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Stillwater Mining Company (NYSE:SWC)
Q3 2007 Earnings Call
November 6, 2007 12.00 pm ET

Executives

Francis R. McAllister - Chairman, Chief Executive Officer
Stephen A. Lang - Chief Operating Officer, Executive Vice President
Gregory A. Wing - Chief Financial Officer, Principal Accounting Officer, Vice President
John R. Stark – Vice President of Human Resources, Head of Metal Marketing & Commercial Sales, Secretary and Corporate Counsel
Terrell I. Ackerman – Vice President of Processing Operations
Rhonda Ihde - Corporate Controller
Dawn E. McCurtain – Investor Relations

Analysts

John Bridges – JP Morgan
Rehan Chaudhri - Altrinsic Global Advisors , LLC
Victor Flores – HSBC Securities

Presentation

Operator

Ladies and Gentlemen, thank you for standing by and welcome to the Stillwater Mining Reports third quarter 2007 results conference call. At this time all participants are in listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded. I would now like to turn the conference over to our host Mr. Frank McAllister. Please go ahead.

Frank McAllister

Thank you. Welcome everyone. We appreciate you joining us for the Stillwater Company’s 2007 third quarter results conference call. I’m Frank McAllister as the moderator has indicated, the Chairman and Chief Executive Officer of Stillwater Mining Company. On the telephone with me here today are Steve Lang who’s our executive Vice President and Chief Operating Officer, Greg Wing, our Vice President and Chief Financial Officer and Jon Stark our Vice President of Human Resources, Secretary and Corporate Counsel, Terry Ackerman our Vice President of Planning and Process Operations and Rhonda Ihde our Corporate Controller. Also included here with us today is Dawn McCurtain our Investor Relations specialist.

First I’d like to remind everyone that some statements in this conference call are forward-looking and therefore involve uncertainties or risks that could cause actual results to differ materially from projected results. We discuss these in more detail in the company’s filings with the Securities and Exchange Commission including the risks factors discussed in the Company’s 2006 annual report on form 10-K.

Now, for the third quarter 2007, the company yesterday reported a net loss of $11.1 million or $0.12 per diluted share on revenues of $163.1 million. The loss was largely driven by manpower issues including a strike at the Stillwater Mine in July which reduced production during the quarter. The Union local representing employees at the Stillwater Mine Processing Facilities in Columbus had rejected a contract offer and went out on strike the evening of July 10th. They returned to work on the evening of July 17th after approving the new contract. So the strike itself cost the company about seven days of production during the quarter.

The company’s mines together produced about 128,600 ounces of returnable PGM material in the third quarter of 2007, a sharp 15% drop from the 151,300 ounces produced in the same quarter of 2006. Clearly the seven day strike isn’t the whole story.

Besides the strike, mining productivity was also an issue during the quarter. The work schedule changed at Stillwater Mine in late March which generated much higher than normal employee attrition rates there. We implemented this change understanding that it would increase attrition in order to utilize our existing workforce much more efficiently and reduce our reliance on mining contractors. However, the schedule change also caused some of our most experienced miners to leave for jobs closer to their families. As a result of these departures, productivity has declined at Stillwater as less experienced miners had to step into some of the roles previously held by more seasoned employees.

The attrition coupled with the distraction of labor negotiations and then the strike accounted for most of the drop in production during the third quarter this year. Meanwhile, the East Boulder Mine continues to make good progress in its difficult transition from bulk mechanical mining methods to more selective ore extraction. This has required developing new skills among much of the mining technical workforce there. We believe these challenges at both mines are transitional and will be overcome with experience but they did result in a difficult third quarter this year.

Financially, our loss of $11 million in the 2007 third quarter compares to a net income of $6.9 million or $0.07 per fully diluted share recorded in the third quarter of 2006. Recycling earnings for the year’s third quarter of $7.9 million were down a little compared to the $10.7 million earned in the same quarter last year. Recycling in last year’s third quarter benefited to some extent from increased inventory flows that shifted earnings disproportionately into the period.

The company sold 70,300 ounces of recycled platinum, palladium and rhodium during this year’s third quarter, down from 96,000 ounces sold in the corresponding quarter last year.

For the nine months ending September 30th 2007 the company has reported a net loss of $14.6 million or $0.16 per fully diluted share. While in the first nine months of 2006 we reported net income of $5.1 million or $0.06 per share. However, earnings for the first nine months of 2006 had included $6.9 million of profit from sales out of the palladium inventory received in the 2003 Norilsk Nickel transaction. These palladium sales from inventories came to an end during the first quarter of 2006 so there haven’t been any corresponding sales this year.

Recycling earnings to date in 2007 have totaled $21 million up from the $17.4 million for the first nine months of 2006 reflecting higher PGM sales volumes and prices on average in 2007.

As I usually do on these calls, I’d like to update you briefly on the status of our strategic operating initiatives at the mines. Most of you probably are aware that we began implementing these initiatives about three years ago on order to increase production and efficiency and reduce mining costs. The five operating initiatives include programs to strengthen mine safety performance and ensure continued excellence in environmental compliance. Secondly, to increase proven reserves, strengthen infrastructure and otherwise improve the developed state of the mines. Third is to shift emphasis away from highly mechanical bulk mining methods toward more selective ore extraction methods that will reduce waste and improve ore yields. Fourth is to cut costs in other areas so as to let opportunities develop and lastly to expand mine production to equal the permitted capacity at each operation over time.

