Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Stillwater Mining (NYSE:SWC)

Q4 2012 Earnings Call

February 27, 2013 12:00 pm ET

Executives

Francis R. McAllister - Chairman and Chief Executive Officer

Gregory A. Wing - Chief Financial Officer, Principal Accounting Officer and Vice President

Kevin G. Shiell - Vice President of Mining Operations

Analysts

David Gagliano - Barclays Capital, Research Division

Richard Garchitorena - Crédit Suisse AG, Research Division

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Stillwater Mining Company Fourth Quarter and Full Year 2012 Results Call. [Operator Instructions] And as a reminder, this conference is being recorded.

I'll now turn the conference over to Frank McAllister at Stillwater. Please go ahead, sir.

Francis R. McAllister

Thank you, Cathy. And welcome, everyone, and thank you for joining us today for this conference call. As the operator indicated, I'm Frank McAllister. I'm the Chairman and CEO of Stillwater Mining Company. And with me today are several members of our management team, including Greg Wing, our Vice President, Chief Financial Officer; Terry Ackerman, Vice President of Corporate Development; Kevin Shiell, Vice President of Mining Operations; Kris Koss, Vice President of Human Resources and Safety; and Rhonda Ihde, our Corporate Controller.

This call is for the purpose of reporting Stillwater Mining Company's 2012 results. As always, I would just like to remind everyone that some statements in this conference call will be forward-looking and therefore, involve uncertainties or risks that could cause actual results to differ from our projected results. We discussed these risks and uncertainties in more detail in the company's filings with the Securities and Exchange Commission, including those discussed in the company's 2012 annual report on Form 10-K that will be filed later this afternoon.

Stillwater had an exceptional fourth quarter in year 2012. Our operations, both at our mines and our processing facilities, performed extremely well. Production and cost results both came in better than planned and most importantly, combined safety performance at our 2 Montana Mines was the best in Stillwater's history.

And in conjunction with our outstanding operating performance, the PGM price trends saw an upswing during the fourth quarter. Our average metal prices were lower during 2012 when compared to 2011. PGM prices began to recover during the fourth quarter from the declines experienced in the second half of 2011 through 2012. Thus, our combined average realized price for mined PGM ounce during the fourth quarter of 2012 was back up to about $867 per ounce, essentially flat with the fourth quarter of 2011.

We believe the market fundamentals for PGMs and particularly palladium, our primary product, are currently more robust than ever. Supply remains constrained as the future demand outlook continues to grow, moving industry analysts who project significant PGM supply deficits this year as well as into the future. We anticipate these fundamentals will continue to drive more palladium and platinum prices higher, more specifically, as to palladium.

Palladium and platinum compete head-to-head in the market. And in particular, for gasoline catalytic converters, a market that has essentially completed its total migration to palladium as of 2012, a market that platinum once dominated. As we've discussed before, just over 2 years ago, during this migration, price of palladium traded up from about 25% of the price of platinum to about 45%.

Even so, given the one-for-one substitutability of palladium for platinum in catalytic converter applications, which is the primary use for both metals, palladium is still priced at a significant discount for platinum. As a result of its equal effectiveness, its significant price discount, and its surging supply deficit, we believe it is likely the price of palladium will continue to increase in relation to the price of platinum. Stillwater is uniquely positioned to take advantage of these market conditions as the largest primary palladium producer in the world.

First, understand that supply is constrained and demand is ever-increasing. Then, consider these palladium market fundamentals. About 80% of this year's estimated 8.5 million ounces of Palladium supply go into automobile catalytic converters. In 2012, the world built over 80 million light-duty vehicles, a build rate that will increase to 100 million or by 25% over the next 3 years. All will have catalytic converters. Majority of these will be gasoline catalytic converters. The Russian government palladium inventory is believed to be depleted. There is no good substitute for the 1 million ounce needed for high-quality multilayered ceramic capacitors or MLCCs in the electronic industry.

And just as the PGM market fundamentals are emerging more robust than ever, we believe that Stillwater's operations are healthier than they have ever been and well positioned to capitalize on the opportunities in front of us. In an effort to benefit from the improving dynamics of the PGM market that we projected in early 2010, we identified in that year 2 significant opportunities for development and growth at our existing Montana mines which became the Graham Creek and the Blitz projects.

In 2011, we began work on the projects. During our mine planning process last year, with our future production factors [ph] like Blitz, we engineered and initiated the Far West project as a third opportunity to increase PGM production in Montana. Work on all 3 projects has now advanced to the point where we have been able to establish future production growth estimates from these efforts which were announced last month. As a result of our investment in these projects, we anticipate that Graham Creek will add about 30,000 ounces of annual incremental PGM production beginning in 2015. Our West project is expected to add about 20,000 ounces of annual incremental PGM production in 2016 and move up to 45,000 ounces per year thereafter.

