Stillwater Mining Company Q4 2007 Earnings Call Transcript

Mar. 5.08 | About: Stillwater Mining (SWC)

Stillwater Mining Company (NYSE:SWC)

Q4 2007 Earnings Call

February 26, 2008 12:00 pm ET

Executives

Francis R. McAllister - Chairman and Chief Executive Officer

Greg Struble - Executive Vice President and Chief Operating Officer

Terrell I. Ackerman – Vice President of Planning and Process Operations

Gregory Wing - Vice President and Chief Financial Officer

Analysts

John Bridges - JP Morgan

Rehan Chaudhri – Altrinsic

Victor Flores - HSBC

[Aaron Edelheit - Saber Value Management]

Borden Putnam - Eastbourne Capital

[Gary Vialis – Vialis Partnership]

Michael Beach – Private Investor

Operator

Ladies and gentlemen, welcome to the Stillwater Mining 2007 fourth quarter and year-end review conference call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Frank McAllister.

Francis R. McAllister

Good afternoon everyone, and thank you for joining us for our 2007 year-end results conference call. I am Frank McAllister, Chairman and Chief Executive Officer of Stillwater Mining Company. With me this afternoon are Greg Struble, our new Executive Vice President and Chief Operating Officer; Greg Wing, Vice President and Chief Financial Officer; John Stark, Vice President of Human Resources, Secretary and Corporate Council; Terry Ackerman, Vice President of Planning and Process Operations; and Rhonda Ihde, our Corporate Controller.

First, I’d like to remind everyone that some statements in this conference call are forward-looking, and therefore involve uncertainties and risks that could cause actual results to differ materially from the projected results. We discuss these in more detail in the company’s filings with the Securities and Exchange Commission, including the risk factors contained in the company’s 2007 Annual Report on Form 10-K to be filed shortly.

Before we turn to a discussion of 2007 performance, let me take just a moment to further introduce Greg Struble, our new Chief Operating Officer. Greg joined us earlier this month and brings with him a wealth of experience in underground mining, both domestically and internationally.

Although he has been here less than a month, he has already demonstrated his hands-on style of management and identified a number of new opportunities to strengthen our operations. We are delighted to have him on board and look forward to hearing from him a little later in this call.

As everyone on the call is aware, Stillwater Mining Company produces the noble metals: palladium, platinum and rhodium, or commonly referred to as PGMs. I make this comment because there are a couple of issues that I want to discuss.

PGM occurrences are rare, and the metal themselves are scarce. And although they have unique properties which qualify them as precious, even luxurious, they also have unique properties which make them absolutely essential for some industrial applications. Worldwide mine production of palladium and platinum is in their equal amounts, roughly 7 million ounces of each per year; and really scarce, at only 800,000 ounces per year is rhodium.

When these production levels are compared to gold production of 80 million ounces and silver production of 400 million ounces per year, PGMs are indeed rare and at the moment very scarce. These scarce, and the essential qualities that I mentioned earlier, have fueled the volatile prices we have seen in the last 30-plus days, with platinum up about 40% and currently trading at about $2,123 per ounce, with rhodium up about 30% at $9,030 per ounce, and palladium up about 39% at $520 per ounce.

As a result, their stock price is up strongly as well. Precipitating these market moves is the South African electrical shortage that emerged January 25, one month ago yesterday. Now, other than mentioning this shortage, and that it is disrupting mine operations there, I do not plan to discuss it in detail, except to say it is a real issue. The full impact of which is still undetermined.

It appears that it will take some time to fully overcome, possibly even years. And in the meantime, PGM producers and consumers will have to learn to cope with very tight market conditions, and with the uncertainty that that brings.

Tagging these South African electrical shortages on to an already tight PGM market is creating something rather like a perfect storm in the PGM market. Tight markets mainly exist for platinum and rhodium, and these markets are strong due to limited supply and increasing use in diesel catalytic converters and diesel particulate matter filters. If you want to know more about that, we’ve got some in our press release, our 10-K talks about it as well.

But, in fact, such worldwide demand for platinum has increased 13% per year since the year 2000. And the market for palladium, while not at the historic highs of platinum and rhodium, has been affected by cost-driven substitution of palladium for platinum.

Now, let me recap these spectacular price moves. Moves, which if sustained, will dramatically affect our 2008 profitability. First of all PGMs are not just rare, precious and luxurious metals, they are scarce and they are essential. Essential, as they are required for a vehicle to simply leave the assembly line. Scarce and essential can be explosive.

How dramatic will the effect be on us in 2008? Well, our platinum hedge book is all but rolled off. Only 15,000 ounces remain subject to forward sales commitments at just under $1,100 per ounce. And these commitments will be satisfied by the end of June 2008.

Of the remainder, about 14% of our production is subject to $850 per ounce auto contract price ceiling, leaving somewhere between 95,000 and 100,000 ounces priced at market. At current prices, the platinum price increase for 2008 when compared to 2007 would be over a $1,000 per ounce on these remaining ounces or, say, $100 million to earnings.

Now, the palladium floors and our auto contracts do not constrain price realizations on the upside, but until you rise above the floors there is little revenue realization change. At current prices, however, we are above the 2006 average floor price of $360 per ounce, and in 2007 we realized about $384 per ounce. But at today’s prices, the palladium price improvement for 2008 compared to 2007 would be about $115 per ounce on a projected 420,000 to 425,000 ounces of production or, say, $50 million to earnings.

That said the mining industry faces another resource scarcity that of mining engineers, geologists and skilled miners, which have become a fierce and fair game between companies, commodities, countries and continents. This affected our production results for 2007 and will continue to handicap us in 2008.

Let me turn to our 2007 results. In the fourth quarter of 2007, the company realized a small profit of about $400,000; a bright spot looking back on what otherwise was a challenging year. The improved fourth quarter earnings performance was due in part to higher PGM prices and to lower corporate overheads as a result of benefits, forfeitures and recovery on a metal receivable we had written off a couple of years ago.

For the full year 2007 we reported a net loss of $14.3 million, or $0.15 per diluted share, on revenues of $619 million. During 2007 we struggled with a number of issues that affected production, including higher than normal attrition in our mining and maintenance workforces, a one week strike at the Stillwater Mine and Columbus processing facilities, and efforts to transition our mining methods towards more selective ore extraction.

The 2007 loss compares to a reported net income of $7.9 million, or $0.09 per share, in 2006. During 2007, the company continued to expand its recycling of spent PGM catalyst, processing a total of 373,000 ounces of recycled PGMs, up nearly 8% from the 346,000 ounces processed in 2006. Income from recycling activities, including finance charges, increased to $27 million in 2007 up from $25.4 million in 2006, mostly reflecting higher PGM prices.

Let me go back to the company mine production in 2007. It totaled approximately 537,500 ounces of platinum and palladium, which was down from 601,000 ounces in 2006 and well below our initial 2007 guidance of 615,000 to 645,000 ounces. This 2007 shortfall deserves some additional discussion.

Three interrelated factors drove the production deficit. First, several years ago the Stillwater Mine changed its work schedule in an effort to facilitate hiring and retaining skilled mining employees from outside of Montana. The schedule consisted of seven consecutive days of ten hour shifts, followed by seven days off. A long break in the work schedule allowed out of area miners to work in Montana while commuting back home on their days off.

The schedule initially was very successful. But in recent years as commodity prices rose, new job opportunities opened up in mining and we saw a steady exodus of these miners towards jobs situated closer to their families. This was coupled with rising benefit cost and increasing difficulty in finding qualified miners.

Concluding that the seven-on, seven-off work schedule was no longer effective in retaining miners, much less in attracting new ones, we took action a couple of years ago to augment our miner training program to develop a more locally based workforce.