We continue to make progress against all of these operating initiatives. Safety performance in the third quarter was excellent further improving an average incident rate that already is substantially lower than the average for the industry. We also have shown progress in our efforts to reduce the level of diesel particulate matter, or DPM as it’s called, within the mines. That’s the familiar black soot that diesel engines produce. This has been done in anticipation of much higher regulations that will take effect next year. These efforts include introducing bio-diesel blends that burn more cleanly, adding filters to some equipment, upgrading to more efficient engines, expanding ventilation flows in both mines and monitoring other emerging technologies and capital solutions in this area.

The new DPM standard which will take effect in May 2008 is a pacesetting effort that has challenged the mining industry to meet what will become the most stringent DPM limits in the world far exceeding those imposed by the EPA or other international regulatory bodies.

Our accelerated capital spending nonetheless, over the year is to improve the developed state of our mines both by updating and expanding infrastructure and by proving up ore reserves equal to roughly 40 months of production has improved our ability to mine more efficiently and has put our operations in order for the future. This program is now leveling off as our proven ore reserves approach target levels and major infrastructure projects reach completion. Consequently we expect our level of capital spending for mine development to decline somewhat over the next two to three years towards a more steady state of development program.

The operating initiative that we are most focused on at the moment is our transition to more selective mining methods. In the past East Boulder Mine has used exclusively sublevel extraction methods of mining which entail long hole drilling between levels in the mine and then blasting out large panels of ore. This moves large quantities of the drill but often results in significant dilution of the in-place ore and does not accommodate variations of the reef. Portions of the Stillwater Mine also have been captive to the use of the single mining method. While sublevel extraction will continue to have its place in our operations, by expanding our proven ore reserves and improving the developed state of our mines, we now have the flexibility to use other mining methods that may better match our mining processes to the configuration of our ore reserve in each mining area.

The transition to more selective methods including both captive cut-and-fill mining within the narrower scopes in mechanized ramp-and-fill mining in areas that are wider or more continuous requires not only changes to the way we develop certain areas, but also a transition to the mining and technical skills of our workforce. We are approaching these changes systematically and are continuing to made progress.

Our fourth operating initiative to expand production at the mines has been hindered not only by the strike in July but also by the need to train new miners to establish the skill sets needed to support these more selective mining methods as I’ve already discussed. Consequently we have concluded to shift our emphasis for a while towards addressing these transitional issues in the belief that production growth will follow as we add skilled and productive miners, trained and available, to staff the additional work areas.

There seems to be a reasonable compromise in our efforts to balance the change requirements and our growth objectives for the operations. Expanding production is now dependent on growth in skilled manpower. We still expect to achieve our goal of graduating about 100 new miners from our training programs during 2007 and actually at this point in time over 50% of our miners in Stillwater are graduates of the company’s training program. These graduates are excellent employees but in many cases they are still building and acquiring their mining skills. Experience suggests it takes between two to three years for a new miner to reach full productivity and we expect to see mining productivities steadily increasing as these new miners gain additional experience.

Turning to our recycling business, our volume of material processed has stayed fairly flat this year after growing substantially during 2006. Recycling is a business that complements our other operations well and we would like to see it grow even further. Recycling sales and production are not necessarily matched as some of the volumes are processed on a tolling basis for the account of others. While recycling sales were down a bit we processed a total of 98,600 ounces of recycled PGMs through our facilities during the third quarter 2007 up 9.2% from 90,300 ounces processed in the same period last year.

As we announced earlier we plan to construct a second smelting furnace in Columbus during 2008 which will accommodate growth both in our recycle business and in concentrate volumes processed in the mines. Besides addressing future growth, the second furnace should also enable us to continue processing during extended maintenance outages at the furnace and reduce our overall operating risk. Engineering design work on the furnace is now nearly complete and some long lead time items are now being ordered.

I’d now like to ask Steve Lang, our Chief Operating Officer to comment in more detail on our operating performance, the outlook for the balance of the year and on our progress against the mining initiatives.

Steve Lang

As Frank asked, I will comment briefly on the third quarter operating results and will provide an update on our mining strategic initiatives and our 2007 goals.

Mine production for the third quarter came in at 128,600 ounces at a cash cost of $326 per ounce. Frank has already reviewed the effects of the strike and the increased employee attrition on production. A lower production also was the primary cause of a higher cash cost per ounce in the quarter as our operating cost was spread over significantly fewer ounces produced.

The dislocations that came with the schedule changes at the Stillwater Mine have been painful but we continue to believe that the new schedule is vital for the longer term success of the mine. It has allowed us to drop from four operating crews to three, better utilize our existing workforce, as well as spread our rising costs of employee benefits over more hours worked and reducing our reliance on outside mining contractors that have proved prohibitively expensive.

Our most recent production guidance for 2007 was for total mine PGM output of between 555,000 and 585,000 ounces. Unless productivity strengthens substantially during the fourth quarter, it now appears that production will be about 550,000 PGM ounces. This lower guidance reflects both the third quarter and strike related losses plus somewhat lower forecasted productivity during the fourth quarter.