While it's too early to provide specific production estimates for the Blitz project, it will primarily serve as a critical role in replacing depleting production from existing mining areas within the Stillwater Mine and has the potential to add about 25,000 ounces of incremental annual PGM production at a future time beyond 2017. Together, these 3 projects will sustain our existing production rate and have the potential to add 20% to our current annual PGM production on the Montana mines.

Now, as to the status of these 3 important Montana-based growth initiatives. Let me go through them in order, in the order that they are expected to come online in the coming years. The Graham Creek project, our existing tunnel-boring machine or TBM has now developed about 6,900 feet of new underground footwall lateral to the west of the East Boulder Mine. Our TBM is expected to complete its planned 8,200 feet of development during the second quarter this year. At that point, we will begin developing 2 new ventilation raises in support of future Graham Creek operations. I mentioned the first production from Graham Creek is expected in early 2015 and has the potential to add about 30,000 PGM ounces per year to East Boulder Mine production. Total estimated cost of this project is about $13 million, the $3.5 million having been spent through the end of 2012.

The Far West area is located about 3 miles to the west of the Stillwater Mine shaft, beneath and to the west of the upper west Area of the mine which has been mined for many years. During our planning and budgeting process for 2013, we identified this area within the envelope of the Stillwater Mine where development can be accelerated to provide production growth ahead of the production timeline for the Blitz project. Development risks are only accessed in this area within the past year or 2. Encouragingly, ore appears to be a bit higher grade, better than in the Upper West and also appears to be accompanied with good ore yields. [indiscernible] this area and sequencing it, second among our 3 Montana-based growth initiatives may require us to pull some manpower away from the Blitz project for a short period of time. It is not however, expected to significantly delay our development of Blitz. Cost pulled forward from later years for expediting development of the Far West area is estimated to be approximately $28 million over 3 years, of which $8.6 million will be spent this year.

At the Blitz project, located to the east of our Stillwater Mine, a newly acquired TBM was received and assembled underground during 2012 and began operating during the fourth quarter. This TBM will drive a 23,000-foot access drift along the J-M Reef over the next several years. TBM is making very good progress and now is about 1,000 feet into the mountain. Development of the second parallel drift, about 600 feet above the TBM, is also underway using conventional drill and blast development methods. This conventional drift is also progressing nicely and is about 400 feet in. And the third stage of the Blitz project, permitting is in the progress of a new surface portal located about 4 miles to the east of the Stillwater Mine surface facilities. The proposed decline ramp originating from this new portal would intersect the new drifts providing ventilation and emergency egress for the entire Blitz area. Again, the development of Blitz will be important to both sustaining the higher production level at our Stillwater Mine, as well as adding incremental annual PGM production. Total cost of this project is estimated at about $209 million over the next 5 or 6 years, approximately $35 million has been spent on the project through the end of 2012. Spending on Blitz in 2013 is expected to be $16.5 million.

As to the current development state of our Montana mines. During 2012, we significantly increased the proven reserve base of both our Montana mines. Since the end of 2011, we have increased our proven ore reserve tons for Stillwater Mine by 20% and at our East Boulder Mine, we've increased our proven ore reserve tons by 21%. Based upon our current proven and probable reserves, the ore reserve life at the Stillwater Mine is currently 19 years and this takes into account the anticipated production increase from the far west area of the mine, but does not include potential increases in production from Blitz, ore in production, or ore in ore reserves.

At the East Boulder Mine, our proven probable reserve life is now about 66 years which includes our estimated annual production increase from Graham Creek. Our teams have done an excellent job replacing reserves we have mined during the past year and adding to the total. Needless to say, the developed state of our mines is very healthy and well-positioned for the future. It's worth noting that we are planning to hold our annual meeting at the Stillwater Mine this year and we'll invite those in attendance to go underground to see the Blitz tunnel-boring machine.

Now, I'd like to spend a few minutes on our continued initiatives at both the Marathon project in Canada and the Altar project in Argentina. Marathon project is near the town of Marathon at the northern tip of Lake Superior in the province of Ontario, Canada. The project is currently progressing through the stages of final engineering and environmental review.

As disclosed previously, the course of our final engineering works and problems were identified with the palladium grades reported in the early feasibility study for the project. Fortunately, the proven and probable ore reserves cannot be updated until the final engineering report is completed. Obviously, highly focused on completing this report and are working diligently for that to occur early in the second half of this year. While the final engineering report and related economic evaluation are not yet complete, we remain very optimistic about the attractiveness of Marathon within our overall PGM portfolio.

