PRECIOUS METALS — Stillwater advances East Boulder project

With the Russians again exporting palladium, sending the price of the metal falling by as much as 20%, Stillwater Mining (SWC-X) is moving ahead with construction of a second mine at its East Boulder project in southwestern Montana.

The Denver-based company, North America’s only primary producer of platinum group elements, has two tunnel-boring machines at work inside the mountain at East Boulder, 13 miles west of the Stillwater mine. The machines are advancing toward the platinum-palladium-bearing J-M reef.

Current efforts are focused on two tunnels, each of which is 15 ft. in diameter. Excavation of the first tunnel started in May 1998; the second got under way in the autumn of the same year.

The tunnels are scheduled to be completed by mid-2000, at which point Stillwater will begin development drilling along the reef. Startup at East Boulder is slated for 2001.

At full production of 2,000 tons per day, the mine will crank out as much as 500,000 oz. combined platinum-palladium annually at a cash cost as high as US$160 per oz. Stillwater plans eventually to expand production to 3,000 tons per day.

Construction costs at East Boulder for the current year are estimated at US$200 million. The total cost of the mine is pegged at US$270 million.

East Boulder is the last step in a plan aimed at boosting company production to 1.2 million oz. platinum-palladium annually by the end of 2001. In all, Stillwater will spend US$385 million to achieve this. Key to the expansion is an increase in Stillwater’s production rate to more than 700,000 oz. annually.

Until recently, the expansion had been occurring at a time of higher platinum group prices and greater market fluctuation. Over the past two years, the prices of platinum and palladium reached highs of US$429 and US$419 per oz., respectively, as a result of inconsistent shipping of the metals from Russia.

In 1998, The Noril’sk Kombinat in Russia stopped shipments of palladium, creating a supply crunch and sending prices soaring. Shipments resumed again in April of that year. The pattern repeated itself in 1999, as Russia again halted shipments for four months only to begin again in April. This time, however, the price of palladium tumbled 20% to as low as US$296 per oz.

While Stillwater’s share price has suffered as a result, the company has a long-term sales contract that guarantees minimum price levels for its production. In September of last year, the company reached an agreement with end-users of the metals to set a floor price of US$225 per oz. for palladium.

For the first quarter of 1999, the company reported a record profit of US$10.6 million (or 31 cents per share), compared with a net income of US$984,000 (3 cents per share) in the corresponding period in 1998.

Revenue for the recent quarter was US$38 million, up 77% from a year ago. The increase was due to higher realized metal prices.

In the first quarter of 1999, the company realized an average price of US$365 per oz. platinum-palladium, compared with US$223 a year ago. Production reached 108,000 oz., though lower head grades early in the quarter kept production below expectations. As a result, cash costs rose to US$175 per oz. In the first quarter of last year, Stillwater produced 101,000 oz. at a cash cost of US$153 per oz.

The company remains on track to crank out between 525,000 and 575,000 oz. in 1999 at a cash cost of US$140-160 per oz.