(Source: MARKETWIRE)
STILLWATER MINING COMPANY (NYSE: SWC) today reported net profit for the 2009 second quarter of $4.2 million, or $0.04 per diluted share, on revenues of $94.8 million. This compares to second quarter 2008 net income of $16.3 million, or $0.17 per diluted share, on revenues of $233.1 million. The 2009 second quarter reflects much lower PGM prices than in the year earlier quarter, but also significant improvements in costs of production.
For the first six months of 2009, Stillwater Mining Company (the "Company") sustained a net loss of $7.4 million, or $0.08 per fully diluted share, on revenues of $180.6 million. In the first six months of 2008, the Company reported net income of $19.1 million, or $0.21 per diluted share, on revenues of $419.5 million. The first half of 2009 was characterized by much lower PGM prices and weaker performance from the Company's recycling segment than in the same period last year.
The Company mines palladium and platinum from two underground mines in Montana. Operations at both mines were restructured in late 2008 to reduce costs and improve productivity in response to a precipitous drop in PGM prices. As a result of the Company's restructuring efforts, production of platinum and palladium at the Company's Stillwater Mine increased to 103,000 ounces in the second quarter of 2009 at a total cash cost of $318 per ounce(1), compared to 88,100 ounces in the same quarter of 2008 at a total cash cost of $357 per ounce. East Boulder Mine production in this year's second quarter decreased to 34,700 ounces at a total cash cost of $371 per ounce from 38,100 ounces at a total cash cost of $482 per ounce in last year's second quarter. Stillwater Mine's higher production benefited from the redeployment of miners from the East Boulder Mine as part of the Company's restructuring plan, while the lower East Boulder Mine production reflects reduced manpower as a result of the restructuring plan and a more cost-driven focus in determining the areas to be mined there. Productivity has improved at both operations in 2009. The average combined sales realization on mined palladium and platinum ounces, including the effect of contractual floor and ceiling prices, declined to $530 per ounce in this year's second quarter from $740 per ounce in the same period last year, reflecting the decline in PGM prices between the two periods.
The Company also operates a smelting and refining complex in Columbus, Montana. In addition to processing concentrates from the Company's mines, these facilities recycle catalyst materials purchased from or processed on behalf of third parties. Including both purchased and tolled material, the Company processed recycling material containing a total of 60,600 ounces of platinum, palladium and rhodium through the smelter and refinery during the second quarter 2009, slightly more than half the 115,000 ounces fed into the smelter during the same period last year. Recycling activities contributed about $1.6 million to the Company's operating margin (before corporate overhead and financing charges) during the second quarter of 2009, compared to about $5.8 million in the second quarter of 2008. Volumes of material available for recycling have dropped off sharply with the decline in PGM prices, reflecting the market's reduced incentive to recycle at lower prices, as well as the steep losses incurred by many collectors in the industry as the value of their inventories declined. Further, with new car sales sharply lower, existing vehicles are being driven longer reducing the number being recycled. Volumes available for recycling have strengthened somewhat as 2009 has progressed, but remain far below the robust levels seen during 2008.
Performance Highlights
-- Second-quarter and year-to-date performance overall remains on track to meet or exceed 2009 annual guidance; -- Year-to-date total cash cost at $366 per ounce is significantly better than guidance for the year of $399 per ounce; -- The Company's cash and other highly liquid holdings decreased slightly during the quarter as working capital requirements grew; however, overall liquidity remains strong at $175.4 million; -- Mine production at 262,500 ounces year to date is ahead of the rate needed to meet 2009 guidance of 495,000 ounces; --------------------------------------------------------------------------- (1) Total cash cost per ounce, a non-GAAP measure of extraction efficiency, is discussed in more detail below. -- Capital spending at $25.2 million year to date remains in line with guidance of $39 million; -- Market prices for platinum and palladium have increased appreciably since the beginning of 2009; and -- Recycle volumes, although well below plan, have improved as the year has progressed.
