With a new chairman and chief executive officer at the helm,
The underground Stillwater mine, turned out 430,000 oz. platinum group metals (PGMs) last year, up from 409,000 oz. in 1999, though total cash costs jumped to US$264 per oz. from US$198 per oz., reflecting higher mining costs, royalties and taxes. However, strong prices for PGMs boosted revenue 49% to US$225.2 million, while net income climbed 65% to US$61.5 million over the same period.
Production in the quarter ended March 31 was 124,000 oz. at a cash cost of US$217 per oz., compared with 112,000 oz. at US$196 per oz. a year earlier. Net income was US$29.4 million on revenue of US$89.9 million, well above the US$6.9-million earned on revenue of US$42.1 million in the first quarter of 2000.
The improved performance was commended by Frank McAllister, who, earlier this year, took over as chairman and chief executive officer from William Nettles. “We are pleased with the continued increase in production from the Stillwater mine,” he states. “During 2000, the company implemented a number of aggressive programs to address the issues of inadequate mine development, mine infrastructure and mine planning. Commencing with the fourth quarter of 2000, and continuing into this year, we are beginning to see the benefits of the programs in terms of increased mine production and lower operating costs.”
Mining analysts and shareholders are glad to see the improved results too, instead of the missed production targets, cost overruns and operating challenges that have plagued the company since the expansion program began more than three years ago.
Back in 1998, Stillwater’s stated goal was to produce at an annual rate of 1.2 million oz. by the end of 2001. The expanded Stillwater mine was supposed to contribute between 700,000 and 725,000 oz. annually, while East Boulder was expected to produce 450,000-500,000 oz. per year. These projections proved to be over-optimistic, triggering speculation that a takeover by an experienced senior mining company was desirable, if not inevitable. However, McAllister’s appointment as CEO seems to have put the issue to rest, at least for the time being. As one of his first acts, the former chief executive and operating officer of Asarco relocated himself — and Stillwater’s head office — to Columbus from Denver in an attempt to provide additional support for the expansion effort.
Based on progress to date, PGM production at the Stillwater mine is expected to increase 16% to 500,000 oz. this year, and 18% to 590,000 oz. in 2002. By 2003, the company expects to boost production a further 13% to 655,000 oz., which represents a 55% increase over last year’s numbers.
Based on what is now known, East Boulder won’t be up and running until sometime in 2002 at the earliest. Meanwhile, capital costs have ballooned to US$370 million from the original US$270-million estimate. Of this total, US$41 million is attributable to “project scope changes,” US$27 million to “additional ground support and schedule slippage due to unforeseen ground conditions in the tunnel-driving process,” US$23 million for the use of mining contractors rather than mine crews, with the remainder reserved for “unforeseen project risks.”
The company also cautions that additional sustaining capital will be necessary to achieve and maintain the initial design capacity of 2,000 tons per day, and that estimated costs and schedules may change again, depending on the results of mine-planning work being completed this year.
On a more positive note, recent drilling at East Boulder has shown a high degree of continuity, making available 140 tons of ore per foot of lateral footwall, compared with 70 tons at Stillwater. Even so, project economics won’t be fully known until the final report (originally expected in March) is in-hand later this year.
Despite the delay, an operating plan is beginning to take shape at East Boulder, McAllister says. “While the initial average mill feed grade is 0.51 oz. per ton, compared to the 0.71 oz. per ton for the entire deposit, it is important to note that at this time, only 70,000 tons of minable material has been defined and modelled. East Boulder will be better understood when additional drilling, the work to refine the detailed mine plan, and test stoping are completed during 2001.
“With regard to the capital costs,” McAllister continues, “we feel the results of the drilling program, along with additional detailed engineering, have allowed us the opportunity to estimate the cost with greater certainty. Our ability to fund the revised cost is supported by the company’s excellent operating cash flows and new credit agreement.”
Stillwater arranged the US$250-million credit facility earlier this year. It consists of a US$65-million project loan, a US$135-million, 7-year term loan, and a US$50-million revolving line of credit. Proceeds are being used to retire existing indebtedness (under a separate credit facility) and to complete the expansion program.
Both Stillwater and East Boulder are found in the J-M Reef, a 28-mile-long structure in the Beartooth Mountain Range. Together they host proven and probable reserves of 35.6 million tons grading 0.71 oz. per ton, or 25.3 million contained ounces palladium and platinum at a ratio of 3.3-to-1.
The bulk of these ounces (15.8 million) are contained in the Stillwater mine, which has proven and probable reserves of 22.2 million tons grading 0.71 oz. At last report, East Boulder had probable reserves of 13.3 million tons grading 0.71 oz., or about 9.4 million contained ounces palladium and platinum. Revised estimates are expected later this year.
Existing reserves should allow for about 25 years of production, assuming both mines operate at full capacity, that is, 3,000 tons per day at Stillwater and 2,000 tons at East Boulder. However, if feed grades of 0.51 oz. persist for the entire deposit (rather than just in the initial mining area), annual PGM production at East Boulder could be limited to 330,000 oz. at 2,000 tons per day, rather than the initial, 400,000-oz. estimate.
The company also expects to apply lessons learned at its namesake mine to East Boulder, as both are on the challenging-to-mine J-M reef. One major reason is the nature of the reef, which pinches and swells both vertically and horizontally. The orebody varies in width from several inches to more than 70 ft., making grade control critical to keeping dilution within acceptable limits.
One of the first problems encountered during expansion efforts at Stillwater was lack of advanced development. To remedy the problem, outside contractors were brought in during 1999 to step up the pace of progress. Unfortunately, the sheer volume of material generated in the process caused material-handling bottlenecks, particularly in early 2000. Ore and waste pass systems, ventilation systems and other infrastructure proved inadequate to meet the increased demands.
Stillwater has spent much of the past year addressing this problem. Four new ore and waste passes were added to move rock from workings, and maintenance programs were beefed up in order to improve equipment availability. Footwall lateral development increased to 26,000 ft. (from 15,000 ft. in 1999), and overall mine planning became more focused, as well as more responsive to changing conditions. The emphasis on mine planning will continue this year.
Stillwater recently amended long-term sales contracts with two of its customers. For 2001, the average floor supporting realized prices (including the forward sales portfolio) are US$368 per oz. for 96% of palladium sales, and US$402 per oz. for 87% of platinum sales. The combination of all contracts and hedge positions result in an average ceilin
g of US$447 per oz. for 36% of palladium oz. sold, and US$556 per oz. for 39% of platinum oz. sold.
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