And given that the seven-on, seven-off 35-hour a week schedule was under utilizing our existing mine and employee assets and leaving the company uncompetitive from a cost perspective, we changed the work schedule in early 2007 recognizing that we would accelerate the loss of miners, but calculating that additional work hours and a restructuring schedule would largely compensate for the loss.

And as expected, we did see significant employee attrition, which has had an adverse effect on hourly productivity and equipment maintenance. Nevertheless, we believe these challenges will be temporary and that in the long run our mining operations will be much more competitive for having made this change.

The second factor that affected 2007 production was the renegotiation of our labor agreement at the Stillwater Mine and Columbus processing facilities. Labor negotiations are almost always distracting and the uncertainties surrounding the negotiations when combined with a schedule change, amplified the attrition rate at Stillwater. In the end, the union membership after a seven-day strike and a substantial production loss centered around the negotiation process ratified a new four-year labor agreement.

Third, we not only lost a significant group of experienced employees in 2007, but also intentionally, sharply reduced our reliance on contract miners at the same time. Rising cost for contractor services in this robust mining environment have well outpaced inflation in recent years, and our contractors also face similar challenges in attracting skilled labor for their needs.

This has generated competition for the same skilled miners and mechanics that we both depend on. The process of scaling back on contracted work in favor of using our own employees, also temporarily affected production rates. But again, we felt that it was essential to maintain long-term competitiveness.

The 2007 restructuring moved the Stillwater Mine from four operating crews to three, each working in average of about 43 hours per week. The company previously introduced new miner training program, is intended to develop a local core of skilled mining talent to replace not only those who leave for other employment, but also to build a new generation of miners as our most senior miners approach retirement.

Additionally, this is a very proactive way to ensure we are providing high quality jobs for Montanans, as well as strengthening the communities where we operate. Just over 50% of our mining workforce is now comprised of miners we have hired and trained internally.

Many of these newer miners are still growing in their mining skills and we expect them to reach full productivity as they gain additional experience over the next two to three years. Plus, although the changes we implemented during 2007 were painful, we believe with time they will prove to be appropriate and necessary in responding to longer term structural changes within the mining industry and will complement our significant reserve base in Montana.

As usual I would like now to spend a few minutes discussing our strategic operating initiatives at the mines. We first introduced these initiatives several years ago in order to increase production efficiency and reduce unit mining cost. We continue to make progress against all of these operating initiatives. At the core of the initiatives is the need to tailor our operations very specifically to the ore reserve we are mining and to the cost environment in which we operate.

More selective methods, including both captive cut and fill mining within the narrow ore blocks and mechanized ramp and fill mining in the areas that are wider or more continuous, promise to reduce cost significantly while allowing for production growth and better utilization of the resource over time.

Our safety and environmental performance in 2007 was excellent. We have accelerated our mine development spending over the last several years to improve the developed state of our mines. Development spending is now beginning to level off as our proven ore reserve reaches the target levels and major infrastructure projects are completed. Capital spending for mine development should decline over the next two to three years toward a more steady state development program.

Our final operating initiatives to reduce cost and to expand production at the mines largely depend upon implementation of some of the other initiatives. We found that trying to implement specific cost cutting efforts and expand production while still in the process of shifting to more selective mining, may create unnecessary confusion and results may be difficult to measure. Consequently, we have deemphasized our efforts on these initiatives until the others are more firmly in place.

The whole transitional program will take several years to implement, although we already are benefiting from our efforts to improve the developed state. We view our employee training programs as critical to the success of these initiatives and the full benefit of the changes will come as the training efforts bear fruit and the newer miners gain added experience.

Now I would like to turn the call over to Greg Struble for a few minutes to review our 2007 operating performance, and provide some guidance with respect to 2008.

Greg Struble

As Frank indicated earlier, production for the year was at 537,500 ounces, which is well below the range we had given as guidance for all the reasons that Frank has previously mentioned.

We did finish the year with more than 39,000 feet of primary development and more than 491,000 feet of diamond drilling. These are both below our targets for the year, for the same reasons as explained before, and related to the production shortfall, but still well sufficient to maintain our developed state of the mines ahead of our current mining plans.

Our 2007 cash costs came in at $328 per ounce, about 11% unfavorable to our guidance of $300 to $315 per ounce, and this is despite a 16% shortfall in the ounces for 2007.

Our capital cost for the year was $87 million, about $20 million less than planned. The shortfall in capital spending was mostly driven by deferring our construction of the second smelter furnace into 2008.

Looking back at the major initiatives we have described in the last two years. Under safety, our overall company reportable injury rate for employees dropped an additional 6.5% from 2006. The rate is now at 3.5% and that’s well below the national average for underground metal, non-metal mines. This is a drop of over 73% from our level in 2001, which was the year we began the G.E.T. Safe program that we are currently using at the mines.

Our second major initiative is to improve the developed state of the mines. Although we did not exceed our primary development in diamond drilling targets of 2007, we still maintained proven reserves consistent and constant with the 2006 year end reserve of over 2.7 million ounces and 4.8 million tons. This represents at least a 16% increase in ore reserve tonnages over the past three years, moving us closer to our goal of 40 months of targeted production contained in the proven ore reserve classification.

Part of the initiative on developed state includes investment in infrastructure at the operations. At East Boulder, the upper most level of the mine has now been connected between the central ramp systems, which will greatly improve ventilation in that area and allow extension into the upper portions of the central mine section. The life-of-mine rating system, which was also initiated, which will consolidate, extend and ultimately replace our less efficient and deteriorating central ore and waste pass infrastructure.

At Stillwater, we completed the upper west vent portal, which will greatly improve the ventilation system for this section of the mine and help us move closer to compliance with the final DPM requirements from MSHA. Additionally, work has initiated on the Kiruna Electric haulage truck ramp and the infrastructure that goes with it, which will greatly improve our haulage efficiencies as we mine further from the shaft area infrastructure, and deeper and further from the mine in general. This project should complete in 2010.

Our third initiative, which is selective mining, grew at both mines. We averaged approximately 630 tons per day from captive cut and fill methods in 2007. This is an increase of over 9% from 2006. Likewise, ramp and fill mining has increased at about the same proportion, driving a corresponding decrease in the sub-level mining techniques.

Looking forward to 2008, we are targeting an increase of roughly 4% in ounce production over 2000 actual ounce production, and that’s going to be within a range of 550,000 ounces to 565,000 ounces. As expected, cash costs will increase in 2008 within a range of approximately $355 to $375 per ounce. Notably, production and cash costs are expected to be weaker in the first half of the year, reflecting our continued focus on training and the ongoing transition in mining methods.

In terms of safety, we will continue to advance the external audit program and improve performance, and increase employee participation. We will also continue to work on increasing proven reserves in 2008, planning 39,000 feet of primary development and 515,000 feet of diamond drilling.

Our capital budget for 2008 is $110 million, and of this approximately $22 million is the addition of that second smelting furnace at the Columbus facility, which was deferred from 2007 capital into this year. Absent the new furnace, 2008 capital spending will be about the same level as 2007.

Also as mentioned earlier, are the life-of-mine ore and waste passes at the East Boulder Mine. These will help greatly minimize dilution on ore delivered to the concentrator and development of the Kiruna Electric truck haul truck ramp at Stillwater Mine, which is essential for improving our ability to haul to the mine and move our ore and material out of the mine.

In 2008, we will continue transitioning on the operations to move to more selective mining methods. Now this means we also need to rationalize at what point we reach an optimal level of this technique, and likewise we’ll continue to pursue sub-level mining as a more cost-effective bulk mining technique where we can possibly do it at either operation.