On the environmental front, earlier in 2012, the company submitted an environmental assessment to the Joint Federal Provincial Marathon review panel for consideration. Following a comment period, this study has been returned with various comments and questions, some of which required additional data gathering. We expect to submit our updated documentation during the first half of this year. We're also engaged and in discussions with various First Nations and other aboriginal groups, potentially affected by the proposed project. Assuming all issues are resolved in a timely manner, construction of the mine at Marathon might begin in late 2014 with first production likely in early by 2017.

On October of 2011, the company completed the acquisition of Peregrine Metals Ltd. Its principal asset is the Altar copper-gold porphyry exploration project in the San Juan province of Argentina. This property was acquired with the intent of providing the opportunity to engage in longer-term product diversification. On the basis of our continued definition of drilling to date, the Altar property geologically appears to be exceptional, one of the best I've known. Going there has substantially expanded the boundaries of the resource to the extent that it appears likely any mine development will be significantly larger than originally envisioned. It is important to note that at this point, there are no proven and probable reserves reported for Altar as establishing such reserves requires completed feasibility study to assess the associated project economics.

Now, in view of the continued improvement in the PGM markets, in particular the re-rating and strengthening of the palladium price again have taken into consideration and taking into consideration increased political uncertainties in Argentina, the company has been cautious in its approach to the Altar project. The company completed its 2012 drilling and evaluation program for about $17 million, far less than the $25 million originally planned. The company has further reduced its exploration budget at Altar in 2013 to approximately $13 million. The company continues to believe the Altar asset represents a significant long-term potential and also believes it would be unwise to make a definitive statement about its future at this time or to otherwise terminate the project. The company intends to keep its spending at appropriately modest levels for the foreseeable future in order to gain a better gauge on its prospects and ultimate value. The management's view of the Altar investment represents a valuable option. The company recognizes the construction of the mine at Altar would be expensive and that the value of this resource may be realized in any of several ways, including through partnering or the sale of all or a portion of the project. As the company's projects in Montana and at Marathon come online in the coming years, the company should have a better read on Altar, as well as its position within our overall portfolio at that time.

I'd like to briefly discuss some of the details around the company's fourth quarter and 2012 financial results. Additional details concerning our results are also available in today's press release. And as I mentioned, they will be also in our SEC filing which our 10-K will be filed later today.

Stillwater reported 2012 net income attributable to common stockholders of $55 million or $0.46 per diluted share, on sales revenues of $800 million. That compares to a net income of $144 million, $1.30 per diluted share in 2011 on revenues of $906 million. The company's average palladium and platinum market basket price per ounce for 2012 was $850 per ounce compared to $952 per ounce for 2011, that's a difference of more than $100 less per ounce. In the fourth quarter 2012, our net income attributable to common stockholders was $16.9 million or $0.13 per diluted share compared to net income of $24.7 million or $0.21 per diluted share reported for the fourth quarter of 2011. Important to note that the year and fourth quarter included tax credits totaling $4 million for the year and $2.5 million in the fourth quarter.

Total mine production for the year was 513,700 ounces of palladium and platinum. This total includes 396,000 ounces of palladium and 117,700 ounces of platinum. Our total mine production exceeded our guidance of 500,000 ounces. Total mine production for 2011 was 517,900 ounces with the difference in production in 2011 to 2012 primarily a result of normal geological variation within the mines. Both cash cost of palladium and platinum produced from the 2 mines averaged $484 per ounce in 2012, better than our guidance of $500 per ounce. This is higher than $420 per ounce we reported for 2011.

I'd like to emphasize that these higher costs are driven by several factors and were in line with our plan for the year. These costs include the effect of the receding face of our underground mining operations. Our mines continue to get deeper and the working areas continue to be further from the mine entrances. In addition, we have been able to decrease cutoff grades in some areas because of higher metal prices. The lower cutoff grade increases cost per ounce. The production remains possible and profitable because of the higher realized metal prices.

Also included in our cost were contractual wage increases, underlying inflation in material costs and catch-up spending following sharp cutbacks in 2009 and 2010 due to lower metal prices at that time. Lastly, a critical element to our growth plans and an additional component to our increased cost is the increased investment on our new-miner trading program to meet our workforce needs for the future. It's important to note that we have begun to make the investments necessary to support the incremental PGM production we expect to bring online in the coming years. This has impacted our cash cost in 2012 and will further impact our cash cost in 2013. I'd note that once these incremental PGM ounces are online, we believe there is the potential for cash cost to actually decrease due to increased efficiencies of scale from the new production. It's also important to note that on a relative basis, we have been very successful at controlling costs when compared to our peers that face many of the same costs pressures that we have. Furthermore, many of our PGM peers are cutting back production or shutting down operations whereas we are proactively pushing to grow our PGM ounces per year.