At East Boulder the third quarter grade of the mill declined despite the mining changes. This mine has grown significantly over the past four years and we are now positively emphasizing mining quality issues for a time rather than pushing further volume growth there. During the third quarter of 2007 we completed about 9,000 feet of primary development and about 116,000 feet of diamond drilling; Year-to-date that puts us in at just over 29,000 feet of primary development and 360,000 feet of diamond drilling. Our guidance for the year was 40,000 feet of primary development and 600,000 feet of diamond drilling during the year.

These activities have been affected along with production but we are still likely to achieve our primary development targets for the year. We’ll probably fall short of our guidance on diamond drilling footage although despite this shortage our drilling has managed to stay about even with our rate of primary development.

As I mentioned, cash cost came in at $346 per ounce for the quarter and at $324 per ounce year-to-date, both above our guidance of $295 to $315 for the year again mostly driven by weaker than expected mine production. We now believe cash costs for the year are likely to come in a little higher than guidance although exact level will depend on the strength of our fourth quarter production.

Capital expenditures through September totaled $62.8 million substantially behind our budget at this point. Our capital budget for the full year of 2007 was $108 million but we now expect capital spending for the year to be closer to $90 million. While the majority of the spending has been focused on capital development at the mines this year’s budget projected during 2007 that we would spend about $20 million toward a two year expansion and upgrade of the smelter and refinery. Some of this upgrade work has been completed but most of the dollars earmarked in the 2007 budget for construction for the second smelter will not be spent until construction of the furnace actually begins in early 2008.

Reviewing our major initiatives, first in this regard to safety, our reportable injury frequency for company employees continued its seventh year improvement despite the operational issues. Our year-to-date incident rate is 3.2 per 200,000 hours worked, outperforming the national average for underground metal and non-metal mines which averaged 4.8 in the first six months of this year. We are particularly pleased with this performance in view of the number of new employees at each site and the distraction of labor negotiations earlier this year.

Second, we are improving the developed state of the mines. Our objective is to improve the overall mine infrastructure and to and to increase proven ore reserves the equivalent of about forty months production at full capacity at each mine. As I mentioned we expect to achieve our primary well target for the year but are lagging a bit in diamond drilling.

Third we are transitioning towards more selective mining methods at both mines. During the third quarter as part of this selective mining initiative we mined about 588 tons per day from captive cut-and-fill isotopes. Down slightly from the prior quarter mostly because of the strike at the Stillwater mine, and 298 tons per day from mechanized ramp and fill operations in the upper west area of the Stillwater mine, slightly higher than in the second quarter.

Fourth, Frank mentioned that we reduced our immediate emphasis on production growth for a while allowing us some breathing room to insure that we have the critical work force skills in place before we resume our push for production.

Productivity measured in tons of ore produced per day has declined at both mines. Stillwater is about at 1,761 ore tons compared to 2,026 tons per day average for all of 2006. East Boulder is at about 1,502 ounce per tons per day compared to 1,506 ore tons per day last year. While these numbers may not tell the whole story, since we would expect the counts per ton greater the ore produced, to be higher using more selective methods, they do indicate the transitional challenges we are facing this year.

Looking forward to the rest of the year our safety performance continues on track. We expect to be within our guidance on capital cost and primary development, but we'll slightly exceed our upper end guidance for the year average of $315 cash cost per ounce. Our mine production will probably be about 550,000 ounces, short of our earlier guidance reflecting the year's labor difficulties and high attrition involving our mining work force. And our recycle business continues to perform well.

I'll turn it back to Frank.

Frank McAllister

Thanks Steve. I would like to offer a bit more detail regarding our financial performance and perhaps a few closing strategic thoughts on the markets as well.

First Earnings, I commented as we began, the company reported $11.1 million loss to the third quarter of this year, compared to net income of $6.9 million reported for the third quarter of 2006. Breaking this down by segment our mining operations showed an operating loss of about $10.6 million in this year's third quarter compared to positive earnings of $5.6 million in last years third quarter. As I mentioned earlier, recycling income is about $7.9 million for the recent quarter including financing income, while for the same period last year, recycling earned $10.7 million. Offsetting the operational contributions though was $6.8 million in the third quarter of 2007 and corporate charges for office expenses, marketing and exploration and $8.3 million for the same items in the same period last year as well as $2.9 million of unallocated net interest expense from the third quarter of 2007 compared to $3 million in the third quarter of 2006.

As I've already discussed this results reflect much weaker mine production and continued strong recycling volumes in 2007. For the first nine months of 2007 we reported a cumulative loss of $14.6 million compared to last year's first nine months net income of $5.1 million. Again, breaking this up by segment, in the first nine months of 2007 mining operations suffered a loss of $8.2 million compared to earnings of $6.3 million in the first nine months of 2006. Recycling earned $21 million in this year's first nine months and $17.4 million in the same period last year. The first nine months of 2006 included earnings of $6.9 million from the final sales out of the palladium inventory received in the 2003 Norilsk Nickel transaction. And obviously that was not repeated this year.

With respect to corporate overhead expenses and other costs, they totaled $23.1 million in the first nine months of this year up from $21.6 million in the first nine months of 2006. Unallocated interest expense from the first nine months of 2007 equaled $8.5 million in both the nine months periods both this year and last year.

Summarizing this year's first nine months showed lower mine production, continued strong recycling volumes and unlike 2006 did not benefit from any sales of palladium received in the Norilsk Nickel transaction.