We will also continue our miner training program at both Stillwater and East Boulder mines. Similar to our primary development, we see this as a vitally important investment in the future for the mine and the surrounding communities.

To summarize what we’re looking at for the year 2008, we are projecting an overall 4% increase in ounces produced; we’ll continue to push on advancing our safety program to employee involvement, as well as effective leadership in DPM reduction programs; continued development in primary drifts and diamond drilling to increase proven reserves at a rate that balances with our mining rates; and also completion of our several key long-term infrastructure projects as mentioned earlier.

We will also be increasing the tonnage of selective mining methods at both operations where possible and decreasing the amount of bench and fill.

And with that, I’ll now turn it back over to Frank.

Francis R. McAllister

I’ve already commented on overall 2007 financial performance, but let me add a few additional thoughts with respect to marketing palladium for jewelry. I find it very interesting to look at how the demand for jewelry interfaces with industrial demand for PGMs, especially for use in catalytic converters.

Price becomes the allocating mechanism that rations PGMs between essential requirements in catalytic converters and discretionary use in jewelry. The strategy of the South African producers who created the extremely successful Platinum Guild International 30 years ago was to level out the demand for platinum with the volume of metal available.

So when industrial demand has increased, driving up the price of platinum, discretionary spending on jewelry declines as the metal becomes less affordable. On the other hand when industrial demand is weaker or supply increases, the price comes down, increasing the demand for platinum jewelry as it becomes less expensive. Overall, the result is smaller inventory swings and therefore better price dynamics.

Looking at the platinum market since 2000, we see this dynamic at work. From an all-time peak in platinum jewelry demand in 1999 of 2.9 million ounces at a price of about $400 per ounce, platinum jewelry sales fell to 1.6 million ounces in 2007 at an average platinum price of about $1,200 per ounce. Now, recognizing the lower demand for platinum last year was at $1,200 per ounce, the price of platinum today is approaching twice that level, nearly $2,200 an ounce.

So the question is what will the market dynamic at this much higher price be? Jewelry sales don’t necessarily drop linearly with price. Instead jewelry designers, producers and buyers may shift to more affordable alternatives, gold, white gold, silver, tungsten, carbide steel, titanium, plastic, even leather and wood.

In 2004 as platinum broke through $800 per ounce, the Chinese jewelry industry began to shift away from platinum towards more affordable alternatives. The Chinese market places a premium on high purity metals, which tends to discourage 18-carat or 14-carat gold and white gold in jewelry, and pure 24-carat gold is too soft for most jewelry uses.

So at that time the industry discovered and began to embrace palladium, which is a sister metal to platinum, which is equally rare with whiteness and versatility comparable to platinum.

As the Chinese move toward palladium emerged, Stillwater stepped into the palladium marketing vacuum created by this search for affordability and purity, and seeking to help shape an image for palladium as a desirable jewelry metal in its own right. In conjunction with this effort, we established the Palladium Alliance International to ensure that palladium was not marketed as a cheap alternative to platinum, but building on its characteristics as white, bright and light, and a rare, pure and luxurious metal.

We then invited the industry to join us in funding this effort and we may be getting close to and that effort as an industry study has just been completed and a decision as to their participation is pending at this time.

Now with respect to this jewelry phenomenon, Johnson Matthey validated the Chinese palladium market phenomenon in its October 2005 interim platinum market report. 18 months after the palladium jewelry phenomena started in China, the news of this phenomena drove up the palladium price which had averaged just over $200 per ounce for three straight years 2003, ‘04 and ‘05. It then moved quickly up to about $350 per ounce level, where it’s remained during 2006 and ‘07.

My point here is that I expect palladium sales to continue to grow as market acceptance of palladium jewelry increases. It’s a great jewelry metal. It’s a great affordability. But driven in particular by the current price differential between platinum and other precious metals, we would expect that we will see substantially greater market penetration for palladium in the coming year.

Last September at the Denver Gold Show, I projected that with platinum supply and demand imbalance rationed by price and with South African production then projected to decline through the year 2011, we would see a $1,500 per ounce price for platinum, that was when the platinum price at the current time was $1,300.

At the same time I also suggested even with inventories of 6 to 8 million ounces of palladium sitting in inventories in Zurich, that palladium production and consumption were coming more into balance driven by the continuing growth in palladium use for diesel catalytic converters, jewelry and electronics.

Consequently I suggested we could see palladium prices creep up towards to $400 to $500 per ounce range. Well, all of this has materialized over the past couple of months. Still I failed to anticipate the dramatic price activity of the past 30 days, driven mostly by the power problems in South Africa.

So in conclusion, let me recap the fundamentals behind the recent pricing activities. PGMs are not just rare, precious and luxurious metals in scarce supply. They are also essential to meeting modern environmental standards now accepted worldwide. And this combination of scarce and essential has been explosive here in the last 30 days. And it appears based upon commentary out of South Africa that it could take some time to bring this situation back into a more normal balance.

Now with that commentary, I’d like to turn the call open to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Bridges - JP Morgan.

John Bridges - JP Morgan

I wonder if you could talk a little bit more about the training progress, productivity measures. How do you measure progress there and how do you see productivity turning into bigger tons in the next few years?

Francis R. McAllister

First of all, the training program and just amplifying on it, it is a formal training program for six months for new hires. We dropped our hiring from 21 to 19 a couple of years ago in order to attract additional people from the area before they essentially left the Montana scene and got away from us. That has brought in, and in fact we are able to keep our training classes filled, not too much of a problem there.

Obviously, mining in the end of the day doesn’t turn out to be everybody’s cup of tea. And so after they tried it for a while, we probably have some which drop out from it. Nevertheless, we will train somewhere between 100 to 150 people, probably retaining about two-thirds of those through this year 2008. And we will continue to do that obviously into 2009 until we get to a point where we have complemented what we need, we’ll continue at a very robust rate, after that dropping it back to meet our needs.

The training program that is augmented following the six month period by having the new employee then work with a seasoned miner for about an 18 month period of time. We track their progress. We follow them. We backup training if, in fact, it may be necessary during that period of time.

And in fact, as we have said earlier today, about 50%, or a little over 50% of our employees have come through that, probably 30 plus percent during the last couple of years and the others who obviously have been in a training program which we’ve had ongoing for some time. It’s just that we made it more robust in this last couple of years and changed the requirements.

Now, with respect to mining, obviously, there are measures which we can use, depends upon the mining method that we are using. But there are measures we use in terms of tonnage for employees, and we write that in terms of how many tons per hour or how many tons per day are been moved out of the mine for any given set of employees.

And, in fact, that’s how we track just exactly how the productivity increases. And we’ll measure that, and what we will do is we will then focus our attention, or in fact, the productivity may need to be enhanced in some way or another. And obviously, it varies because each work area is a little bit different than another work area, and may be more difficult or less difficult. So you have to take that measure into account as well.

Greg Struble

I’ve had a chance with the brief time I’ve been here to talk to some of the students, and I’m really impressed. It’s a very robust program. They are getting a lot out of it. It’s focused on the key base elements of their training, which is starting with safety and then working into the production.

With regards to how we are going to look at expansion, I think as Frank mentioned, we are monitoring tons per man-hour as our metric. But I think it is very important to focus on, first improving the productivity of our workforce. Once we understand where the opportunities lie there, then we can look at expanding that into other areas of mine and growing the mine proportionally. But, overall, very strong program, robust, I’m impressed with it. And I think it represents a real opportunity for Stillwater.

Francis R. McAllister

John, one additional point that Greg alluded to out there, and I think it’s terribly important is that the training program really is levered off of our G.E.T. Safe management process at the mine.