Reviewing the Company's 2009 second quarter financial performance, Francis R. McAllister, Stillwater Chairman and CEO, commented: "Following the steep decline in PGM prices during the second half of 2008, Stillwater Mining Company undertook a significant restructuring of its operations in order to bring cash costs into line with the reality of market conditions. Although the process of realigning our business is still very much in progress, our results in the second quarter suggest we are making progress in implementing the restructuring. Combined total cash costs of our mining operations were $331 per ounce in this year's second quarter, down substantially from $396 per ounce for the full year 2008. Combining these lower total cash costs with our much reduced capital expenditure targets and a modest recovery in PGM prices to date in 2009, we not only have maintained our available liquidity essentially flat during the year as planned, but have enjoyed a profitable second quarter, as well. Although available cash and cash equivalents decreased to $154.4 million at June 30, 2009, from $161.8 million at the end of last year, if we include highly liquid short-term investments together with our available cash, our available liquidity decreased only slightly to $175.4 million at June 30, 2009, from $180.8 million at year-end 2008.
"Prices for palladium and platinum have regained some upward momentum since the end of 2008, although they remain well below their 2008 highs. As of June 30, 2009, the afternoon posted price for platinum as quoted on the London Metals Exchange (LME) was $1,186 per ounce, up from $898 per ounce at December 31, 2008. By comparison, however, the price of platinum on the LME peaked at $2,273 per ounce in March 2008. Similarly, palladium ended the 2009 second quarter quoted at $249 per ounce on the LME, up from $183 per ounce at the end of 2008. Palladium had reached a price on the LME of $582 per ounce during March 2008. Prices of some of our other significant by-products, including rhodium, nickel and copper, also have strengthened modestly since their lows in late 2008 but remain well below their earlier peaks.
"We have reported previously on our efforts beginning late last year to restructure, including employee cutbacks and realignment of work assignments, renegotiating labor and supply agreements, a freeze on salaries and on most discretionary spending, and changes in work processes to improve productivity and reduce costs. Specifically, we reduced the overall workforce at the East Boulder Mine, employing a team-based approach to mining there that focuses only on areas that can be mined and supported efficiently at current PGM prices. A portion of the East Boulder mining workforce was transferred to the Stillwater Mine, allowing the Company to reduce the contractor workforce there and to more fully staff its mining stopes.
"During the 2009 second quarter, we have continued to make progress in these efforts. The findings of several of our multifunctional process teams have now been implemented and are beginning to bear fruit, while new initiatives have been introduced and are in progress at both mines. Current and upcoming initiatives include teams assigned to address opportunities for accident reduction, materials handling and grade optimization. To date, we have seen substantial improvements in productivity and cost control at both the East Boulder Mine and the Stillwater Mine, and both mines are achieving production rates in 2009 higher than originally projected."
Commenting on the Company's recycling business segment, Mr. McAllister observed, "Along with the sharp decline in PGM prices during the second half of 2008, we also saw a steep reduction in the volume of recycling material arriving at our processing facilities. It appears to us that many of the businesses that collect old catalytic converters and supply them to the market had experienced painful inventory losses as the value of their material on hand dropped in value, and some even exited the business altogether. The business now seems to be slowly recovering. Total PGM recycling ounces fed to our smelter increased to 60,600 in the 2009 second quarter from 38,600 ounces in this year's first quarter; that compares to 115,000 ounces fed in the second quarter of 2008. Despite the downturn, our recycling activities have remained profitable even at these lower volumes, although at much lower levels of profit than previously reported. Profit from the Company's recycling business segment, including financing income, totaled $1.7 million in the 2009 second quarter, down sharply from $7.8 million in the second quarter of 2008. However, the balance sheet working capital employed to run our recycling business also has declined to about $22.1 million at June 30, 2009, from $172.8 million a year earlier."
Addressing the effect of the recent General Motors Corporation Chapter 11 bankruptcy filing, Mr. McAllister continued, "The General Motors filing was widely anticipated, and we did not have any outstanding receivable balance owed to us by GM on the date that they filed. However, as we have advised previously, on July 7, 2009, GM filed a petition with the bankruptcy court seeking approval to reject our executory supply agreement with them. We filed an objection with the court, but following a hearing on July 22, 2009, the judge approved the GM request, thereby effectively voiding our supply contract with GM. While we will still be able to sell the metal that previously would have been delivered to GM -- there are well-established terminal markets for platinum and palladium that we access frequently -- going forward we will lose the benefit of the floor prices in the GM supply agreement. The financial effect of losing these floor prices depends on what happens to market prices for PGMs in the future, but at price levels prevailing during the second quarter, we estimate that the loss of the floor prices will cost us in the range of $5 to $10 million per year.
