Gregory A. Wing - VP and CFO
Stillwater Mining Company (SWC) Denver Gold Forum Conference September 23, 2013 1:35 PM ET
Our next presentation is actually a PGM company, its Stillwater Mining based here in the United States as well. And we have Greg Wing, the Vice President and CFO to present for us.
Gregory A. Wing
Well, good morning and thank you for joining us for a few minutes of discussion on Stillwater Mining Company. I guess I need the green button I assume advances, is that right? There we go. As in all these presentations, we do have a disclaimer slide. We will be making some forward-looking statements and also alluding to some non-GAAP measures. We do want to abide by the Safe Harbor’s in those.
I thought what I would do today is discuss for a few minutes the Stillwater itself and then spend a little bit of time on the PGM market, since those may be unfamiliar to some of you.
This is a map that shows where Stillwater’s operations are located. We are a PGM or Platinum-Group Metal producer that produces about 500,000 ounces of platinum and palladium a year and about a 3.4 to 1 palladium to platinum ratio. The mine -- the trend that we’re mining is called the J-M Reef. It’s about a 28 mile trend, located in the Beartooth Mountains of south-central Montana. We’ve been operating there in one mine since about 1986. The grade of the resource there is -- so far as we know the highest grade PGM resource in the world.
However, it’s a little more challenging than in some other areas. The part that we’re mining is part of a very deep trend that was broken off when the Rocky Mountains were formed and it’s tilted up at about a 55 degree angle. So as a result, we need to tunnel parallel to that reef and go up into it to mine it vertically in levels underground.
We have two mines, the Stillwater Mine is located on the -- towards the eastern end of the trend and the East Boulder Mine is located towards the western end. In addition, we have a smelter and a base metal refining facility located in Columbus, Montana which is on the Interstate Highway I-90 and we have our headquarters in Billings, Montana.
In addition to mining -- because we’ve the smelter and refinery, we do a great deal of recycling as well, and we will talk about that little bit more in a minute. The lower half of this slide shows a cross section of our operations. The sort of tunnels that you see in the mine there or just that on the right you see the Stillwater Mine and on the left the East Boulder Mine.
Adjacent to those operations, we have some new developments that we’re undertaking as well. The most advanced of those is to the extreme left, it’s called the Graham Creek project. It will come online probably in late 2014 or 2015, expanding the size of the East Boulder Mine and in 2015 probably adding about 30,000 ounces a year to our base 500,000 ounces of production.
At the Stillwater Mine we had two areas of extension. The first we call the lower west or lower far west, which is to the western extreme of the Stillwater Mine underground. That’s a little less for advance. It should come online in mid 2016 and ultimately we will add about to 45,000 ounces a year to our production.
And then to the extreme right of the slide is the Blitz project. The Blitz may be thought of as a replacement project for much of the Stillwater Mine. It’s a much longer term and much more expensive project. It will take probably at least to 2018 to complete. We have a tunnel-boring machine and a parallel conventional drift, both going out about 4.5 miles to the east from the existing infrastructure. The thought is to also add a [portal] allowed at the far end at some point.
So our hope is with all of those projects not only to replace some depletion of production that will come about over the next 10 years, but also to grow production up from about 500,000 ounces today to around 600,000 ounces in -- later in this decade.
I mentioned our recycling business. This is just a -- or few pictures that illustrate that on the lower left, you can see the material as we receive it. The material comes in typically in super sacks. It’s a ceramic material. It’s already been de-canned and typically its very high grade in platinum, palladium and one other metal rhodium.
On the right, in the lower picture, you can see our automated assay facility. This -- the robot that you see there processes the samples and then puts them through an x-ray assay. The typical timing of the assays in the recycling industry would be about 30 days. We can assay in about 7 to 10 days. That’s very important to our suppliers because it means that we can completely settle and pay them off within basically a week or week and half. So they have their working capital back to be able to reinvest in the business.
At the top of the slide is an indication perhaps how popular that approach is. We’ve seen significant growth not only due to stronger prices, but also due to adding new suppliers. And to the extent that our rate of recycling in the second quarter of this year, if annualized, would be about 700,000 ounces a year. So that’s actually greater in terms of total volume than our mining. I should add that, that’s a margin business, so it’s not quite as profitable. But on the other hand, it’s a low capital business, so it’s attractive that way.
These are just a few numbers that indicate our financial performance recently. We give guidance in three areas. First at our total production, which again is -- our guidance is 500,000 ounces this year. If you annualize the 630, six months number, you can see that we’re a little bit ahead of trend at that point.
Net income was off a little bit compared the year before. That’s attributable to some unique circumstances that took place. We had a bit of a proxy battle earlier in this -- earlier this year. And there were some costs associated with that and with some early investing of shares that resulted from the change in control as a result of that.