And in that particulars instance, what we have done is we’ve taken each one of the critical task that is performed underground by our miners, and we’ve engineered that so that, in fact, we have the safety put into it in a way in which we protect ourselves, each of our miners and ourselves from harm or accident underground.

Obviously, this impacts how we work and what we do in our work process or workplaces. It trains us how to be efficient and effective underground, and it really is quite a marvelous way to approach these things. So we find that our new employees actually have as good a safety record as the employees that have been around for sometime, because they start off with good practices.

John Bridges - JP Morgan

I’m just trying to figure out how to put those words into my model. You’re talking more selectivity, so does that mean that once this is fully implemented, you’re going to be producing better grades and the focus is going to be a less on tons? Or would it be pushing back towards your previous tonnage level as these new guys pick up the skills?

Francis R. McAllister

I think what you have to look at in terms of as they pick up the skills, there will be more tons. The selectivity, obviously, that takes training to get into the selective mining areas, so we reported earlier that the selective mining will continue to increase. That will continue to increase the grades.

But they are really kind of separate issues, while they are all combined. We train people; that will give us more tons. We train people in selective mining; that will give us more tons in selective mining. More selective tons will give us more grades. So it really is both issues, more tons and then obviously as we get more selective tons moved out, that will give us better grade. So it is all an improved process.

I don’t know how to put it into your model. I understand what you’re suggesting, and we will look at that and see if there’s some better guidance that we might be able to give which would give you direction as to more tons and grade as well.

John Bridges - JP Morgan

I think I also read in your note that you were ramping down. Is that going back into the Golden Triangle, or are you looking to?

Francis R. McAllister

It is going into the Golden Triangle. I’m going to let Greg talk about the Kiruna trucks and that process. But essentially what we’ve done is ramp down using Kiruna Electric trucks in order to access the lower levels of the Stillwater Mine. It is below in the Golden Triangle area where the grades are higher and the material is a bit more poddy. It widens out and swells up in those areas. And it really is to go down to the 2,000-foot level.

Greg Struble

Essentially, what it does is it really streamlines our future haulage profile for the lower section of the Stillwater, below the bottom of the shaft. And that’s going to be a pretty straight shaft below the 2,000 level.

Several alternatives were looked at last year, and the electric truck haulage was the successful candidate from a cost and timing perspective. So that project really has just begun, and it’s probably going to take three years to fully execute. But when it is done, it’s going to really be a benefit and allow us to really consolidate much of our haulage infrastructure that we’re currently struggling with in some areas.

Francis R. McAllister

John, one of the real neat things about it is that, once we get down to that level, we can also put in a haulage rail link down on that level which would bring materials from out to the far west, and actually even we could go back to the far east. And be more efficient in terms of hauling across the footwall laterals that would then come over to the trucks, be put on the trucks and then hauled out to where it can be lifted out on the shaft.

John Bridges - JP Morgan

Is this old Steve Kearney project?

Francis R. McAllister

No, I think this is more recent in vintage than Steve..

Terrell I. Ackerman

This is really a product of the technical groups up at the mine site. And one of the key things in this rising cost of capital projects that the benefit is the Kiruna system, and excavation and everything is done in-house and we have a good handle on those costs and we have some of the best development miners probably around North America right now.

Francis R. McAllister

. John’s point on the Kiruna trucks, these also electric trucks which allow us to move material without creating additional DPM in the mine, which obviously is a problem for safety and health.

Operator

Our next question comes from Rehan Chaudhri - Altrinsic.

Rehan Chaudhri - Altrinsic

If you look at the cash flow for last year, the cash fell by about $27 million, and the investments at fair market value fell by about $8 million and inventories went up by $12. Was most of that shortfall just due to the underproduction issue?

Francis R. McAllister

Not really. And in fact it’s more money put into secondary business.

Gregory Wing

Rehan, clearly our cash did go down substantially even when you take the investments into account. But if you look at the total working capital, that is the cash and net working capital together, there actually is only about a $3 or $4 million drop. So that argues that a lot went into inventories, and obviously changes in payables and receivables as the prices went up. But net effect is that the lower production probably cost us $4 to $5 million in cash net as a result of all that.

Francis R. McAllister

Rehan, I’d just comment that when you see our first-quarter report, you’re going to find that we’re still going to have even more money yet into inventories, essentially again the price driven factor, when these prices go up, in particular in a recycling business.

Rehan Chaudhri - Altrinsic

With regards to the target ounces, but it was a 4% increase. Is that off of the ‘06 production or off of the ‘07 production in terms of where you think ounces might come out for ‘08?

Francis R. McAllister

It’s off the ‘07 production, so it’s 550,000 to 565,000 ounces is the guidance.

Rehan Chaudhri - Altrinsic

Are you being too conservative there, given that a lot of these issues have been in the past now?

Francis R. McAllister

We don’t think so. We would hope to be able to beat that. Obviously, we’d prefer to delight people rather than disappoint them.

The issue here is one of our work force, which is obviously still down in terms of numbers and the skill level of our work force. And so what we’re trying to do is risk effect essentially our production, so that we would be able to tell just exactly where we are.

Now through the year, were we successful in being able to attract additional miners or the productivity levels that John Bridges had talked about and asked about earlier? If they come up faster than we’ve estimated at this point in time, obviously we would expect to be able to beat that. But we think we’ve targeted this. Even at that, it’s still going to be, we’re going to have to work hard to make sure that we get it done, but we think this is the right guidance.

Rehan Chaudhri - Altrinsic

And with regards to the diesel catalytic converters, I know last time we’d spoken about a Volkswagen having a 25% palladium, 75% platinum, and possibly even higher. Given how severe the price constraints have gotten on platinum, why aren’t you seeing a more rapid transition towards palladium, and do you expect to see that over the next few years? And what percent of diesel catalytic converters on a global basis do you believe will become hybrids?

Francis R. McAllister

First of all, Volkswagen is at 25%. Yes, you’re correct that there will be a move away from platinum to more palladium, just as we saw a move from palladium to platinum back in 2001 when the price drove it at that point in time as well.

And essentially, the industry is getting to a point to where the technology allows them to move back and forth with greater efficiency, because they know the technology and where to move based upon price. For instance, in the gasoline catalytic converters at present, I would believe that the technology is there for them to thrift down to almost no platinum in the gasoline catalytic converters for at least some cars. So that would be taking place at these prices.

The second thing is though, it is technology with respect to diesel, and the technology and this phenomena is still recent as compared with the gasoline technology. The gasoline technology is 30, 35 years old now.

The diesel technology is more recent, because the first work that was done by the auto industry and the truck industry was to reengineer their engines so that they would avoid the need to put catalytic converts in them. So literally the big trucks in the United States did not have catalytic converters until last year.

That was the first year that trucks and cars in the United States had to have catalytic converters, but then they had to also have DPM filters. This is the device that allows them to oxidize the carbon that otherwise comes off the back tailpipe of a truck or a car. Well, if you put that in, that’s two times the loadings of PGMs in a diesel car or diesel truck.

So it’s a complex technical answer that you’re asking, which I don’t know the real answer to, except that I know that we’ve got catalytic converters being built out there with more than 25% in them. We saw one in Europe last year that may have gone up to as high as 40%. Again, that was a specific application, and it may not be generalized for the industry.

But nevertheless, they will move up. And some people in the industry suggest that it might go up to as high as 50% palladium in a catalytic converter for a diesel engine. I don’t know that that’s the case.

And I would not be the one to give that answer, except we do know that there will be immense efforts by the research people to make sure that they thrift this down as much as they can in terms of the loadings of platinum, and then increase to the extent they can the loadings of palladium to offset what they can’t thrift down completely.

Rehan Chaudhri - Altrinsic

And some of the announcements made by the Japanese that they were using much less PGMs in their catalytic converters. Can you just sort of comment on that?