In terms of capital spending, we came in at $116.6 million for 2012 which was lower than our original guidance of $135 million but higher than the $104 million spent in 2011 from existing operations. This increase in capital spending was driven primarily by the development efforts at our existing mines and our Blitz and Graham Creek development projects. Looking out on a segment basis, the company's mining operations contributed $109 million to 2012 earnings which was less than the $197 million contributed in 2011, primarily driven by the lower prices I've mentioned.

Regarding PGM revenues in 2012 were $455 million on 500,400 ounces sold down from the revenues in 2011 of $528 million on 516,200 ounces sold. The company's recycling operations are in $10.5 million in 2012 including financing income compared to $18.8 million in 2011. Recycling ounces processed including tolled ounces totaled 445,200 ounces in 2012 compared with 468,700 ounces processed during 2011 as the lower average PGM prices in 2012 resulted in fewer ounces being available for Recycling.

Before concluding, I'd like to spend a few minutes on our guidance for 2013. As I mentioned, we have established guidance for longer-term production growth. And in the meantime, our mine production outlook for 2013 is once again 500,000 PGM ounces. As we've discussed many times, we believe at present, our Montana mining operations functioned optimally even at the stretched goals at a target production rate of approximately 500,000 PGM ounces per year. Total cash cost per ounce for the 2 Montana mines are expected to average approximately $560 per ounce for 2013. And an increase in cost is a result of the same factors that impacted our cost for 2012, including receding face, lower cutoff grades, contractual wage increases and general inflation in material costs and is also affected by our slightly lower 2013 production guidance.

Additionally, as previously mentioned, adding to cost is our investment in our new-miner training program. As a reminder, total cash cost per ounce is a non-GAAP measure of extracting efficiency that we defined in detail in our SEC filings. It's anticipated that capital expenditures will total approximately $172.8 million for 2013, significantly up from the $116.6 million spent in 2012. And for 2013, spending on our Montana operations will be $151 million or 87% of the total. The 20% of that directed to the growth projects at the Graham Creek which is about $4.7 million, Far West which is about $8.6 million and the Blitz project, which is $16.5 million. Marathon project budget for 2013 is $21.9 million, principally for engineering and permitting activities. At current PGM prices, we believe Stillwater will have adequate cash generated from operations. We have enough cash on hand to complete each of our PGM expansion projects with the potential exception of Marathon. Cash and cash equivalents on hand at the end of 2012 totaled about $379.7 million but if we include highly liquid short-term investments, available liquidity was about $641.7 million. We expect $166.5 million of the total to be utilized in redeeming the company's outstanding 1 7/8% convertible debenture, just shortly in a couple of weeks time from now on March 15. The remainder should be available for general corporate purposes including support for our capital projects. In 2012, cash and liquidity balances include about $43.4 million of cash held in Canada that is dedicated to funding the Marathon project and so is not available for the company for its general purposes.

Now, Cathy, operator, I'd like to open the call up for questions on our 2012 results.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dave Gagliano with Barclays.

David Gagliano - Barclays Capital, Research Division

I just have a few sort of line item questions. On the exploration spending plans for 2013, can you quantify how much you plan to spend at Altar and is there any -- and also, what is the variability in terms of quarterly exploration spending plans there?

Francis R. McAllister

Sure. The expenditures in 2013 for the 2013 season, some of which started in December, would be about $13 million, of which about $2 million of that is actually G&A. So I think the total spending for direct exploration is about $11 million. And quarterly, we have a little bit of spending in December. I think that probably was around $1.5 million and the rest of that will actually, probably, be coming in the first quarter. There may be some that will come over into the second quarter but the majority of that goes through the drill season down there which is really December, January, February, March. But sometimes, the season is open enough for work to continue into April. Dave, is that helpful? There will be some additional exploration that will go on on the Marathon project next door to the Marathon project on our property up there -- on the Bermuda property up there. I think that's budgeted at about $3 million.

David Gagliano - Barclays Capital, Research Division

Okay. Now, that's very helpful.

Francis R. McAllister

And that will be spread over sort of the summertime period.

David Gagliano - Barclays Capital, Research Division

Next question, interest expense line seemed a bit high, even after we factor in the convert. Was there anything going on there in the fourth quarter that isn't going to happen in the subsequent quarters?

Francis R. McAllister

No. I think the interesting thing there is that while the convert has a 1 3/4% interest rate, that's what we pay on a cash basis from an accounting standpoint, that convert -- the new convert is accounted for at a computed 8% rate and that is what is increasing the interest rate there. So it's not a cash lien but what we do is we decrease the value of the convert carried on the books and that will increase with that additional interests accrued over the time the period the convert being outstanding.

Gregory A. Wing

It isn't the full $400 million that takes the 8% or 8.5% interest rate. It's a discounted bifurcated in the accounting sense between debt and equity. So we've got about the $250 million of debt from that which we pay at 8.5% on, if that's helpful.