We have a strong cash position. We have about $450 million in cash and short-term investments. And in addition to that we’ve a line of credit that’s -- of which we have available about $100 million. Total cash costs have been increasing each year. One of the challenges of an underground mine is we get a little bit further from the portal every year. We also have been doing some training of new people to staff those new operations that I was -- those expanded operations that I was showing. So we have some costs there.
EBITDA is more or less in line with our capital expenditure year-to-date. Our recent guidance for capital is about $145 million to $155 million. Its -- I’m believing at this point that we will probably adjust that guidance down somewhat in the third quarter as well.
We have a significant -- because of where we operate, which is in a very pristine environmental area, we have Wilderness area right adjacent to where we operate. There is a lot of focus on corporate responsibility. Our first in priority of course is employee safety and also a focus on wellness not only for our employees, but for their families as well.
We have adapted the core safety initiative, which is the National Mining Associations recently adopted safety program that consist of a series of stages or modules that could be implemented and we’re integrating that into our preexisting safety programs. From an environmental standpoint, we obviously need to be performing in an outstanding manner. We are permitted at our smelter and refinery to emit just 75 tons of S02 a year that would be substantially less than any other player in the industry, but last year we emitted less than 3 tons. So again, we’re setting a standard there.
We also took a look -- the industry took a look at our carbon footprint recently and again our carbon footprint is substantially less than the most of the other players in our industry. We have the strong focus on community. One of those is Good Neighbor Agreement. It was put in place in 2000. It's legally a mining agreement in which we agreed to cooperate with the local NGOs. That model actually has made them advocates for us. It's also ensured that we’re in tune with what the community view or the community concerns. It's been a very cooperative and very effective model that’s avoided legal challenges when we want to do sort of things differently. In other words, we first go to the NGOs, describe what we’re going to do and work with them to find a plan that’s acceptable. We feel that that’s an excellent model for the mining industry, and in some of our other projects that we have we’re also seeking to apply it there.
Finally, we did have a change in our Board of Directors in May. We welcomed four new directors and retained three of our prior directors in the end. We have seen the new Board [cohorts] very effectively with the existing directors. They do have a program underway in which they’re looking very closely at all of the processes and all of the operations that we have in the company where the focuses indicate here on capital allocation, on corporate activities including SG&A.
In the SG&A area we had been spending a fair amount of money on marketing jewelry or promoting jewelry for palladium jewelry, and that has been scaled back because as we look at the markets we don’t see a need to project jewelry. We believe that it will be forced out by price increases going forward. In the mining operations we’re looking at cash cost to see if there are ways to scale those back. There may not be short term ways to do that, but there are significant opportunities in the longer term we believe.
And then finally we have development and exploration projects, the ones I mentioned in Montana. We also have a property in Canada, the Marathon Project. We’re looking at the economics on that. And we have a copper gold project in Argentina that we acquired a number of years ago and we’ll be looking at that to see how best to apply that strategically to the company and its assets. The focus of the new board will be to look at rates of return, to look at applications of capital and to focus on maximizing shareholder value.
I now would like to talk for just a few minutes of the remainder of the time perhaps on palladium and the palladium markets; just a few thoughts on that. If we look just at palladium, the largest sources of production are first in Russia. Norilsk Nickel being most of that production as a byproduct of their nickel operations. As a result the amount of palladium that they produce is driven by nickel markets. They’re producing as of 2012 about 42% of the new mine production of palladium each year.
As the slide indicates that total production is about 6.3 million ounces. To put that in perspective that would compare to about 80 million ounces of new gold every year. So these are very small markets. The South Africans or Southern Africans including South Africa and Zimbabwe produced last year about 41% of the new mine production. The Canadians would largely from byproduct to nickel but also through North American Palladium which is the other primary palladium producer in the world produced about 8% and all of the U.S. production, the 6% that shows on the slide was us.
The slide mentions Russian State inventories, I’ll get to those in a slide or two here. This is actually a slide of the supply of palladium, history from 2006 to 2012 and some sort of simple minded projections of 2013 through 2017. What we’ve done here is to put in Johnson Matthey’s projections or history of what projection has been historically by location. As you can see again South Africa and Russia are the major producers.
The black section towards the top is actually immaterial, that’s been exported from Russia out of their strategic inventories that’s been going on for about 20 years. In the early years they were producing between 1.5 -- or they were exporting between 1.5 million and 2 million ounces over and above production, that’s dropped down recently. Last year it was about 250,000 ounces. This year it appears it might be more or like 500, but our projection going forward is that that remains minimal.