Perhaps an update on the company's liquidity position would also be useful. At the end of the third quarter of 2007 our total cash and short-term investments totaled $104.3 million up about $7.4 million from the end of the prior quarter. This change was attributable to reduced working capital requirements particularly for recycling inventories and advances which more than offset the effect on cash in the third quarter loss. The recycling business in inherently more working capital intensive then our mining operations, reflecting substantial time and money involved in acquiring the spent catalyst material and then processing it into refined metal. At the end of the third quarter total inventories in advances related to recycling $80.6 million down from $97.1 million at the end of this years second quarter, but up from $70.9 million at the end of 2006.

With respect to debt at the end of the third quarter the company’s debt balance was $128.5 million down a little from the $130.7 million at the end of last year. We also had $23.6 million in outstanding un-drawn letters of credit as direct or indirect surety for future reclamation obligation leaving $16.4 million of unused capacity under our revolving credit facility. We increased our outstanding surety bonds and so the letters of credit by $3 million during the third quarter. The State of Montana is finalizing an updated environmental impact analysis that is likely to increase our surety obligations significantly, later this year or early in 2008 but the company will have adequate financial capacity to handle these increases.

Besides our mine performance initiatives that we discussed earlier, another strategic focus for Stillwater is fostering new and expanded markets for PGMs and particularly for our primary product palladium. These market development efforts this year are normally channeled through the Palladium Alliance International, an industry marketing organization established by the company in early 2006. To date in 2007 the Alliance has sponsored image advertising for palladium, particularly targeted at selected Chinese jewelry markets and has worked amongst other palladium producers to better coordinate market development efforts within the industry. We now estimate that worldwide jewelry demand for palladium will exceed 1.4 million ounces this year up from around 1.1 million ounces in 2006 given the strong growth in the Chinese palladium jewelry this year but as well across other sectors of the world, the United States and Europe in particular.

Platinum and palladium remained strong in the third quarter at the end of September the [Alameda] platinum was quoted at $1377 per ounce up from about $1273 from the end of June. Palladium at the end of the third quarter was quoted at $343.75 per ounce down from $365 at the end of June but up on the year-to-date. The company's mining operations produced by products of gold, silver, rhodium, nickel and copper all of which have also enjoyed strong pricing this year.

With Respect to platinum our hedge volume dropped to 23,500 ounces in the third quarter, down from 28,000 in this year's second quarter. The platinum hedges continue to fall away completely, and will be completely gone over the next three quarters. They fall to 20,500 ounces in the fourth quarter then 9,000 ounces in the first quarter of 2008 and 6,000 ounces of the second quarter of 2008. Platinum and palladium prices have continued strong so far in the fourth quarter the [Alameda] afternoon fixings today were $1472 per ounce for platinum and $376 per ounce for palladium. For the prices at this level results in 2008 on the lower platinum hedge volumes would benefit from that alone by about $25 million over those we realized in 2007. Pricing for platinum and palladium appears to be driven by primary catalytic converter and jewelry demand and also by a certain amount of speculative interest in the metals.

As I noted in our earnings release yesterday, platinum in particular has benefited from a growing shift particularly in Europe in favor of using high performance diesel engines in automobiles. Over 50% of the automobiles manufactured in Europe this year will be equipped with diesel engines. In the UK it's been recently reported that 70% of the BMW's sold this year will be diesel powered. Each of these diesel vehicles will be equipped with a catalytic converter and a particulate filtration system to deal with the DPM. Because of the lower exhaust temperatures of diesel engines these diesel catalytic converter systems are primarily a platinum application requiring about twice as much PGM catalyst as the average gasoline fuelled car. As this progresses we would expect that the wide price disparity between platinum and palladium would be motivating a move to substitute as much palladium for platinum as possible in these diesel converters. That appears to be starting to happen with manufacturers reporting success in replacing about 25% and in some cases closer to 40% of the platinum in these converters with palladium. We will be watching this market dynamic closely over the next year or two.

Besides our general work and market development we also executed a new sales contract with one of our automobile customers in August. The new agreement extend the portion of our palladium sales commitments out through 2012, favorably adjust the floor price relative to the previous contract and provides us with additional flexibility in how we source material for them. As before, pricing in this agreement is based on a slight discount for the market price in each period should the price of palladium exceed the floor price.

The additional sourcing flexibility in this new agreement along with a planned level of capital expenditures in 2007 and 2008, higher then permitted by covenant, has required us to secure an amendment and waiver of certain provisions in our bank credit agreement. Yesterday our bank group approved the amendment and waiver approving new language accommodating the new sales agreement increasing our permitted capital expenditure levels in each of the next three years and revising the provision to clarify the definition of debt for covenant purposes. In conjunction with this amendment, the interest rate spread on our bank credit facilities was increased by 25 basis points one quarter of 1% and now stands at 7.75% with the spread at 2.5%.

Another area of strategic focus for the company is diversification. As some of you may remember, in 2006 we invested about $1.9 million for an 11% interest in Pacific North West Capital Corporation which is a Canadian exploration company with substantial exploration expertise, which has identified a secured position in several prospective PGM targets. During the first nine months of 2007 we have invested an additional $700 thousand towards participating and in interest on some of those targets. Also On July 3rd, 2007 we completed a $1.5 million initial investment in Benton Resources Corporation, another Canadian exploration company, providing us with an attractive opportunity for future participation in Benton's Goodchild Project as well as an equity interest in Benton itself. We plan to commit additional exploration dollars to certain other Benton projects over the next several years.