David Gagliano - Barclays Capital, Research Division

And then just the last question. 2014, 2015 CapEx, if you add up all the moving parts and think about what's been spent on Marathon and also make some assumptions for maintenance CapEx, et cetera. It looks to me like it's a range of somewhere around $250 million to $300 million for 2014 and 2015. Is that a reasonable assumption for total CapEx in the out years?

Francis R. McAllister

David, let me not provide your guidance on that. Let me sort of talk openly without providing guidance because we're not prepared to do that. First of all, obviously, we're going to get into a permitting issue. I mentioned that not a permitting issue but the permit will be opened up for the Benbow area here in Montana. That will likely increase our cost over at the Blitz, the spending at Blitz. At this point in time because the permit is sort of an open-ended thing until it comes into hand, it's hard for us to say just exactly how much that will increase that. I think we've got the spending over at Graham Creek will begin to diminish a little bit as we move forward after 2014. But it will still be continuing in 2015 with those raises. The spending at the Far West will continue kind of on a sustained basis for a 3-year period of time. So the spending there is not necessarily ramping up with the exception of the Benbow added. At Marathon, it's a bit early to explain just exactly what the spending might be up there but your sense of spending is probably correct from the standpoint if we're successful with the permitting and with the negotiations with the First Nations and aboriginal groups, if we're successful with BIS [ph] which looks really good at this point in time, the spending will increase and it will be up substantially. I would say, we report 100% in our financials for the Marathon expenditures but we only sustained 75% of that with our partner, Mitsubishi, who, by the way, is a terrific partner, footing the other 25%. We're also investigating and looking for a project financing that will help us with that project up there. And obviously, Mitsubishi is very helpful in that arena. I don't know that helps, Dave. I apologize for not being crystal-clear on it but it's still some moving parts there.

Operator

[Operator Instructions] We'll go next to Richard Garchitorena with Crédit Suisse.

Richard Garchitorena - Crédit Suisse AG, Research Division

So just the first question, it looks like your sales were a little lower than production in Q4. I assume that's with timing of shipments? Would you expect to make that up in the first quarter?

Francis R. McAllister

Absolutely right, that's exactly what goes on there. It's that the production going through the plants sometimes does not quite meet the production rate of the mine. Sometimes, it exceeds, sometimes, behind, and you're exactly right. It just catches up.

Richard Garchitorena - Crédit Suisse AG, Research Division

Great. Okay, and then just turning to CapEx, you gave some detailed overview of your plans for this year. I was just curious about one line item, processing another $20 million expected for this year. Is there anything specific there?

Francis R. McAllister

No, that's simply -- well, there are 2 or 3 things going on there but for the most part, what we have is a rebuild of what we call are -- sorry, the -- I'm losing the name, the thickener for our processing the SO2 that comes out of our stacks. That thickener has been in place now for many, many years, would sort of held it together over the last number of years. And at this point in time, it needs to be rebuilt and that's part of the cost there. Aside from that, there are no real big costs that are going into that area.

Richard Garchitorena - Crédit Suisse AG, Research Division

My last question, just you gave some detailed information on cash costs over the past 5 years or so, and obviously ramping up production over the next 5 years. You highlight the fact that the last 5 years average growth in terms of cash costs about 7%. Is that, in your view, is that a good run rate to sort of think about at a normal growth rate for cash cost and then obviously, that will change depending on production ramping up, as you mentioned earlier, and also new projects and where those cash costs are?