Francis R. McAllister

Yes, I can, except I don’t know the technology very well. And in fact, in some cases, there was suggestion that they would use no platinum or palladium in their catalytic converters. My guess is that that “no” means in certain parts of their catalytic converters, that they have not gotten to a point to where they have eliminated platinum or palladium as a catalyst for catalytic converters. But they may have been able to take it out successfully in some parts of it.

And obviously, with price they would continue to try to do that. And obviously, even if you have to put a device, even it doesn’t have platinum and palladium on the car, they’ll try to get away from that. So there’s also engine technology that they are working on right now, which would not create the harmful emissions that we now see and that they have to treat.

Every time we talk about this with some of those who manufacture catalytic converters, they say, yes, yes, well, it’s not quite as good as it might sound, and it’s probably further off. My guess is, this is going to come. It’s not here today, not here this year. But it will come.

I guess the other comment I’d make, by the way, is that diesel cars are coming to the United States, and some people smirk about that, and say, well, diesel will never make very much of an inroad in the United States. I think it’s only about 2% in cars right now.

But BMW’s car is peppy and smart and looks nice, and it’s got a diesel engine in it, and you would never know it’s a diesel engine. It’s quiet, it’s clean, it’s fast. It has more torque than a comparable gasoline engine, in some cases. And what they’re doing now is they are going to put that on the market here in the United States this fall.

They have two models, one’s a utility vehicle, and the other one’s I think their X3 series. It’s a smart car, and my guess is it’s going to be picked up by kind of the affluent young people, and quite frankly, I’m going to look at one myself.

Rehan Chaudhri - Altrinsic

I talked to [inaudible] and they had mentioned that, basically they thought the Russian government had just two or three years more worth of supply, they are going to put out in the market. Is that your understanding as well?

Francis R. McAllister

Well, I don’t know what to say there, because I don’t know. But here is what I do know is that we keep saying different reports and people speculating as to the reduction in the inventories. What I do know is this. The shipments from Russia have begun to fall, have begun to reduce, that’s number one.

And there is a bit of price built into the palladium price currently in anticipation that what some of the analysts are saying that it’s about gone is correct. The one factor you have to factor into the palladium prices, when it’s gone, it’s gone. You don’t reproduce yet another inventory that you can sell.

There has been probably 25 to 30 million ounces of palladium put into the market by the Russians, Soviet era inventory over the last 15 years. That means that if you have equal production, about 90 million ounces of production of platinum, about 90 million ounces of production of palladium over the last 15 years, and then you have augmented the palladium production with 30 million ounces coming out of an inventory.

When that’s gone, you are going to see a dramatic change in the dynamics, in the price area for palladium as well. So I just make that comment. My guess is there some price in the current price for the fact that it is nearing exhaustion.

Operator

Our next question is from Victor Flores - HSBC.

Victor Flores - HSBC

The increase in ounces with respect to last year has to come from either more tons or more grade. Could you share with us which of the two it is? And how that is going to be different for each of the two operations?

Terrell I. Ackerman

Victor, the key driver will be tons as we see a balancing of production at the Stillwater mine, specifically off-shaft and upper west, the upper west grade center is a little lighter than the off-shaft area. So I think bulk will be driven by tonnage.

In East Boulder, we’re seeing some successes in our more selective mining areas with grade. But it’s not substantial. Again it will be a tonnage driven factor over there.

Victor Flores - HSBC

Now let me turn to a comment that was made in the press release that says you are talking about productivity in bringing new miners up to speed. And then says, however, that implies lower total mine production for a period of time. What is the period of time, this year, this year or next year, three years?

Francis R. McAllister

We basically commented earlier in this call, it’s going to be probably two to three years as the productivity levels increase. So we would expect this as to going to go out for some period of time. There are two elements to that though, Victor, I think you need to put in place. Number one is increasing the workforce. Number two is building up the productivity levels in the existing workforce and the new employees that come online.

Victor Flores - HSBC

All right, achieving both over time?

Francis R. McAllister

Yes.

Victor Flores - HSBC

With respect to capital, you’ve indicated that at some point in time, you’ve caught up with the development, and then capital starts to come down. But we are looking this year, excluding the expenditure on the smelter, at basically another $90 million of capital. Does this mean we are looking now to 2009 for capital levels to start declining?

Francis R. McAllister

Capital levels based upon what we are seeing probably will begin to decline by 2009. But, quite frankly, we haven’t quite adjusted to our new environment. I was asked the question last night, “Well, goodness, what are you going to do with all that money?”

The reality is we are not going to continue to increase our capital spending. But obviously, it gives us some additional flexibility. The furnace $22 to $23 million this year, capital spending at the mine will include the Kiruna trucks for the next couple of years. Then we wind up with obviously the continued push to make sure that we have got the 40 months of proven ore reserves.

So it’s going to be a couple of years off before we actually see a decline precipitously. But quite frankly, these current prices, obviously, put us in much better position to be able to deal with that.

Victor Flores - HSBC

Now that Greg Struble has joined, we have chatted over the years with various operators, and they have shared with us their philosophy for what they intend to do with the operations to make them profitable, especially in an environment, if we were to go back one where commodity prices are much lower than they are today.

And I would like pose the question to Greg, now that you have joined, what do you see as being sort of your philosophy for driving profitability at the operations?

Greg Struble

Well, first off, Victor, I think fundamental to everything is going to be our safety performance. We need to rationalize how we start our business, and that begins with how we approach it from a safe perspective. That has to happen.

Next, I focus strongly on productivity, whether that’s productivity of men, machines, or capital. All three of them have a descriptor, that’s called productivity. And that will be basically my focus, is how do we improve, maintain and accelerate our safety performance and build a culture that’s sustainable within the work forces.

And then secondly, how do we wrest the best productivity out of all three of those elements, labor, machines, and capital. It all has to be done in a way that’s sustainable, that makes sense to the group doing it and makes sense to the market.

Victor Flores - HSBC

So, your philosophy is oriented more say towards containing costs or getting the most out of the costs you’re spending, as opposed to say getting grades up?

Greg Struble

Getting grades up is part of optimizing productivity, productivity of the deposit. So, I think, you’ve got to be careful. The question you asked was what is my operating philosophy. That was it, safe-based foundational approach, and then optimizing all the elements that we use to create our product, and that’s labor, machines, reserve, and capital. And that has to be functioning very well before you can think about any kind of an expansion or further growth of this in my opinion.

Operator

Our next question is from [Aaron Edelheit - Saber Value Management].

[Aaron Edelheit - Saber Value Management]

I have a question. In 2000, there were over 9 million ounces of used palladium. And right now, there’s around seven. Do you expect that we are going to get back to that 9 million?

Francis R. McAllister

No, never. No, let me explain the 9 million. The 9 million came from sales from Soviet era palladium inventories, about 2 of that, maybe 2.5 of that, we were probably producing about 6.5 million ounces at that point in time.

So, to the extent that there was 9 million ounces available in the year 2000, there will never be that 9 million ounces like that available again, because the Russian Soviet era inventories are close to depletion. That was my comment earlier. Once they’re gone, they’re gone, you can’t replace them, except to do what they did before, and accumulate them over a period of 30 or 40 years.

What will happen though, your question, and I was a little bit cute with you, I don’t mean to be that way, could we get up to 9 million ounces of production of palladium in the world? The answer is we could, given the right price dynamics.

And obviously, at $2,150 platinum and $500 palladium, it will encourage additional mining opportunities in the world. The reality is there are only a few remote places in the world where these metals are produced: South Africa, Zimbabwe, Russia, the United States in our mines. You’ve got by-product out of the nickel mines in Canada, and to a certain extent the majority of that is driven by by-product coming off of nickel mining or platinum mining.