"In view of our current liquidity position and the progress we have made to date in bringing down our cost structure, I believe that we positioned ourselves to reduce the full brunt of this financial setback. Even without the GM filing, we have recognized for some time now that our automotive supply agreements have finite life, and consequently we have been trying to position the Company for viability after they expire. Our other remaining automotive supply agreement is with Ford Motor Company, which is scheduled to expire at the end of 2010. While the specific commercial terms of that agreement are confidential, it also contains floor and ceiling prices that have been beneficial to the Company during periods of low PGM prices. Many of the steps we have taken to restructure our operations are designed to better position the Company for the period after these contracts have expired. As a result, we are not badly positioned for this unexpected early termination of our GM contract. However, loss of the GM agreement somewhat increases the Company's vulnerability to a prolonged decline in PGM market prices."
Referring to the Company's business objectives, Mr. McAllister continued: "Mine production in this year's second quarter was 137,700 ounces, bringing year-to-date production to 262,500 ounces, well ahead of the level required to meet our 2009 full-year production guidance. Consequently, we reaffirm our earlier full-year 2009 mine production guidance of 495,000 PGM ounces. Our year 2009 guidance for total cash costs averaging $399 per ounce also remains as it stands, although total cash costs for the second quarter came in at $331 per ounce and year-to-date total cash costs are at $366 per ounce.
"The Company's three primary strategic initiatives -- mine transformation, market development efforts, and corporate diversification -- are continuing to progress, although with emphasis adjusted to current conditions.
"With regard to mine transformation, I noted last quarter that we have shifted our operating focus in the current pricing environment toward minimizing costs rather than necessarily maximizing mine production. While consideration of economies of scale might suggest that maximizing production is the best way to minimize unit costs, experience has shown in our operating environment that often the effort to accelerate production can introduce inefficiencies that more than offset the cost benefits of higher output. Consequently, our focus at present is on optimizing costs at current production levels, rather than trying to ramp up production at the mines. Similarly, during the past several years of fairly robust PGM prices, we deliberately overspent somewhat on the developed state of the mines, first catching up and then getting ahead of current mine development needs in order to facilitate effective mine planning for the future. Now, with lower PGM prices compressing mining margins, we have the comfort of reducing capital spending on mine development for a time without impairing future productivity significantly. At present, we are committing resources solely toward maintaining the developed state of the mines, rather than on improving and expanding infrastructure.
"Regarding market development, our spending has been scaled back in today's economic environment, but we are maintaining our contacts in Shanghai, Beijing and Shenzhen in support of palladium jewelry manufacturing and marketing. Despite the economic downturn, by all indications the popularity of palladium as a jewelry metal in China has continued strong with Chinese demand projected at nearly one million ounces for 2009. The Chinese automobile market also has continued its strong growth, with automobile production projected to be on track for a 10% increase in production during 2009. Chinese investment demand also reportedly has remained strong for PGMs.
"With regard to corporate diversification, during the second quarter the Company commissioned a second smelter furnace within the Columbus processing facilities. The new furnace is now in full operation. The second furnace is intended to accommodate expansion of both mining production and recycling volumes, as well as potentially to improve metal recoveries and reduce process risk.
"We regularly monitor opportunities to participate in various mineral development projects, as well as potential merger or acquisition candidates, in an effort to diversify the Company's operating risk. This effort has continued despite the worldwide recession as there may be additional attractive investment opportunities when market conditions are difficult.
"On balance," McAllister concluded, "although we are disappointed with the loss of the GM contract, I believe we will still be able to achieve the operational objectives we set for ourselves for 2009. As we had planned, to date our cash position is holding about stable, our capital and operating expenditures remain at or better than targeted, mine production is on track to meet or exceed annual guidance, and morale at our operations appears to be positive."
Changes to Board of Directors
Subsequent to the end of this year's, second quarter, two of the Company's directors, Donald W. Riegle, Jr. and Michael E. McGuire, Jr., stepped down from the Company's Board of Directors effective August 3, 2009. In advising the Company of their departure, each director stressed that his retirement was not based on any fundamental disagreement or other issue with management, and that they wish the Company well in its future endeavors.