Francis R. McAllister

I think I would be remiss if I were to say that that's exactly it because obviously, you see the production cost in 2013 going up quite strongly, about 16% is what we're projecting. But when we look back, and look I've got 2 different numbers here and I'll give you 2 different numbers. One is if we look back to 2008 through the third quarter of 2012, when comparing ourselves against our peer group out there, our costs were up 5% during that period of time. Our North American base metals were up 8%. North American silver was up 8%. South African PGMs were up 13%. By the way, they were up 20% last year and the North American Gold was up 14% during that period of time. So we compare very favorably. Then the 7% or 8% we were talking about were also way below all the rest of our peer group. Now, having said that, there are a couple of things and I've mentioned them but I think they're worth reiterating based on your question, Richard. One is that we cut back sharply late 2008 which we do start cost during 2009, 2010. That was an unsustainable cost-reduction. We try to explain it at that point in time so everybody would understand that we were sort of borrowing from the future, if you will, if we were to be able to sustain our production rates at the 500,000 ounce level. So in 2011, as prices came back up late in 2010, we resumed spending and development during that period of time to be able to restore where we were so that production going forward would be able to be sustained. And Kevin talks to me now and he says "Look, we finally get back literally to the point to where we have achieved that sustainable level, mid-year this year, 2013". So it's taken us 3 or 2.5 years to get back to that point to where we are sustainable at the 500,000 ounce level with our normal operating areas and without considering obviously the additional areas. Nevertheless, you have it right that as the production comes up in these future years, we would expect our costs to be able to come down. Two reasons. First of all, the development will have been in put in place, the production will come online but to a certain extent, we will reach a more steady-state of minor workforce at that point in time. A steady-state where we're replacing attrition but we're not having to grow our level of minor workforce. That's a critical thing. So to a certain extent, some of the cost that is going through P&L at this point in time was really an investment for the future to build that workforce. And obviously, all the guys put it right. There are 2 factors here. One is the deepening of the mines, which you're all aware of as well as the receding face that goes back further and further and further. But when we get into to the Blitz, the Blitz is literally right there to face and we have the potential that we will have production coming to a very shorter haul, a very more efficient production area, at least for the initial years on Blitz. And then obviously, it too, will see the receding face. Nevertheless, what the guys have done is really press in on their part. What they've done is they put in a rail system that goes behind the tunnel-boring machine going in there which will be more efficient than it would be to have to haul the materials out by truck and so what it does is it runs along underneath all of the production area that we see for the foreseeable future which is above that rail haulage level and we can pull that out. Now, that doesn't say anything about the future generations who are going to go below that rail level and pull out the trail from below that level which has the opportunity in which, at this point in time, we know is there but we're not focused on putting that into operation, of course. I am not sure if that's helping you, Richard, but that's essentially where we are.

Operator

The next question is from Sam Dubinsky with Wells Fargo.

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Just a couple follow-ups. In terms of cash mining cost, how does that trend again through 2013? What's the linearity of it?

Francis R. McAllister

It's pretty steady as we go through the year, except when it comes down to the wage increase. The wage increase comes middle of the year, typically. And then East Boulder will come at the end of the year so literally, what we have is the East Boulder just kicked in just a couple of months ago and that will go flat through the year. But at Stillwater, the increase in wages kicks in July 1. And so you have a bump there, but the rest of it is as you see receding faces and you have to add incremental people that takes place over the year as we add miners. This is not bringing in the 50 people at the beginning of the year, this is bringing in 50 people over the year as we train the miners. And so that's sort of spread over the year. I don't know of any other cost jumps or bumps that would take place, most of it is on that basis.

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

So a little lower in the beginning of the year and a little bit higher in the back half of the year?

Francis R. McAllister

I think that's how you can look at it, yes.

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Okay. And then obviously, the PGM market is pretty tight right now. Do you have any color on inventory levels, your catalytic converter customers? Are they themselves supply-constrained? Have they been building inventory, or are they themselves sort of running hand to mouth?

Francis R. McAllister

They're about level in the hand to mouth right now. I'd have to say some of them are starting to talk about 2014 already, which is very early in the cycle and much sooner than we would have expected. But that's sort of as a signal that their hand-to-mouth situation, they're looking forward themselves.

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Okay, great. And then just some housekeeping questions. In terms of interest expense, I know you just said it was $7 million a quarter on a GAAP basis. What is the cash interest expense on a dollar amount?

Francis R. McAllister

Let's see. You'd have to run it 1 3/4% against $400 million and the other portion is going to be paid off by -- excuse me, the $166 million we paid off in about 2 weeks time. So that'll be gone. So it's really 1 3/4% against the $400 million or $397 million.

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Okay, great. And also just tax rate for 2013?

Francis R. McAllister

Tax rate for 2013, 20%? It may be a little bit below that, actually. But that, at most, that's it.

Gregory A. Wing

By the way, I'll just comment that when all of a sudden everything changes, you've made good on everything and you're now making money, taxes that tend to wind up catching up with you and you now got to go back and figure out just exactly what you are, it's a good thing to have to pay taxes. I have to say that.

Operator

[Operator Instructions] We'll go to Andy Shellfit [ph], private investor.

Unknown Attendee

I think I want to touch on a little more sensitive matter right now, and feel free to comment as you may because I'm going to make comments not so much in the form of a question but general comments on the initiatives from the Clinton group. And I want to say upfront that I am a current shareholder. I'm a former securities analyst. I have no affiliation or involvement with the Clinton group. However, having read their letter back in December, I found myself somewhat in agreement with certain points that they made. I was particularly concerned...

Francis R. McAllister

Let me just sort of -- I apologize for this, to cutting you off but we're really dealing at this time with -- the purpose of the call is for 2012 results and operations. We're going to have plenty of time to deal with that and we'll come back to it. And I apologize for this and I understand your point. Let me be specific about the Clinton letter. Look, we're excited about where we are positioned. Palladium market and its outlook in operations and growth are very, very good. We believe we've been very clear about our strategy, which is focused on our Montana PGM operations and growth initiatives, first and foremost. And importantly, we are well-positioned from both an operational and financial standpoint to execute on our strategy at a time when most peers face significant operational and financial challenges. And we're confident our strategy best positions the company to maximize long-term shareholder value. So I apologize for that but really, what we're trying to deal with is the 2012 results, fourth quarter results, metal markets if you will. But at this point in time, I apologize but we're just not ...