So, in response to the question, you don’t drive a lot of new palladium production out of South Africa by the platinum prices being high. They will, and actually as they move over to the other side of the Merensky Reef, there will be additional palladium production coming out of there.

When do we get back to 9 million ounces, or when do we get back to where there’s an availability of 9 million ounces production? That’s going to take some time before we actually get to that level from a primary production level.

[Aaron Edelheit - Saber Value Management]

I guess my question was more instead of the supply, more of the demand. There was about 9.6 million ounces of demand.

Francis R. McAllister

Actually, the demand in the year 2000 was based upon two things. It was based upon low-cost palladium beginning in the decade of the 1990s, and that demand moved from platinum to palladium in the gasoline catalytic converter car. And what was happening is you had the first two decades of catalytic converters you used maybe 20 to 25 million ounces of platinum and rhodium, and some palladium.

That brought us to the end of the decade of the 1980s, and the auto industry looked around and said, there isn’t enough platinum in the world for us to be able to meet the requirements of the EPA and other such organizations around the world in the decade of the ‘90s, and that was when they concluded that, they could use palladium for catalytic converters. First of all, it was much less expensive at the time, and secondly, they knew there were substantial palladium inventories available to do it.

So, they moved into it with two cautions. One is they wanted to make sure the loadings were sufficiently there to avoid any legal problem with respect to not meeting the requirements. So they loaded up those catalytic converters during that period of time. And then when you got the price rise in the late 1990s on palladium, they went to two things. Number one was thrifting down the loadings in the catalytic converters, and number two was to switch back to platinum to a certain extent.

Now let me come back and address your question. So, today the technology is such that they don’t use as much palladium in a catalytic converter. It’s about 3 grams on average on a gasoline engine car in the catalytic converter, about 1 gram of platinum, about 0.5 gram of rhodium, that could increase to 4 grams of palladium at these prices, and no platinum in some cars.

But, what you then have to look at is what’s happening around the world. Last year, General Motors built a million cars in China; that’s up from about 200,000 cars. And so you see the enormous, enormous growth in terms of demand for cars, and that’s just one of the automobile manufacturers in China. Goodness, they must be up into the 6 to 8 million cars being built a year.

Now, there are two things going on there. Number one is, they all had catalytic converters on them. Number two is they are at a much lower loading than we are currently in the United States. But, they’re ramping up that loading in China. India will go through the same thing, and rest of the world will go through the same thing.

So, could we get back up to 9 million ounces? My guess is yes. And the reason is, I guess, yes, is because you’re going to see two things. Number one is the loadings in these cars in the developing world come up, but you’re also going to see the move from platinum to some more palladium in the diesel engines, and so quite frankly it could move back up.

[Aaron Edelheit - Saber Value Management]

You presented at a conference yesterday and I’m not sure I heard it correctly, because I heard it through another source. There was a mention about getting to 800,000 ounces produced in a year. Could you tell me what in the context, you mentioned that?

Francis R. McAllister

Our permit levels for both mines allow us to go significantly higher than we’re currently producing. And so, were we to achieve those permit levels by being able to ramp up our manpower sufficiently to be able to move the tons to do that, we would be at a rate of mining tons coming from the mines that would produce roughly 800,000 ounces.

We believe that’s going to take some years to achieve in this very tight economy for miners. I mean, we just can’t go out and hire trained miners at this point in time. We have to go out and hire people that we will make into trained miners. That takes several years to do.

So, there are two things that go on here. One, you got to hire them and train them. Number two is you have to build the work force up. And so, part of our problem here is, when you have 20, 30 years of world global economy, and you have resources now being demanded by the developing world, that there just simply were not resource production units built to feed, you have prices going up. Those prices have gone up for copper, for nickel, for lead, for zinc, for silver, for gold, and now obviously platinum and palladium.

But it isn’t just the price on those products. What happens is that when prices are going up across the board like that, you then have increased demands for the units of input, trucks and gasoline and oil and steel and rods and people. And it’s the people issue that perhaps you just can’t lose focus on.

My goodness, part of the problem is the skill levels in South Africa. Many of those skilled people are leaving South Africa and going to other continents to work because of the demand for them say in Australia, where the mining industry is very big and the price of iron ore for instance last week was increased 65% for iron ore coming out of Australia going into China.

So, when you have that big a demand, then you have to build your own. If we look around for the state of Montana, Montana is not suffering from a lack of jobs, in fact our unemployment level is probably in the 2.5% to 3% level. So, we are having to attract people that would go to other jobs, if in fact our pay levels weren’t sufficient to attract them. But we’re having a rough time attracting miners.

We get miners, good miners, they can go up and double their wages by working as a contract miner up in Alaska or some other place where they have to fly in and fly out. So, it is a difficult environment in which we work. And so what I’m saying is it’s going to take us a few more years than we originally projected to be able to achieve that higher level of production.

[Aaron Edelheit - Saber Value Management]

Now hypothetically, if palladium was suddenly $1,000 an ounce, would you have the thought that you could just spend a lot more on miners. How much of this thought or how much of your thoughts are controlling costs and making sure that the spending doesn’t get out of control versus the price of palladium and platinum. I mean, is it just a question of throwing money or are they just really not available?

Francis R. McAllister

No. It isn’t a question of throwing money. If it were, South Africa could resolve their problems, and they are not being able to resolve their problems. They are losing people, number one.

Number two is they don’t have the electrical supply. If you could just throw money at it, you could bring generators in from around the world and simply solve these issues. It isn’t that easy. So, these are long time solutions that have to be put in place. We believe we have got the right solution. We believe attracting people from the State of Montana in the local area there, training them and building up the workforce in our own local areas is the only way that we really can go.

Can we attract miners from Nevada, from Idaho now? Goodness the silver at $17 and gold at $950, those guys don’t want to lose them, and they pay the same thing, and yet we probably have a more attractive ability to earn money in Montana right now, and we still lose people going back to these other places.

You can’t just throw money at it. You have to do it on a very conscious way. And the problem with throwing money at it is there will come a time when these prices will come back down and we still have to survive at those times as well. So, your point is well made, you don’t just throw money at these. You have to do it in a very engineered, very methodical, very managed way.

[Aaron Edelheit - Saber Value Management]

But if I were to put you in the shoes of Russia or Norilsk, and you are sitting on, I guess, is a great divergence of opinion whether it’s a couple of months supply up to two to three years of palladium, and you see the price difference of platinum and palladium, why exactly would you be selling at these prices?

I am just curious is that if you could give your own thoughts, if you control that stockpile what would you be doing with it, and if you have any other further thoughts about what Russia’s motivation or what they may do with their palladium supply considering the price differential between platinum and palladium, and that the only real reason I can find between the two is that Russia is sitting on a stockpile, and they have been selling tons of it?

Francis R. McAllister

You are talking about their inventory itself, you are also talking about government people who sell these things. When the U.S. government got out of their stockpile, they finally sold the rest of their stockpile in the year 2003 at $150. Why did they do that? Because they decided they were going to sell the inventory, and quite frankly government officials don’t necessarily follow the market that closely, they want the money. And so quite frankly, it’s not a speculative thing they have got, they have just simply got a strategic stockpile, which they are using to fund government programs.

Now, if you are looking at Norilsk, that’s different. Norilsk is driven by nickel prices, and they would say to you as, “Yeah, we have got a lot of palladium and platinum, and at these prices we make a lot of money on it, and if the prices go up further we still got a lot of platinum and palladium and we can sell it.”