Messrs. Riegle and McGuire were nominated by Norimet Limited ("Norimet"), the Company's majority stockholder and a subsidiary of MMC Norilsk Nickel. Under the provisions of the Stockholders Agreement between the Company and Norimet, upon the resignation of a Director nominated by Norimet, Norimet is entitled to nominate a replacement candidate to fill the vacancy, subject to approval by the Company's Corporate Governance and Nominating Committee and election by a majority of the independent Directors of the Board. Consequently, Norimet is entitled to nominate two candidates to replace the two retiring Directors, subject to the approval of the Company's Corporate Governance and Nominating Committee, as well as by the Company's independent Directors. Under the Stockholders Agreement no nominee of Norimet is permitted to be an officer, director or employee of MMC Norilsk Nickel.
Accordingly, effective August 5, 2009, Mark V. Sander, a nominee of Norimet was elected a member of the Company's Board of Directors. Norimet also has recently provided a second nominee whose election has not yet been addressed by the Company's Board.
Mr. Sander brings to the Company's Board extensive experience in mining and natural resources. He holds a PhD in Ore Deposits and Exploration from Stanford University.
Commenting on these changes, Stillwater Chairman and Chief Executive Officer, Francis McAllister said, "I join with all the members of the Company's Board in acknowledging and expressing our deep appreciation for Don's many contributions as a member of our Board. Don's experience and knowledge have been of great value to us since he joined the Board in June of 2003. In addition, we express our sincere appreciation to Michael for his contributions during his tenure on the Company's Board of Directors. He brought to us the benefit of his international business experience and contacts within the Russian Federation. We will miss Don and Michael and wish them the best.
"We also warmly welcome Mark Sander as a member of the Company's Board of Directors. We look forward to working closely with Mark in the future and welcome the benefit of his long experience in the mining industry."
Cash Flow and Liquidity
At June 30, 2009, the Company's available cash and cash equivalents (excluding $38.0 million of restricted cash) totaled $154.4 million, down $16.4 million from March 31, 2009, and down $7.4 million from December 31, 2008. If we include the Company's available-for-sale investments, total available cash and investments at June 30, 2009, was $175.4 million, down $6.4 million from $181.8 million at March 31, 2009 and down $5.4 million from $180.8 million at the end of last year. Net working capital, comprised of total current assets including available cash, less current liabilities, increased slightly during the second quarter of 2009 to $235.9 million, from $227.5 million at March 31, 2009, from $230.4 million at December 31, 2008. Recycling inventories and advances increased by $10.4 million during the quarter.
Net cash provided by operating activities (which includes changes in working capital) totaled $6.7 million in this year's second quarter, compared to $17.4 million of cash provided by operations in the second quarter of 2008. During the second quarter of 2008, growth in working capital associated with recycling largely offset the stronger earnings contribution in that period. Capital expenditures were $13.0 million in the second quarter of 2009, while capital spending in the second quarter of 2008 totaled $20.8 million. Capital spending has been cut back in 2009 as a result of lower PGM prices.
Outstanding debt at June 30, 2009, was $211.0 million, unchanged from March 31, 2009, and December 31, 2008. The Company's total debt includes $181.5 million outstanding in the form of debentures due in 2028 and $29.5 million of Exempt Facility Revenue Bonds due in 2020.
Second quarter Results - Details
For the second quarter of 2009, the Company's mine production was 137,700 PGM ounces including 103,000 ounces from the Stillwater Mine and 34,700 ounces from East Boulder Mine. For the comparable quarter of 2008, the mines produced 126,200 ounces including 88,100 ounces at the Stillwater Mine and 38,100 ounces at East Boulder Mine. Stillwater Mine's production benefited from the additional miners transferred in from East Boulder Mine in conjunction with the fourth quarter 2008 restructuring. The lower production at East Boulder Mine reflected the reduced workforce there as the Company has limited production areas to those that can be most efficiently mined and supported in the current low-price environment.
Sales out of mine production totaled 135,700 ounces in the second quarter of 2009 at an overall average realization of $530 per ounce, down from 140,300 ounces at $740 per ounce in the second quarter of 2008. Mine revenues decreased to $78.8 million in the 2009 second quarter from $118.1 million in the same quarter of 2008.