We've also closely monitored various investment opportunities that might go beyond our existing base in PGMs into late stage development projects or existing operations involving other precious metals or even certain base metals. We are proceeding deliberately and carefully in this process and will keep you informed appropriately as it proceeds.

In conclusion, despite a very difficult third quarter, I believe the company is on the right track in pursuing these longer-term strategic initiatives. I would once again remind you that accompanying these changes we expect to experience some associated earnings volatility, particularly when viewed from quarter to quarter. We are cautiously optimistic that during the fourth quarter we will be able to demonstrate progress in strengthening productivity in advancing our selective mining efforts.

I would like to thank you for your interest in Stillwater Mining Company and for your continuing support as we work through these important changes. Operator, I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes to the line from John Bridges with JP Morgan.

John Bridges - JP Morgan

Hi everybody. Just wondered why you focused on the tons per day metric for mining efficiency because you know if you go to selective mining, that number's gonna go down anyway.?

Frank McAllister

You make a very good point. I'm going to let Steve address it.

Steve Lang

I think John, all we tried to do there, in particular looking at the different mining methods, is to track our progress in those methods by ton per day but you’re right in that, in particular, I think we have seen that as a difficulty in East Boulder where as if we just talk tons per day it is probably a misleading number.

John Bridges - J.P. Morgan

It’s probably more in ounces per man or something like that.

Steve Lang

And what we typically track, for instance, in Stillwater tends to be ore tons per man hour by mining method. And it also can be differentiated between the off shaft area and the upper west area. So a lot of different metrics there, and just trying to pick the easiest one to at least get a general sense of it.

John Bridges - J.P. Morgan

You say that you have got up to date, more or less, with your reserves. So Cap-Ex is going to go flat for, could you give us an indication as to what you think is going to happen to Cap-Ex. And is there any Cap-Ex in the recycling?

Steve Lang

You know part of the smelter refinery upgrade has been to deal with higher volumes in the recycling and to make that two things: One, is more efficient; secondly is to give us more opportunity for growth and recycling in the future and I think if we just look at our budget this year of $108million, the mine expenditure would have been down slightly versus last year. But it is offset by this kind of one-off two year investment that we made in that improvement in the Columbus processing facility.

The development is really the bigger piece; and most of that development has been around increasing the proven ore reserves at both mines; and that will be more of a gradual change over the next several years. The other piece of primary development in particular at East Boulder has been work on some [live] mine passes. The initial mine passes that we had in place had deteriorated a bit and were one of the sources of some dilution going to the plant. At Stillwater a good part of the capital program there has been a major truck college ramp that accesses the lower off shaft going down well below the 3,200 level.

John Bridges - J.P. Morgan

So what is a good maintenance Cap-Ex number that we should use for you?

Frank McAllister

In terms of development, John, is that what you are referring to?

John Bridges - J.P. Morgan

I am thinking the mines and maintaining reserves.

Frank McAllister

While Steve is thinking about that a minute, let me come back and expand just a little bit more on the recycling capital spending. It’s really quite modest aside from the furnace that Steve has commented on and the furnace is obviously solving two issues: growth in our mine production, as well as growth in our recycling. And obviously the need to make sure that we don’t have a furnace that is down and not operating during the period of maintenance, so that we basically have to curtail operation. But aside from that it’s basically crushing sampling facilities. Terry has indicated that we have spent probably about $1.2 million in that area. It’s not a big expenditure, it’s obviously important that we are able to handle these materials as they are received, and process them and get them into the furnace. And so it’s been a modest capital spending. I’d have to say though, years ago there was some additional capital spending, some storage facilities and handling facilities that were put in place; but on an ongoing basis it’s fairly modest. Steve?

Steve Lang

Yeah John, I don’t have the report directly in front of me but I can tell you I remember roughly the numbers that we gave two or three years ago. I believe that presentation was the one immediately following the Denver gold show. It is still up on the web site. We kind of outlined the long term steady state primary development requirement. This goes beyond just the [fault wall lateral] with all of the primary development and I think at that point we described the sustaining rate for primary development at about $50 an ounce. I would tell you it has probably crept up since then but still year-on-year probably varies between $50 and $70 an ounce. There is some depreciable capital but it’s a relatively minor component. And there’s also a piece at the Columbus process facility that is just part of normal sustaining capital as well. Again those are relatively minor compared to the primary development. I don’t think our view of that sustaining primary development rate for the long term on a steady state has changed significantly.

John Bridges - J.P. Morgan

Okay, that’s helpful. And just finally, on the recycling, the amount of toll refining, which seems to carry a lower margin, could you give us an indications as to how you see that moving, going forwards?

Frank McAllister

Whether it will grow or not?

John Bridges - J.P. Morgan

Yeah.

Frank McAllister

Let me have John talk about that, just a second.

John Stark

You know it will depend on the circumstances. On a percentage basis it probably won’t and on a volume basis it probably will as the opportunity arises.

John Bridges - J.P. Morgan

Okay; well thanks very much for the production and recycling guidance and I just wonder whether you could include the percentage of toll treating in that pre-release. That might be helpful for us, to get a better fix on your numbers.

Frank McAllister

I think to the extent that we can we will. Part of the problem, just for everybody’s information, is that those numbers become a bit commercially sensitive in the marketplace and so we are always trying to make sure that we give as much guidance as we can without hurting the business. And that’s basically one of the sensitivity issues here. So we kind of give it on an annual basis but have not necessarily given it as closely on a quarterly basis, John.