I have got to tell you what you are going to see though between the two of us is that we are actively seeking and working on ideas that will leverage PGM value creation. And we talked to Norilsk about this, and in fact, they have got some ideas as well. And so we think there may be some more things that we can do and which obviously we are not ready to talk about. But these prices in these markets obviously that attracts a lot of attention.

[Aaron Edelheit - Saber Value Management]

Is there ever a thought for you considering where the differential between platinum and palladium, and considering how palladium with substitution, would you ever stockpile some palladium?

Francis R. McAllister

I guess, the same answer is that probably not. If you want to stockpile obviously you can go into the market and buy financial futures. We would probably leave that in the hands of our investors, our job is to produce at the lowest cost the most material that we can, put it into the market and make sure the markets are there to accept it and develop it.

And that’s why we market palladium for jewelry. It’s been a wildly successful program, and with these prices for platinum and gold, it will be extraordinarily wildly successful in the year 2008.

So, I think, no, ours is one of more production, speculating on buying and holding, we’ve got a mountain of it. And so we can continue to produce, and at these prices obviously that would – it goes very well. We’ll make a lot of money this year. Hello...

Operator

Our next question is Borden Putnam - Eastbourne Capital.

Borden Putnam - Eastbourne Capital

Terry, I have been looking at your operating performance for the past two to three or four quarters, and it looks like things bottomed from the badness about two quarters ago. And I am reflecting on that looking at the grade that you have achieved both versus your reserve grade and just as reported.

And I wonder was there a lot of excess dilution or was it just the training of people, what was going on two quarters ago or actually leading into that from almost a year ago there was a steady decline in grade. These are minor changes, but they matter to you a lot on profitability, and I wonder, if you could talk a little bit about that, and it looks to me like you are past that?

Terrell I. Ackerman

I would like to think we are past that. I think, there’s a couple of things to remember: one, our reserve is pretty substantial, and you are looking at a large variability within that overall reserve. So depending on where we are mining at specific periods, you will have a considerable grade fluctuation.

I think, that your dilution comment is right on, and that’s one of the key focuses with the selective mining initiative is to get at that. And that’s the function of the skill set of the miners, as well as skill set of our technical people to guide the miners.

And I think we have got a pretty good handle on what we need to do, but we have got some work to do on that. I think, you will see us fluctuate from time-to-time, but hopefully the trend is positive from your observation a couple of months ago or quarters ago.

Borden Putnam - Eastbourne Capital

The thing that triggered the question was your reply or Greg’s reply to Victor’s question about whether you were going to achieve the increase in ounces through mostly tons or grade. And it looks to me like you are achieving it already in realized grade, if you will, I know that’s not a proper term, but you are actually achieving a better percentage of the reserve grade in the past two or so quarters, and it looks like a pretty sustainable trend.

Terrell I. Ackerman

From our having it right in our face, we see us getting closer to the grades. We think, we should be realizing at the mills, and maybe we are doing a little better in that regard. But my caution is that I think ‘08, the increase over ‘07 in production would be probably biased by ton rather than by grade, and hopefully through productivity. And grade is obviously an ongoing thing.

One thing to remember as we are more successful with production and with cost then that would allow you to include more reserves, which may not mean the higher grade you realize, it’s just more ounces, so the bucks obviously would cut off.

Borden Putnam - Eastbourne Capital

And in that what is your target as far as percent of reserve grade that you hope to sustain? Because you have gotten almost as high as 80% of reserve grade, you were sustaining for a while, a drop down to about 70%, depending on whether you measure it from a ratio of your recovered ounces or from your reported mill head grade, either way. I am wondering what you are using for your object target?

Terrell I. Ackerman

When you take a look at what we carry as our reserves, basically, we like to hit in the 85% to 90% of that realized.

Borden Putnam - Eastbourne Capital

Net of recovery, or is that just you are mining your head grade?

Terrell I. Ackerman

Of the contained ounces.

Borden Putnam - Eastbourne Capital

So your target is that, but your head grade would be 85% to 90% of your reserve grade?

Terrell I. Ackerman

That’s correct.

Borden Putnam - Eastbourne Capital

So about a 15% dilution, okay. And then recovery, of course, or are you with the guys in the middle of what they are doing?

Terrell I. Ackerman

Yes.

Borden Putnam - Eastbourne Capital

About the capital project at East Boulder, when you were talking to Victor, you talked about the waste and ore passes being refurbished or improved, can you talk a little bit more about that?

Greg Struble

Borden, briefly the ore release system that we had before was simply board raisers, now over time they have added some dilution as they start to slop a little bit.

Borden Putnam - Eastbourne Capital

Sure. Exactly.

Greg Struble

So, the new system, the life of mine rate system is going to actually be done with Alimak and it would reinforced ground support with jack drilling to minimize some of that problem.

Borden Putnam - Eastbourne Capital

And what’s a timing budget to get that in place 100%?

Terrell I. Ackerman

We are making good progress. I think, it will be during this year that we will bring on line, probably by mid-year, two of those rate systems on that East Boulder.

Borden Putnam - Eastbourne Capital

How do you measure productivity for these guys, is it by the tons, are you reconciling against the long-range model. How are they incentivized to understand that a ton is not a ton, if not a ton? In another words, you got to have tons that pay?

Greg Struble

It’s really tailored to the method, Borden. A better way to maybe understand it is can the miner cycle his activity in a shift. Now if he cycles his activity that’s drill, blast muck haul bolt, those things and get ready for the next shift. Obviously, in a narrow vein it’s going to be less tons than it would be in a horizontal stope.

So the ton per man-hour measure for a captive cut and fill is going to be less than a sub level stope. However, there are some indicators that allow us to look at the activity within that cycle, that we say, well, our productivity should be x in here and y in there. So you can make some qualitative assessments, as well as subjective assessments on what our goal productivity should be.

Now this is far too much detail, but what we would look at as measuring a new miner coming out of the training program as he starts mining in his stope, and against some of the standards that are already established in terms of averages across the mine. And then use those to help leverage our way up with time.

Borden Putnam - Eastbourne Capital

Yes, it does. It’s important that the guys that are in the different mining methods don’t feel that they would rather be working in a different method area, so that they have a strong bonus, that’s the challenge for you, isn’t it?

Greg Struble

And that’s why we look more at we call equivalent cubes or equivalent tons, so when the bonus structures are set they have that taken into account.

Operator

Okay. We have a question from [Gary Vialis – Vialis Partnership].

[Gary Vialis – Vialis Partnership]

About a year ago, in California got EPA approval to start requiring catalytic converters on small pieces of equipment like lawn movers and that kind of thing. Is that being processed, is that looking to fall through on, and if so, is it going to be using palladium or platinum in their converters or both?

Francis R. McAllister

My guess is if its gasoline engines, it will probably be palladium and palladium only, maybe, and I don’t even think they will put rhodium in that. There wouldn’t be that much NOx that they would be concerned about on those, but it would be the other hydrocarbons and other products that come off that they would be converting them, probably mostly palladium.

It’s lawn movers, it’s chainsaws, it’s motorbikes, other things like that. It’s the whole range of things.

[Gary Vialis – Vialis Partnership]

Have you heard whether if there is an effective date on implementation of this law, or whether there has been challenge in the courts, or whether it is going to be implemented?

Francis R. McAllister

I don’t know the answer to that. I apologize. We will find it out, and some how we will make sure we get back to you.

[Gary Vialis – Vialis Partnership]

In reference to your comments about the dynamics of the market earlier, and what happens when that Russian above ground supply is gone; it’s gone. I wanted to make a slight reference and John Bridges’ corollary to the 1980s, when there was a quite a bit of above ground copper that was coming on the market from suppliers and jobbers that were closing down during the commodity deflation in the ‘80s.

