This article is a follow-up of my earlier article entitled, "The only safe bet in the palladium mining sector."
Since my last article written on February 20, 2014, Stillwater Mining Co. released the Q4 2013 earning with the year 2013 results. The 10K SEC filing is now released, and the company discussed the financial in its conference call on March 3, 2014.
Then, I felt compelled to write a new and more up-to-date article that will add some important elements to my study.
1 - Introduction.
Primarily, Stillwater Mining Co. is a mid-tier PGM specialized in developing, extracting, processing, smelting, refining and marketing palladium, platinum and associated metals. It is the only mine producer of PGM in the U.S. (which offers safety and stability due to its location and is unique to the industry), and just one of only 2 palladium mines in North America with North Palladium Ltd. (NYSEMKT:PAL) in Canada (which presents some serious financial concerns now. - Read my article about PAL here.).
Nearly all of the other PGM mines are located either in South Africa: Anglo, Impala (OTCPK:OTCPK:AGPPY), Lonmin (LON. LMI), Aquarius (AQP.L), Northam (OTCPK:OTCPK:NMPNY) or in Russia: Norilsk (OTCPK:OTCPK:NILSY).
Stillwater Mining Co. is the only U.S. producer of palladium and platinum. It is the largest primary producer of platinum group metals outside of South Africa and the Russian Federation.
Stillwater Mining Co. is exploring for nickel, copper, gold, and silver ores, too. The company conducts its mining operations at the Stillwater mine located near Nye, Montana, and at the East Boulder mine located in Sweet Grass County, Montana.
The company is developing a Canadian project with Mitsubishi Corp. (OTCPK:MSBHY) (25% stake) called the Marathon prospect. It is a PGM-copper project located in Ontario, Canada, and also the Altar project, a copper-gold project, which includes 8 wholly-owned mining concessions covering 7,771 hectares, 5 optioned mining concessions covering 3,705 hectares, and 1 staked mineral concession comprising 469 hectares in San Juan, Argentina. Both projects will not be developed within 3 years at least, if ever.
The company operates a smelter and a base metal refinery located in Columbus, Montana.
Another part is the recycling business of spent catalyst material to recover palladium, platinum, and rhodium at its smelter and base metal refinery. It is a growing business, and I will talk about that later.
As of December 31, 2012, the company had proven and probable ore reserves of about 46.1 million tons at its Montana operations. Stillwater Mining Co. was founded in 1992. Click here to access the Home page.
On December 8, 2013, Stillwater Mining Co. announced the appointment of Michael J. McMullen as the new CEO. Michael J. McMullen is also serving on the company's board.
2 - Stillwater Mining: 3 different segments.
- The mining sector: The company has 2 distinct sites in Montana. The first one is called the Stillwater mine with its extensions (Blitz project - 2010 and the lower far West side - 2016) and the second is the East Boulder mine with its extension called the Graham Creek project. These 2 mines are situated within the J-M Reef (Montana). The only source known of PGM in the U.S.
- The recycling division: Stillwater Mining Co. has been recycling spent catalyst materials at its metallurgical complex in Columbus, since 1997. Impressive growing business.
- The non-core mining "projects": The altar in San Juan province Argentina (Copper/Gold) and the Marathon project situated in the Province of Ontario Canada (PGM/copper). If you want more information about these 2 projects, please go to my earlier article, linked above.
3 - Production highlights:
|Mined K oz (2013)||Q1||Q2||Q3||Q4||2013||2012|
|East Boulder mine (2)||34.5||40.5||40.4||132.6||158.0||n/a|
|Total mined K oz||127.1||131.5||124.2||231.1||*523.9||*513.7|
|Recycled K oz processed||154.2||175.0||167.5||120.0||*616.7||*445.3|
|Total combined K oz||281.3||306.5||291.7||350.5||1,140.0||959.0|
* Not including the by-products (Rhodium, gold, silver, copper and nickel.) included in the cash cost which was $500/oz mined.
* The recycled production is a total of 3 metals (Palladium 56%, Platinum 36% and Rhodium 8%)
4 - Balance sheet.
Here is a good resume of the 2013 numbers given by Michael J. McMullen CEO at the conference call:
"Our fourth quarter highlights. We had record total revenues in 2013 of $1.04 billion, which was a 29.9% increase from the previous year. And mine production was just under 4 -- 524,000 PGM ounces, which was up also from the 514,000 ounces the previous year. We had a record 616,000 ounces of recycled PGM processed for the full year, which was a 38.5% increase from the previous year. We took impairment charges on the Altar property in Argentina and the Marathon properties in Canada. And we have adjusted after-tax consolidated net income attributable to common shareholders of $49.5 million, excluding the impairments. We finished the year with a very strong liquidity position. Our cash plus short-term investments were $496 million."
It is very impressive and show a significant growth year to year. Let's put them in a table and compare to the last year.
|Financial information||2013||2012||Change %|
|Stock price 03/05/2014||13.77||12.34||11.58|
|Revenue $ billion||1.0400||0.8002||29.97|
|Outstanding shares in million||119.63||117.58||1.74|
|Liquidity $ million||496||*642||-22.74|
|General and Administrative cost $ million||42||40.9||2.68|
|Interest income $ million||4.5||2.3||95.6|
|Long-term debt balance $ million||308.7||292.7||5.46|
|Earnings excluding impairments $ million||49.5||55||-10.0|
|Earnings per share $||*0.41||0.46||-10.87|
|Profit from recycling(pre-tax) in $ million||35.5||10.5||338.09|
|cash cost per oz recycled $||959||946||1.37|
|Cash cost per oz mined (Stillwater) $||484||456||6.14|
|Cash cost per oz mined (East Boulder) $||525||562||-6.58|
* The 2012 liquidity included the net proceeds of the Company's $396.75 million offering of convertible debentures in October 2012.
* 2013 earnings calculated with the real outstanding 119.63M shares.
Revenue is up almost 30% from year to year and liquidity is at a very decent level. The debt is manageable and increased only 5.5% since 2012. I hope that the new management will be able to cut this amount in 2014.
The cash cost for recycled PGM is constant just under $1,000, which is very good and I noticed an increase in profit of $25M in 2013 compare to 2012.
Cash cost for East Boulder and Stillwater is around $500 average and it is very reasonable.
5 - 2013: Assets impairment ($350.1 million after tax). The Altar project and the Marathon project.
If you read my earlier article, you will see that I suspected that the Marathon impairment was next in line. Now, it is a fact. Here is what was revealed in the 10K filing:
"The 2013 full year results include a $290.4 million ($226.5 million, after-tax) impairment charge reducing the carrying value of the Altar mineral property in Argentina to its estimated fair value of $102.0 million . The Company also recognized $171.4 million ( $123.6 million , after-tax) impairment charge in 2013 reducing the carrying value of the Marathon mineral properties (and related mine development and depreciable fixed assets) in Canada to their estimated fair value of $57.2 million."
Altar and Marathon are still a liability in my opinion, and should be sold as soon as possible. The estimated value for both projects is now $159.2 million, which is still a negative in the balance sheet.
Despite this massive impairment in 2013, totaling $350.1 million, the stock price corrected only slightly and recovered fast? Yes - it is $2.93 a share gone up in smoke.
6 - Conclusion and Analysis.
- Positive points:
1. J-M Reef is a unique asset that will support SWC growth for many years. This is a solid 22 million of oz, palladium and platinum combined proven and probable reserve. (Pd 78% and Pt 22%)
Here is what McMullen said on the conference call:
"...I just like to remind people of our world-class mineral assets we have here in Montana. We have 2 mines and mills on the J-M Reef. It's the world's highest grade PGM deposit. But at this point, only around 9 miles of that 28-mile strike length has been developed. We are updating our proven and probable reserves today. They now sit at 22 million ounces of P&P, 78% of which are palladium, 22% are platinum, both are metal. And exploration beyond their reserve areas suggests that there may be an additional 102 million tons of undeveloped mineralized material controlled by us at an average in-place grade of approximately 0.4 ounce -- 0.48 ounces per ton."
2. Michael J. McMullen CEO is a good leader with a long and focused strategy.
Here is what he said on the CC:
"... the management style that I have is I like to challenge each area of the business, so the mining is one area, the processing is another area, the smelter is another area, to see where the bottlenecks in the production line are. And then as we solve or fix each bottleneck, then we move the bottleneck to another part of the business, and then we now challenge them to deliver more. And so the key thing of getting more mill throughput at the Stillwater Mine, that had been the bottleneck. It's now no longer the bottleneck, and now we'll be challenging the mines to deliver more tons to fill the mill."
3. A good palladium price prospect due to a large deficit, and an average platinum price prospect for at least 2 to 5 more years.
I do not want to go into the details here, because it is a complex and long analysis. I may write a separate article soon about palladium and platinum spot price growth expectation. I will say that palladium has a tight market versus platinum, which is more abundant. But the situation for platinum can change rapidly because 78% of the platinum produced now is from South Africa.
4. Dividends in late 2014?
In my preceding article, I said that SWC may declare 2% or 3% dividend and/or start a share buyback. I am opposed in a share buyback program because it is not a positive from a shareholder perspective, but I will be happy to get the dividends. The subject was addressed on the last conference call:
Wells Fargo Securities, LLC, Research Division
I have a few quick ones. You have about $500 million of cash on your balance sheet, I believe. How much cash do you think you need to run your business? And is there a chance we see things like stock buybacks or special dividends?
M J McMullen CEO
I'll answer the second bit first, if it's okay. Yes, look, I made a very clear statement that my goal is to be able to return some to shareholders in some form or another in the not-too-distant future. So it's still too early for me to be able to give a firm timing of that and what form it may take, but clearly, a dividend or a special dividend or a buyback would clearly be options we can pursue. I think also that I tend to look at our liquidity position on a net liquidity basis, which is cash and liquid investments net less debt. And so we obviously do have some debt on the balance sheet, it's long-term debt and can't be called, but we'd still do have some debt. I think it's probably a little early for me to start returning funding to shareholders immediately until we've actually got into the business plan and see what we can do -- what we can drive the business to. But certainly, those options are all on the table for us."
Then, dividends buy-back or/and reducing the debt should be the next step. All 3 will have a positive effect on the stock price.
5. Recycling business is expanding.
As you can see, the recycling business has provided a net profit after tax of $35 million in 2013 compared to $10.5 million in 2012. It is expected to expand even more the next few years.
- A few negatives still...
As long as the Altar and the Marathon projects are part of the company, I see them as a liability and a risk, even if the cost of maintenance of these projects is low now. I simply hope McMullen will decide to get ride of both, either by selling the 2 prospects and get the cash, or sell Altar and spin-off Marathon the way it was explained during the CC.
The new management is still new (risk), and needs to prove himself to shareholders. So far, a lot of potential, but "actions speak louder than words." We will have to see down the road.
- Stock Analysis.
I believe the company is a growth stock for multiple reasons that I am going to explain here. Growth companies are the ones that have real potential for growth in the foreseeable future in a business safe environment. It is measured mainly by the progress they have made from year to year.
SWC is growing revenue now at a 12% pace, which is an attractive and healthy rate. The net cash is now at $496 million, doubled from 2012, if we take out the cash net of the $396.75 million offering of convertible debentures (October 2012). The company is not really threatened anymore by any large impairments from earlier investment mistakes and is focusing on its core business.
More, the recycling business, which is still small, is adding profit at a surprising pace. Net profit was only $10.5 million in 2012 and jumped to $35.5 million in 2013. This situation seems to be getting even better after analyzing the 2014 guidance and the conference call transcripts. The company can easily increase production by exploiting a new market barely used now. More, while increasing recycling production, the net profit margin will improve even more. Cash cost per oz from recycled PGM (Platinum, Palladium and Rhodium) has been constant at about $950/oz in 2012 and 2013, while net profit tripled.
Although this recycling segment is promising and adds to the net profit, the company focus is clearly on the core mining business at the J-M Reef in Montana. The company is focusing on Stillwater mine and East Boulder mine and their extensions opportunities. It is an important element for you to decide if the company is a "keeper" for the next few years.
One sign of future growth is found in the capital expenditure (Capex). Management has been very reasonable and pro-active if you look at the last presentation. Capital expenditure was a total of $218/oz in 2012 and was $246/oz in 2013. Better, the $129 million capex in 2013 will be increased to $145-$155 million in 2014.
The company introduced recently the concept of all-in sustaining cost per ounce (oz) *mined (Stillwater and East Boulder). *mined means the metal extracted not recycled.
|All-in cash cost $||768||833||805/855|
The cash cost is staying constant and may even decrease this year. This is a sign of productivity improvement. This all-in cash cost compared to the average price of palladium and platinum at a ratio around 70/30, which is what SWC is producing now. At today's spot price for Pd ($768) and Pl ($1,474), I calculated a price at about $980, which gives a net future profit of $150/oz and a double-digit growth projection for 2014 and probably 2015. All-in cash cost includes the sale of the metal by-products.
Another point that confirms SWC as a growth company is its business model strength. The company owns reserve of palladium and platinum (with other by-products) and has a proved and probable reserves of 22 million oz now (78%/22%). The business model cannot be more simple and effective. Extracts the metal from the ground and sells it at a net profit.
The company will probably deliver 2% or 3% yearly dividends and may cut the debt with the excess cash on hand, which is close to $500 million. The new CEO indicated that it wanted to reward SWC shareholders using perhaps a combination of dividends/share buyback/cut debt. As I mentioned, I am not in favor of a share buyback.
At last, and this is the true foundation that supports all the above, SWC is in a "business safe zone" called North America and is the only profitable mine. (I do not mention NAP because I do not think the mine will survive.). Most of the platinum and palladium produced is from Russia (Norilsk) and predominantly from South Africa (Anglo, Impala, Lonmin, Northam). No need to discuss why it is not particularly safe.
Stillwater is a "keeper" and I have shown why. My target for 2014/2015 is around $17.75, but I may revise it if the company declares dividends to $18.50.
On a negative note, the stock price is now above $15 (as of this writing), and I believe it is expensive at the moment. I decided to sell about 25% and keep the cash for the next weakness. RSI is at 80 and signals a over-bought situation. I'm waiting for a slight reversal to buy again.
Disclosure: I am long SWC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.