Unknown Attendee

Fair enough, Frank, and I understand. And I can accept your response. No apologies necessary. Do you have any significant fears of a major supply interruption in the PGM market? We all know what's going on in South Africa. We don't know ultimately how that's all going to unfold. Clearly, there are concerns. And I wonder, to what extent you as a management team, may have fears of a major supply interruption and anything that you might be doing in connection with that possibility?

Francis R. McAllister

A fair question, great question. Look, the Palladium market going forward and the platinum market going forward are supply constrained, just as you mentioned, just as I had said in the past. Obviously, South Africa is faced with great headwinds at this point in time. They're not just cost headwinds. They're political headwinds, they're operational headwinds, they're labor-related, in particular, and the labor relations down there are strained at the best. I think that's perhaps a soft tone to be able to say it at this point in time. We know the people there very well. We're intimate in terms of discussions with them on the legitimate areas. We don't talk price and we don't talk production because those things are off the radar screen. But we observe exactly what they're doing and we know them personally. They're a good group. They're good managers. There's been turnovers in their ranks down there this past year. Obviously, that's because they've had significant challenges. And the challenges going forward, when you put together a new shaft down in South Africa, which has to go down some to the depth of 2 kilometers, that's something that in the planning and outfitting and development stage takes up to a minimum of 10 years and some of them are expressing as much as 15 years to put in place. Now, what's happening at the present is some of those development initiatives are being held back, being held back simply because they cannot fund them at these current prices. I think probably, over 2 million ounces in the last part of last year were underwater just simply to meet the cash cost of operations, forget the development cost down there. We share and we will continue to share with the industry, what the cost on a palladium equivalent basis looks like. And when you’re cost-constrained like that and against prices, the only thing that can happen is eventually production will be shuttered or in fact, prices have to go up. Now, the palladium market and the platinum market are both supply-constrained and when it comes down to the demand, the demand is exceeding production in each one of them. We look at the numbers from the standpoint of palladium and palladium is far, at this point, ahead in terms of the deficit than platinum. Let me just sort of give you some numbers that we look at. In 2012, it looked like 700,000 ounces was the deficit for palladium. That doesn't matter who you look at, it was a big deficit. So it's Johnson Matthey puts numbers out. We could get a private group to put together some numbers for us. Our platinum last year was in a deficit of 200,000 ounces. Now move forward to the next 2 or 3 years, during 2013, that's this year, the supply deficit is projected over 1 million ounces. When you go to 2014, it's projected at 1.5 million ounces and it continues to grow from there. When you look at platinum this year, it looks like it's 60,000 ounces despite the production interruptions and the lower production in South Africa. 2014, that goes to 370,000 ounces, in 2015, 325,000 ounces. So to a certain extent, both of them are constrained but for the production to continue uninterrupted at the levels where South Africa is producing 70% of the world's platinum and 38% of the world's palladium -- and I, let me reiterate, they produce 38% of the world's palladium. So when they produce less platinum, they're producing less palladium on a two-for-one basis less. So the issue there is one of, will the prices be pushed up simply because of cost push? And my guess is that is what's going to happen and we'll wind up having prices higher. Will that shutdown some of the demand? Of course, it will. In some cases, perhaps, the platinum side will shut down a little bit of the jewelry side. But from the standpoint of catalytic converters, our catalytic converters for gasoline now is predominantly a palladium-based technology. The diesel cars still require platinum. We have to see Europe recover and the diesel cars continue to be produced in Europe for platinum to see really good surging demand. And quite frankly, what these demand numbers I'm giving you would suggest is that Europe may languish yet for a few more years. I'm sort of rambling on, I apologize. But the reality is the market is very, very robust. There is no alternative except for our platinum and palladium. And I give you one sort of nugget. If you run out of palladium with catalytic converter, the only place, the only recourse the auto industry have is to resume using some platinum to augment the fact that they can't get enough palladium. Now, you can figure out the price dynamics of that. If you're using something that's $745 this morning, you now have to move to something that $1,604. Now, what's the price dynamics between the 2 metals? Platinum is not going to come down because South Africans would have to shut down their production. Platinum is going to go up because they're demanding more platinum now more from catalytic converters and you've run out of the palladium. So what happens to the palladium price? And I'll just let the imaginations of everybody on the call figure that one out.

Unknown Attendee

Fair enough. Last question, the shareholders meeting. When do you expect to be able to announce when that will occur? I assume it will be in May or June but...