John Bridges - J.P. Morgan

Well I’m just thinking if you just report what happened what happened the previous quarter it will give us a better fix on the historical pieces.

Frank McAllister

Understood, we will do that to the extent that we can.

John Bridges - J.P. Morgan

Thanks Frank.

Frank McAllister

You bet, thank you John.

Operator

Thank you. The next question comes from the line of Rehan Chaudhri with Altrinsic Global Advisors. Please go ahead.

Rehan Chaudhri - Altrinsic Global Advisors , LLC

Hello Steve, Greg. Thanks for your time. Just had a couple of questions regarding the quarter, and a couple of more long term questions. It seems like the shortfall with the seven-day strike was roughly about 12,000 ounces; but the shortfall against the year before seems almost like, roughly about 22,000 ounces. Are those numbers roughly correct for us to try and get more of a run-rate number for you?

Steve Lang

I think that roughly, we are about 22,000 ounces versus the prior year. I would tell you that the impact of the strike isn’t just the seven-day duration of the strike. It was a pretty rough run up through all of June. The week in July prior to the actual work stoppage, and then the return to work following.

Frank McAllister

It might be important to comment too Ray, that the activity in June of production fall off in June, because of the way things flow, would affect third quarter earnings…… the lower performance there did impact July particularly.

Rehan Chaudhri - Altrinsic Global Advisors , LLC

Yeah in terms of the workforce issues it seems like the contract is now signed for roughly three to four years?

Frank McAllister

Four years.

Rehan Chaudhri - Altrinsic Global Advisors , LLC

It would be quite unusual for the workers to strike again at this point, or are they relatively satisfied with the agreement that they have received?

Frank McAllister

Let me have John comment on that.

John Stark

Yeah the workforce at the Stillwater mine and processing facilities in Columbus have a four year labor agreement and would not be able to strike until the conclusion of that, should they not have a good contract that’s acceptable to their workforce. We do enter into negotiations with the East Boulder workforce in May of next year, same expiration date of July 1st. That’s kind of what’s in front of us in the immediate future.

Rehan Chaudhri - Altrinsic Global Advisors , LLC

Okay, it sounds good. And in terms of if we look at the firm and look at the amount of Cap-Ex you are spending right now, it is a fair amount. What type of volume gains would you expect three of four years out if we build some long term models for the company?

Frank McAllister

Let me give you a couple pieces of guidance to the extent I can and then I’m going to have Steve comment more directly about it. What we have is an operation that typically right now at the developed state would be in the production area of 600,000 ounces. That is what we produced in the year 2006, obviously we are off 50,000 ounces in 2007 and we have discussed that. The growth potential for the mines, as we’ve put in our annual report and have talked about in the past; is up to in excess of 800,000 ounces over time.

The question then for your model is, “how is that going to run out over time?” Given the change in our work force, and given the need now to develop our own work force here, what we are seeing is that that time frame has probably been extended some, because simply to find an experienced miner today is very difficult. We used to essentially borrow them or steal them from other people, or other operations; I don’t mean to say it that way, but basically we would go to other mining operations and try to hire people that we could attract to Montana. Today that’s very difficult with the price of gold, the price of silver, and the price of copper where it is; and underground miners being a scarce commodity.

So what we have been doing, as we had mentioned earlier in the call, is growing our own. As you grow your own the productivity comes up, but also growing them, 100 people a year and with the attrition rates continuing because they find it attractive to go to other places as well. So it really has lengthened out that period of time over which we are going to be able to achieve the 800,000 plus level of production. Let me have Steve comment directly to you with respect to how we see it rolling out in the next few years.

Steve Lang

I think if you just take our current guidance for the year you can see that we are projecting a fourth quarter haul around 140,000 to 145,000 ounces or thereabouts which is pretty consistent with the level Frank talked about last year of 600,000 ounces.

Going forward will depend really on two matters; one would obviously be the productivity of the workers. That can be up or down perhaps, 5% or 10% might be a reasonable range of fluctuation; on that. The bigger one will be our ability to both recruit and retain our workers. We have talked about the attrition we saw early in the year. That continued during the third quarter up until September, where it was exceptionally low, not just by this year’s standards but any year’s standard for us. Now that is one month, is the issue I guess, but depending on how that trend would continue would make the difference on the rate at which we would project further growth. I think one of the things we are trying to emphasize now is we have really pushed a lot of new employees into the system here in the last year or so and at some point it’s probably worth our while to catch our breath on that push, and try and emphasize the quality of the work and the cost containment rather than the growth.

Rehan Chaudhri - Altrinsic Global Advisors , LLC

Yeah and there’s safety issues as well. In terms of your total workforce, what is the annualized attrition; what’s the total number of miners you have and how much are leaving roughly? Or how much do you anticipate to leave for the next year?

Steve Lang

I think the total number of miner classifications which covers, if you will, the production, rock breakers, primary development, secondary development, and some of the diamond drilling as well. Typically companywide right now is about 450. If we looked at the last few years, the range of attrition typically has been in the 15-20% range, some years a little bit lower, this year probably closer to 30-35% in that workgroup, particularly in the middle portion of the year, right after the scheduled change and then around the work stoppage.