And then lastly is the recycling, which is the brown at the top. What we’ve done from 2013 through 2017 with a little bit of a tweaking for reasonableness it's just to take the five year trend and project that forward. So, what you can see is that there is very little growth projected in the palladium supply. There is a little bit of new production coming on, but we believe that that will for the most part be offset by a depletion in the existing mines.
Turning to the demand side of the palladium market; we can see that by far the largest component of demand for palladium 70% last year well was for automotive catalytic converters. There are other minor segments of that market including electrical at 13% and then dental, chemical and jewelry as other minor segments. Doing sort of the same thing that we did on the supply side; we’ve layered in the contribution for the last six or seven years and then projected for the next five years; in this case just projecting using historic five year rates which does reflect the affect of the downturn as well.
And that what we see here obviously is the growth in catalytic converters which is driven by growth in the automotive consumption or automotive production has continued to increase significantly and it's projected to continue to increase. Although our forecast here are relatively simple minded in the methodology, they actually agree fairly closely with what those who study each of these segments in more detail conclude as well.
If we take those two slides and sort of superimpose the results of them arithmetically we can see that and again we’ve not included any investment effects in those slides nor do we in this slide. We can see that the supply of palladium has been in surplus in some years very significant surplus over the last five to six years, and last year was in deficit and again to the extent you believe our numbers any way we see growing supply deficits going forward very significantly to the extent that by 2017 we could be well in excess of a 2 million ounce deficit.
Why does supply not grow, a fair question. First of all in South Africa many of you maybe well aware of some of the challenges there. Our palladium production in South Africa is driven by platinum, and the platinum demand has been down particularly since the European economy which is the primary source of diesel automobiles has been sort of flat on its back since the downturn in 2009. There are ongoing political and labor issues particularly that limit the ability to scale back production from uneconomic mines there. So money losers are forced to continue producing.
The mining conditions are getting deeper and deeper even though there’s a large resource available in South Africa. It's getting more and more costly and more and more complex to produce. There are persistent limitations on power and water both of which become factors particularly in putting in new mines. There is under spending because of the loss, because of negative margins, negative cash margins on some of the operations there. There’s under spending on sustaining capital which I think will have longer term issues. And finally just the cost profile there is increasing substantially as well.
In Russia, Russian palladium production again is governed by Nickel. So to the extent if the nickel price remains fairly weak there’s no incentive to drive palladium production up there. The Russian government stocks appear to be depleting. There is some opportunity for growth in recycling particularly if prices continue to strengthen, but our strongest projections of that don’t come anywhere near covering that deficit. And finally the new mine supply as I mentioned is primarily replacing depletion not adding to production.
We did a little -- a couple of slides or two or three slides here that might be called Economics 101. What we did was very simplistically took the relationship between price and demand. Our supply in this case over the last eight years and applied the line of best fit to that. What we learned from this line is that, there is no opportunity to increase production in response to price and therefore supply is relatively fixed in these markets. There are no undeveloped resources out there to develop that are economically attractive at this point.
Doing sort of the same thing with those different segments in a demand area, the automotive catalyst -- what we see here is not that demand goes down as price goes up which is what you would normally expect. But rather that, that demand is driving price. So that is growing demand is forcing the price to go up. In electronics and to a similar extent in chemical we see the same lack of elasticity if you will the lack of response to price. And only in jewelry and although we don’t show it here in dental do we see what we would expect to be a typical demand curve where as demand goes – as price goes up demand goes down.
If we sort of layer all of those together you’ll see that the composite demand curve which is really the price driver is completely inelastic to new -- to the price increases. Incidentally if you take this chart although it's probably not appropriate to do so for our purposes here and overlay a demand curve you can get some idea of where prices might be going in the future.
Just one other way of looking at this, as we begin to conclude, first of all if we take those three inelastic components of demand that is the catalytic converters, electronics and chemicals, we see that this year 94% of the available mined and recycled supply of palladium will be consumed by those inelastic elements of the market. If we extend that out to 2014 next year that will be at or in excess of 100% which has -- it raises interesting questions about where the market is headed.
Given the limited ability to increase production, we see opportunities perhaps to pull metal out of inventories to the extent that those are available. To increase recycling as prices strengthen and perhaps ultimately to substitute platinum for palladium in catalytic converters again that will not make sense to do however until the price of palladium reaches the level of where consumers are indifferent between palladium and platinum which would suggest a much higher palladium price.
So again in conclusion Stillwater we believe provides the premier investment opportunity in palladium and we believe that the robust demand fundamentals provide some very interesting opportunities moving forward. Thank you.
Thank you very much Greg. Unfortunately we don’t have time for questions.
Gregory A. Wing
(Indiscernible) I anticipated.
[No formal Q&A for this event]
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