Francis R. McAllister

It will be in May. The date, at this point in time, is May 2. I will be at the Stillwater Mine and bring your lazy clothes, if you will. Bring the clothes that you would not want to get dirty and go underground with us. Going to be at the Stillwater Mine where it's just -- this is an exciting thing. We had a family day for our worker and their families last year. The guys, I mean, it was just something to bring a tear in your eye to see the people go underground. Children, obviously we had a cut-off age to having the children, wives and fathers and uncles and cousins going underground. We learned that we can do that in a safe, protected way. Obviously, we aren't taking them off to the extreme parts of the mine. In this case, we'll take shareholders over to see the tunnel-boring machine which is well, literally only about a thousand feet back into the mountain which is quite easy.

Operator

We now have a question from Sam Crittenden with RBC Capital Markets.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Just a question on growing your workforce. So if you could just remind us where you're at with the number of miners you have now and how many miners do you think you'd need to sustain the sort of 600,000 ounce level of production you're talking about? And then, just finally, how many workers you're expected to sort of retire over the next 5 years? Just sort of curious on how you're thinking about that ramp up in the workforce?

Francis R. McAllister

Kevin Shiell winds up worried about this at night when he goes to bed and worried about it in the morning when he gets up. I'm going to let him speak to this because it's his one of his major drives and what he does. And when we sit down with the board, and when we sit down with management, he has the numbers, he talks about them. He talks about the attrition rate, he talks about the attrition not just from the standpoint of miners retiring or moving on in their lives but obviously moving onto other mines. Let me preface this just a little bit ahead before Kevin gives you the numbers, to say only that in 2008, we made a very large change to our manpower dynamics. And that change came when we moved from what we call the 7 on, 7 off work schedule were a miner could work 7 days, 7 11-hour days and then be off for 7 days. And that allowed him to sort of live anywhere he could want to be, where his family might be. Whether it was in Idaho or in Wyoming or Nevada or even Arizona. So they lived all over the place. What we concluded is that sort of made us a transient mining workforce with people moving in and out. And the turnover rate was extremely high because of that, because they're up in Idaho and the Idaho guys are hiring. Why would they go back to work at the silver mines instead of continuing to make the commute to here? We changed that and obviously, the workforce understood what we were doing and why we were doing it. We worked with them in the process of doing it and we changed it to a 4 on, 4 off schedule. What we now have is really a Montana family workforce. And it is what's happened in the workforce as a result of that is dramatic. Productivity, safety, turnover rates, supervision, you name it. It is changed. And the culture amongst our miners is just, I have to tell you, at this point in time, is really very, very high and very good. The collaborative nature, we've done some surveys in the last year which just show that the change that's taken place over this last 3 to 4-year period of time since we made that change that that was the right way to go. Even though we did lose a few miners upfront. Kevin, I'm sorry. I'm going to stop. Why don't you tell them the numbers?

Kevin G. Shiell

At the beginning of 2012, we had about 450 miners across both mines. And where we need to go, we need to add about 90 miners by 2018. So that number could be about 540 and that's what's driving the miner through training program. Phenomenally, we'll have about 90 people committed per year in that program for the next 5 years. And obviously, that focus or that scope will change based on the attrition we see as we march forward through the plan.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

And how long does it take in the miner training program? Like once you're in there for a year, you're sort of out working at that point? Is that the time frame?

Kevin G. Shiell

It's different between the 2 mines. I mean, if we had the best of everything. It would be about 1 year program. The reality is we've condensed that, consolidated that program a little bit and it's basically a 6-month program. And then they go out into the workforce and work with a miner 1 or a miner 2 to gain more experience. And realistically, by the time they're a miner 1, it's about 3 years out.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

And you're getting good demand for that program currently? What's the employment like in the general area? Are people wanting to come work at the mines right now?

Kevin G. Shiell

Yes. That's -- we're...

Francis R. McAllister

When we open up the call in, sometimes we get about 10 times as many people on the roster as we can handle at that point in time. Now, let me point out. We're not that far away from the Bakken. And obviously, employment in buildings has been affected dramatically by that. But at the same time, the rate of our -- the new hire sign-ups is very, very high. It's very good. We're pleased and that gives us the ability to make sure that we get the right people.

Operator

And we have no further questions, Mr. McAllister. Please go ahead with any closing remarks.

Francis R. McAllister

I'll just comment that we're getting close to the hour point that people have budgeted for the call and I appreciate your patience and attention today in joining us. The future looks really great and thank you very much. Thank you, operator.

Operator

Thank you, and ladies and gentlemen, this conference will be available for replay after 12:00 p.m. today through midnight, Wednesday, March 6. You may access the AT&T executive playback service at any time by dialing 1(800)475-6701 and entering the access code 281224. International callers, dial (320)365-3844 using the same access code, 281224.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Stillwater Mining Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts