- South African strike and Russia-Ukraine crisis pose very complicated supply-side challenges for PGM and associated industries in the near term.
- Demand for PGM metals to expand through 2014 and beyond, especially considering the resurgence of global auto industry.
- Stillwater Mining has solid financials and nearly $500 million on balance sheet, while CEO McMullen hinted the possibility of the company returning cash to its shareholders in near term.
Over the last five years, Stillwater Mining (NYSE:SWC) has returned 255.2%, outperforming its industry peers who have struggled to post positive returns. The Billings, Montana-based miner is engaged in developing, extracting, processing, smelting, refining, and marketing of platinum group metals (NYSEARCA:PGM). Despite it being up 24% year-to-date, there are a handful of reasons that should propel the stock price higher.
South Africa and Russia are the dominant producers of platinum group metals, contributing to as much as 80% of world production. However, recent developments in both the regions point to possible interruptions in production with far-reaching effects.
Platinum mining in South Africa, which accounts for nearly three quarters of global supplies of the metal, has been crippled by widespread strikes in the nation. The stoppage has taken a toll on the output of the metals producers as thousands of employees downed tools at mines across the nation, causing millions of dollars of revenue loss since January. Anglo American Platinum (OTCPK:AGPPY), Impala Platinum (OTCQX:IMPUY) and Lonmin (OTCPK:LNMIY), the world's three biggest platinum producers, may be forced to close shafts or sell assets in South Africa due to the strike that is about to enter its twelfth week. While negotiations continue, the disruption in production will create shortages.
On the other hand, sanctions imposed by the European Union and the United States are pushing Russia towards an economic decline as the intensity of their penalties increase after the annexation of Crimea last month. In doing so, President Vladimir Putin sent his popularity soaring to a five-year high, but the effects of his decision are beginning to show. Russian equities slumped to become the worst performer this year and the economy set to suffer more than any other western or emerging economy. Russia accounts for over 40% of global annual production of palladium and roughly 15% of platinum production. So far there are no signs that either side is willing to concede, as a result the Russia-Ukraine crisis could lead to additional sanctions being imposed against Russia, including against palladium and platinum exports. The limitations on supplies could have severe impact on PGM metals' prices and associated industries.
Improving global auto industry
While the supply-side is likely to face a few challenges, the demand for PGM metals is set to expand this year, according to a study by Scotiabank. Auto catalysts account for nearly 40% of platinum demand and around 67% of palladium demand. These demands are being supported by stronger than expected recoveries in the US and Chinese auto sales in recent years, a trend that is expected to continue this year as well.
After enduring a six-year slump, with sales falling to a two-decade low, the European auto industry is poised for a 2% to 3% upside this year. As a matter of fact, sales figures were up for the sixth-straight month in February. A recovery in EU auto sales should further increase the demand for PGM metals. In all, Moody's Investors Service expects global light vehicle sales to grow 3.2% in 2014.
The improving consumer confidence, amid expectations of a more robust global economic growth this year, is likely to spur platinum demand in other sectors as well, for instance, the jewelry manufacturing that accounts for some 34% of the metal's total demand. As might be expected, industrial demand for all PGM metals is expected to pick-up through 2014, in line with ongoing economic recoveries.
In 2013, Stillwater's revenue grew to $1.04 billion, up 29.9% from 2012. Mine production increased to 523,900 PGM ounces from 513,700 ounces in the previous year. The company has manageable debt, which is up by 5.5% from 2012. The company took impairment charges of $461.8 million (before-tax) on the Altar property in Argentina and the Marathon properties in Canada. Adjusted for these impairments, the after-tax consolidated net income was approximately $49.5 million for 2013, compared to $55.0 million in 2012. As costs for recycling remained constant, profit (before-tax) increased to $35.5 million in 2013 from $10.5 million in 2012.
At the year-end, the company's cash and liquid investments totaled $496 million. During the recent earnings call, CEO M J McMullen reiterated his goal:
"...to be able to return cash to shareholders in some form or another in not-too-distant future."
Considering Stillwater's current liquidity position along with debt, CEO McMullen indicated that company is considering dividend payouts or stock buybacks in near future. In either case, it will have a positive effect on the stock price.
Stillwater is the fifth biggest palladium producer and seventh biggest platinum producer in the world, and the only significant PGM metals producer in the Western hemisphere. The strike in South Africa and the Russian-Ukraine crisis pose some very complicated supply-side challenges in the near term. In contrast, Stillwater offers safety and stability due to its location and, thereby, is among the best positioned in the industry to gain from the production disruptions or supply limitations in South Africa and Russia, respectively. The resurgence of global auto industry is likely to further increase the demand for platinum and palladium through 2014 and beyond. Lastly, its financials look good and - with nearly $500 million on balance sheet - the possibility of cash distribution only adds to its appeal for the investors.