All of a sudden, one day the market figured out that a bunch of demand needs were being met from above ground one-time stocks, and then copper went up to levels that were previously unseen, and stayed there for quite a while.

My question is, is that likely to be seen in palladium, the market is anticipating the elimination at some point down the line or a reduction in the supply of the above ground stocks. But is it likely that when it really happens that we are going to be, I hate to use the term from the 1929 stock market talk of permanently high plateau, but could we see substantially higher levels that you think may hold in terms of market pricing once that supply is gone?

Francis R. McAllister

Let me caution here, the price will go up. It’s just a law of supply and demand. You know that as well as I do. There are inventories in Zurich, 6 to 8 million ounces in Zurich. They are in private hands at least for the most part, we believe. I am not sure exactly what it is, but they talk about those inventories.

Those inventories ultimately will be pulled out of that inventory by higher prices, and then will we see kind of a permanently a different layer of prices? My guess is yes, we will, but I don’t know what that is. Is that going to be $500 to $600 or $800 to $900, $1,100 given platinum at $2,200.

It’s going to be higher, but I don’t know what the number is. And the reason you can say that is if you got platinum at $2,200, you are going to have shifting to the lower priced metal, palladium. It’s going to happen in jewelry, it’s going to happen in catalytic converters, and those two things are huge markets for both metals.

You are talking about 50% of both metals being consumed right now for catalytic converters. You are talking about upwards of 20% of both metals being used for jewelry, right now. When you take that in consideration that’s 70% of the marketplace, and if you can move back and forth between those two, you’re going to see some rationing of price between the two. That’s just common sense.

[Gary Vialis – Vialis Partnership]

Regarding platinum, palladium in jewelry, are the characteristics similar in terms of substitute, or is one more malleable than the other?

Francis R. McAllister

They are different. We have spent a lot of time in producing and publishing articles for the jewelry industry. So, they understand the differences. Platinum and palladium are more similar in their workability than you would have if you are working with gold or silver.

Neither one of them tarnish, they can be made hard. The hardness of them can be made about as hard as equivalent, and you use different alloying substances to make them hard. Platinum uses palladium in it for instance, or ruthenium in it as an alloying agent; and palladium uses ruthenium or platinum in it, but they also use other metals to increase their hardness, make sure that they are malleable and workable.

But also in the end of the day when you put that ring on your finger you are going to want it to look nice and bright, white, light. And essentially you can do that with both metals, but it takes some different techniques to do it.

One of the big challenges has been how do you cast the material, and we have got some people now that can do very well in casting palladium jewelry, and obviously that’s one of the important elements in terms of making jewelry. But so that the techniques are different, but the people quickly gravitate to those if in fact they are driven by economic affordability issues, and that’s quite frankly what’s happening. It’s real fun to see this happen.

Cartier is putting together yet another watch, they’ve got the Pasha watch that they have sold. They are now putting a Cartier palladium watch together that’s going to go for $82,000 in a limited edition. That’s really exciting when you have got people in that industry driving that type of branding for palladium.

[Gary Vialis – Vialis Partnership]

In regards to government minting, there are a few governments that mint platinum and/or palladium coins, have you seen any increase in interest in that regard, in terms of demand?

Francis R. McAllister

That interest probably peaked out, when the Canadians got in and made their Maple Leaf, what was it 2005 or 2004, they made their first Maple Leaf. They have had extraordinary demand. It’s worked out very well for them.

We had made our own coin back in 2004, and quite frankly, we don’t make it anymore. What we were trying to do is encourage others to do that. So those coins are quite frankly at this point in time, probably a collector’s item if you can get them off of eBay.

But we have seen other governments do it, but typically the big ones in making coins like that would be Australia, would be the United States, would be Canada. The United States did not make a coin out of palladium. They should have, but they haven’t.

The Canadians have made it, and they have done very well by that coin. And there have been other governments that have made them, but they are not the big market, it’s basically commemorative type coins instead of something that would be sold year-after-year like the Maple Leaf.

Unidentified Analyst

You talked about miners moving in some cases from continent to continent. I don’t know what the pay scales are, and the premium and so forth. But is it totally impractical to think that you could get miners from the area where Norilsk is doing all their mining from Russia to come to the States, if somehow they could be permitted because of their extensive experience?

Francis R. McAllister

Yes it is. It’s impractical, number one. Number two is, it’s a completely different mining method. And so quite frankly what we would have to do is retrain them anyway. And then obviously they may want to go back home as well. So, the reality is we think we are doing it right the way we are.

And typically when I am talking about moving from continent to continent, these are generally the geologists, the mining engineers, the professionals. They are all skill sets it takes to manage and operate the mines. When it comes to miners, typically they are highly skilled, very professional people, but typically aside from those that go into the contract workers, and go into remote areas of the world, typically you get them locally.

Operator

Our last question comes from Michael Beach, and he is a private investor.

Michael Beach – Private Investor

Couple of years ago, I do recall that the recycling operations were anticipated to be quite a contributor to the company’s operations. And at this stage the recycling operations are quite big, but they are not materially profitable. Gross margin is very low. And I don’t know how much additional contribution to overhead there might be from those operations. Can you comment on that perhaps please?

Francis R. McAllister

First of all, the margins are low they will always be low, because essentially what you have is locked in pricing on both sides, you have to buy the material, then process it, then you sell it. And so it really is a locked in margin of 4% to 5% in that range. Obviously as prices go up, you get a little bit more profit out of them, because there some of that is based upon recoveries of metals that we take out of the business as well.

The thing you have to look at though is there is extraordinarily low overhead that goes into that business. We must have 10 to 12 people that are involved in the business, and obviously it does take up some of our capacity in the smelter and refinery, but it’s capacity that is excess to our own operations, because we have copper and nickel that come through from our smelting and our mining business. And it’s that copper and nickel that facilitates the collection of those platinum and palladium and rhodium out of the catalytic converters.

So while it’s low margin $25, $27 million last year for us was a very important contribution to what we do. It’s a very big credit back against our mine operations, and it’s a credit back against our mine operations, because without the copper and nickel coming out of our mines, we simply don’t have that business.

So we have looked at it as an augment, an adjunct to what we do, not taking a lot of overhead, not taking a lot of attention of our mining professionals and of those people who are mining from the operations up there. And so it’s just one of those added-on things that have been terribly important to us for the last three years.

Now when you look at it in terms of today’s prices and today’s business, obviously it will be small in terms of the overall profitability in 2008 given where prices are now. But if the prices go back down that margin is still locked in and we would still make money from that business.

Michael Beach – Private Investor

I understand that the capital costs to drive that are relatively low. I wonder, if there is any sort of depreciation associated with running the additional volumes through for recycling purposes, maybe it increases your grade, maybe it reduces your overall average costs, and in some way, that’s not entirely recorded on the books. Some sort of additional benefit in that regard, but I sort of wondered if it was competing with your mining operations to a degree and whether it was advantageous in the very long run or not?

Francis R. McAllister

It is advantageous. It is not competing with our mining. I would have to say that some of our miners from time-to-time think, “Wow, you are doing recycling maybe you are going to displace our mines.” Well the answer is no, we would never displace the mines. The mines are the important critical element of what we are and what we do.

But it really is serendipitous if you will. It works together well. Additional depreciation, we have a little bit of investment for the screening and crushing and sampling facilities, the blending facilities. But it’s nominal in terms of overall costs, and primarily been paid for many times over at this point in time. So no, I think, it’s just one of those additional things that from the standpoint of profitability last year was terribly important to us.

Francis R. McAllister

I would just comment that while we have been sitting here the price of palladium is up another $11 on the market. That’s pretty good, so maybe people are buying palladium instead of our stock, but buy both. Appreciate you all being on the call.

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