Russian bear ambles into Montana

Russian mining giant Norilsk Nickel, the world’s largest palladium producer, has agreed to acquire a 51% stake in Montana-based Stillwater Mining (SWC-N), the western world’s largest producer of the metal.

Under the proposed deal, Norilsk would pick up 45.5 million newly issued Stillwater shares for US$100 million in cash plus about 876,000 oz. of palladium. The deal values Stillwater shares at US$7.50 apiece. In the end, Stillwater’ would have about 89.1 million shares outstanding.

If Stillwater’s shares are trading below US$7.50 fifteen trading days after the deal closes, Norilsk can launch a tender offer of US$7.50 per share for up to 10% of the company’s outstanding shares. That would boost Norilsk position in Stillwater to 56%.

The deal also calls for the two to ink a deal six months after closing that would see Stillwater buy at least a million ounces of palladium a year from Norilsk. Stillwater would then resell the metal to its customers under long-term marketing contracts.

Both companies’ boards of directors have unanimously approved the deal; it still requires the approval of Stillwater’s shareholders. The deal also hinges on Stillwater amending a US$250-million credit facility it has with a syndicate of lenders.

Stillwater plans to apply the cash from the deal to the repayment of bank debt and the possible expansion of its East Boulder mine in Montana.

Stillwater earned less than US$5 million (11 per share) during the three months ended Sept. 30. A year earlier, the company made US$10 million (26 per share). Revenue between the two periods climbed US$13 million to US$66 million. Cash flow slumped to US$19 million from US$36 million.

Stillwater’s earnings in the first nine months of 2002 topped US$32 million (76 per share) on revenue of US$217 million, compared with year-earlier earnings of US$61 million ($1.57 per share) on revenue of US$218 million.

Higher palladium and platinum production (up 40%) failed to offset new expenses arising from the commercial startup of the East Boulder mine earlier this year.

The transaction is slated to close in the first half of next year.

Stillwater’s shares quickly sank as low as US$6.50 following the news. The issue regained ground during the day, and were trading at US$7.17, or 24 off its previous close, in the late afternoon in New York on Thursday.