Going forward it is kind of tough to predict. I think part of this has been the change in mining methods we made is more physically demanding; and I think then we see some of the experienced folks opt out. I would think that, realistically, we would look at a return probably to that historic rate. We are in a position where we can replace the attrition through the training program. With perhaps a little bit of upside potential, and we also do better recruiting of experienced people. Probably not one that we push just because we prefer the ones trained and from the area; we think we have a better opportunity of retaining them.

Rehan Chaudhri - Altrinsic Global Advisors , LLC

And you made a comment, I think, Steve had with regard to PGM catalysts in gas versus diesel in Europe. Can you give us a rough idea how much ounces are used for vehicles in gas versus diesel engines?

Frank McAllister

Sure let me comment broadly and then narrowly, first of all we were a little bit, startled as I looked at the numbers over in Europe as to the platinum demand for catalytic converters and the growth in that over the last seven or eight years. If we look back to the year 2000, the amount of platinum going into diesel or catalytic converters in total was roughly 600,000 ounces. Currently it’s well over 2 million ounces on an annual basis. So what’s happened is as they have moved from a gasoline driven, essentially build on their cars, to the diesel cars, what they’ve done is increase the amount of platinum going into the catalytic converters because of the transition to diesel.

What’s happening is about, probably, four and a half grams per gasoline car of platinum, palladium, and rhodium, and what we look at that is about three grams of palladium in the gasoline car, one gram of platinum and about half a gram of rhodium, and that’s kind of conventional wisdom that people talk about generally, with some automobile manufacturers having not engineered their engines as closely as others and so there may be higher loadings in some cars and lower loadings in other cars. It also depends upon obviously the power of the engine, but on average that’s about what it is.

When you get to the diesel, what you’re talking about is roughly twice that much with the majority of that being caused by, the majority of the growth being caused by the particulate filter, the DPM filter that is put on to the diesel catalytic converter as well. So you’ve got two elements to the diesel emission control, one is the catalytic converter, the other one is the soot trap or the DPM filter.

What we’re seeing there, as I mentioned earlier, about 25% of that has moved to palladium, so if you’re talking up to as much as eight to nine grams, 25% of that’s palladium and that’s growing. At this point in time, we do know that it’s above that in some cars already and we have seen as much as 40%. Then what we would wind up with is perhaps something in the range of 3 to 3.5 million ounces of total demand and with respect to each one of the metals. In other words, we produce 7 million ounces of platinum and 7 million ounces of palladium a year, and essentially it’s about half of those ounces going into catalytic converters with the growth mainly at this point in time really shifted over to platinum because at one point in time we kind of looked at this as kind of a palladium technology and now it’s shifted to where it’s half and half platinum and palladium and perhaps a little bit more shifting back to palladium in time as the diesel catalytic converter can accommodate more palladium. That’s just a scientific technical issue that they have to be able to adapt to that.

Rehan Chaudhri - Altrinsic Global Advisors , LLC

So the 25% palladium platinum catalyst is in operation right now?

Frank McAllister

It is, in fact Volkswagen’s, all of their diesel catalytic converters at this point in time use about 25% palladium.

Rehan Chaudhri - Altrinsic Global Advisors , LLC


Okay well thank you very much for your time. I appreciate the insight.

Frank McAllister

Thank you

Operator

And our next question comes from the line of Victor Flores of HSBC.

Victor Flores – HSBC Securities

Good afternoon. I have a couple of questions. First of all, with respect to Cap-Ex, on the one hand you’ve indicated that Cap-Ex should start to come down, as the levels of development reach your target, but I think I heard you mention that one of the amendments to the debt facility was to approve an increase in capital. Could you explain what that means?

Frank McAllister

Of course. Let me have Greg speak to that directly.

Greg Wing

Well I can speak to the amendment directly. I don’t know if we disclosed previously or not, but the limit on capital expenditures in 2007, 2008, and 2009 in each of those years under our debt covenant was $81 million. We looked very hard at staying very hard within that $81 million envelope if you will, and in doing that concluded, and I’ll let Steve amplify on this, but staying within it probably in the end would be damaging to our operations.

So we did go in and ask for an amendment to the bank facility which was finalized or approved yesterday by the required banks which increases that spending to $95 million per year. Some of that is just reflecting the inflation that has occurred over the last three or four years in capital requirements. I might add that we also talked about adding the second furnace and we did carve that out separately in the covenants as a stand alone project. Steve, maybe you want to comment on the specifics.

Steve Lang

Well, I think that’s one of the things that we try and differentiate here as particularly around the smelter in the refinery. We do have a one time investment that will be making a little bit this year, but primarily in ’08 and a little in ’09. That’s just associated with that upgrade, and if you look at the mines separately the overall development profile is now trending down. That one time expenditure around that smelter refinery kind of masked that for a year, so I think it’s important that you view that as almost a separate capital budget itself.

As Greg mentioned, certainly there’s some inflationary pressures. I think they tend to be a little bit less for us because a lot of this Cap. development as we’ve moved that away from contractors, it’s really related to our own labor cost increases which I think on a percentage basis has been relatively small compared to contractor rates.

Victor Flores – HSBC Securities

Ok great. Thanks. Second question goes to the issue of grades; the whole purpose of moving to selective mining is to get those grades back up. And you pointed out that East Boulder you are achieving, and throughout the operations, you are achieving better rates of selective mining. But we’re still not seeing the grades move up and I guess I ask you this question every quarter, but why do you think that is and when do you expect to see grades go up?

