mine & Mill, and the Processing and Warehouse facilities and United Steel Workers (USW) Local 11-0001, ratified July 9, 2011 (filed herewith) | |
31.1 |
Rule 13a-14(a)/15d-14(a) Certification Chief Executive Officer, dated, August 3, 2011 | |
31.2 |
Rule 13a-14(a)/15d-14(a) Certification Vice President and Chief Financial Officer, dated, August 3, 2011 | |
32.1 |
Section 1350 Certification, dated, August 3, 2011 | |
32.2 |
Section 1350 Certification, dated, August 3, 2011 | |
101 |
The following materials from the Quarterly Report on Form 10-Q of Stillwater Mining Company for the three-month periods ended June 30, 2011 and 2010, filed on August 3, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Statements of Operations and Comprehensive Income (Loss), (ii) Balance Sheets, (iii) Statements of Cash Flows, (iv) document and entity information, and (v) related notes to these financial statements. Users of this data are advised pursuant to Rule 401 of Regulation S-T that the financial information contained in the XBRL document is unaudited and these are not the officially publicly filed financial statements of Stillwater Mining Company. The purpose of submitting these XBRL formatted documents is to test the related format and technology and, as a result, investors should continue to rely on the official filed version of the furnished documents and not rely on this information in making investment decisions. In accordance with Rule 402 of Regulation S-T, the information in this Exhibit 101 shall not be deemed "filed" for the purposes of section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by the specific reference in such filing. |
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