Steve Lang

I think it’s still, a larger part of this is as we move the mine more and more relative to the off shaft area which tends to be a lower grade. The average doesn’t change as much, although more to the upper west more comes from that lower grade portion of the mine. The average doesn’t change as much, although we may improve the grade realized out of [Ball Terry’s] it’s the proportion that has, East Boulder’s probably more of a concern.

So let me talk a little but about East Boulder. First off, you remember back in the first quarter, we were able to do a number of dedicated runs of the captive cut and fill and we haven’t been able to do any sense, couple of reasons for that. One is we need to get these new life of mine passes completed. The current ones, the material handling that we have in terms of pulling down completely an ore pass and then restocking it in these ore passes are just not that robust. And secondly, they had pretty significant impact on the ventilation, so we won’t be back to that program probably until late in the quarter of next year.

In the meantime, given the growth that we had in East Boulder, I would tell you just a lot of quality issues that we needed to stop this push on higher tonnage and just address the quality issues. What we identified there was really starting with design and some of the stopes to strengthen that technical involvement up front in getting a better stope in design. Improving our grade control, one of the difficulties we’ve had at East Boulder, given the dip there of the ore body is following the profile of the reef. In a fairly shallow lined deposit has been a challenge plus now you’ve got a more grade control intensive program. We’ve had to add to our grade control staff. We’ve got a lot of inexperienced folks watching grade control at East Boulder and that scenario where identifying the reef and staying on reef is more difficult than it is over at the Stillwater side.

In addition to that we’ve set up a number of metrics whether it’s around the simple ore when it’s marked and is mined, how we handle internal waste. We’ve identified a number of issues just around muck handing and some improvements that we need to make there, as well as just good mining practices around cleaning out the stopes as well as how we do the sand fill.

Really what the emphasis the next few months to be on improving how we do that piece of the operation rather than increasing the quality or the quantity that we’re trying to move kind of challenged the manager there, given our efforts there. We’re not expecting an overnight turnaround, we might see some initial incremental improvements in grade bur really we’re trying first and second quarter of next year before there’s something I think that’s really visible there.

Victor Flores – HSBC Securities

Ok, that’s great. That’s helpful. And just finally, coming back to some commentary that came up when John was asking his question with respect to productivity and the admission, if you will, that tonnage on a per day basis has come down because you’re doing more cut and fill. My understanding of the whole process here was that you expected to maintain tonnage levels even as you moved to more cut and full just given your fixed cost basis. If cut and full leads to lower tonnage, that’s going to lead to lower production and as we say in the third quarter that leads to higher costs. The whole idea is to get grades up, tonnage steady so that costs can come down. Can you sort of comment on those trade offs and what you’re seeing there?

Steve Lang

Again, I think we have talked about the mines separately if you look at East Boulder, the tonnage is flat year-on-year, or within four tons per day out of 15 hundred tons per day, and the struggle there has really been on that following the reef if you will and getting that quality of excavation. I think if we put the emphasis there and really stop trying to grow the work force at the rate we have, we’ll get the grade improvements over time. At Stillwater I think a lot of the productivity issues have really been around the labor disruption that we had midyear. I think generally the grades that we see by stope at Stillwater have really met our expectations.

Frank McAllister

Victor, have we answered your question?

Victor Flores – HSBC Securities

Yeah, absolutely. I was just going to say that I guess unfortunately the labor issues that you’ve had earlier in the year have sort of muddied the water so it’s hard to follow the numbers quarter by quarter, but no. Thank you very much.

Steve Lang

I think, again, given the outlook for the fourth quarter, if we’re able to deliver what we expected at Stillwater, it should be pretty well back on track and producing at a rate that’s not significantly less than four quarters ago but with substantially fewer people.

Operator

(Operator instructions)

We have one more question sir. John Bridges of JP Morgan, please go ahead.

John Bridges – JP Morgan

Hi Frank. Not so much a question, an observation. I didn’t realize that the turnover was at the level Steve was saying. Under those circumstances I think that the operation has performed quite well and I’m encouraged for next year.

Frank McAllister

John, we do too. And quite frankly while it’s been a difficult season, if you will, we made the right choice at the beginning of the year in making the schedule change. The schedule change was something that we had to do in maturing the property so that we were attracting people from the local area as opposed to continually trying to draw people in from other areas.

In the process of doing that what we’ve got is a more mature local workforce and these guys are realizing now they are going to work longer hours, they are going to make more money. My sense is that actually the attrition rates are likely to diminish somewhat over the next little while and we will as we come out of this have a much better operation. Steve wanted to comment.

Steve Lang

I think frank mentioned, one of the real changes of the work force compared to a year ago, it’s a much higher percentage that’s locally based and I think that’s very positive on the long term.

John Bridges – JP Morgan

Okay thanks guys. Good luck.

Frank McAllister

Good thank you. We’ve gone an hour, in fact we’ve gone over the hour that we typically try to hold this to, if there are any other questions we’ll take them, or in fact we’re here at the offices and you can get a hold of us. Operator, unless you’ve got somebody on the line we can probably bring this to an end.

Operator

No we do not sir.

Frank McAllister

Well thank you everybody for joining us today.

Operator

Ladies and gentleman, this conference will be available for replay after 3:30PM today through midnight on November 13.

(Operator instructions)

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Source: Stillwater Mining Company Q3 2007 Earnings Call Transcript
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